Anyone who has bought a house knows the process involves stacks of mind-numbing paperwork. It’s almost impossible to read everything, but as the Great Recession taught us, bad mortgages can have devastating consequences for both individuals and the entire economy. Thankfully, a batch of new federal mortgage disclosure laws protect home buyers and help prevent the economic consequences of bad mortgages.
Know Before You Owe
In the wake of the recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed to prevent the financial practices that led to the financial crisis. While historians will likely argue for decades about whether Dodd-Frank—the most far-reaching Wall Street reform in American history—was successful, the act has provided new homeowners with a small but potentially significant change in the mortgage process, based on the simple idea that consumers should know what they are getting into.
Buried among the more hotly debated provisions of Dodd-Frank was a directive to the newly created Consumer Financial Protection Bureau (CFPB), ordering the agency to consolidate the disclosure forms that consumers receive when they take out a mortgage. Together with a suite of new online resources, the new disclosure forms are part of the CFPB’s “Know Before You Owe” initiative designed to help consumers understand their loan options, choose the best loan for their circumstances, and avoid costly surprises at closing.
In October 2015, homebuyers began to receive the two new disclosure forms: a Loan Estimate , which allows consumers to directly compare the estimated costs of their loan options; and a Closing Disclosure, which spells out the details of the loan they have selected. This second form is provided at least three days before the scheduled closing, to avoid surprises at the closing table and to allow consumers to ask questions and negotiate changes. The two forms are designed for easy comparison, so that consumers can quickly spot differences between their estimated and actual costs.
The rest of the Know Before You Owe initiative comprises an online, interactive suite of tools written in plain language to help consumers navigate the mortgage process and make informed decisions. The centerpiece is the “Owning a Home” website. Structured around milestones like “Prepare to shop,” “Explore loan choices,” and “Compare loan offers,” each section of the website includes educational materials and interactive tools. A paper booklet called “Your Home Loan Toolkit,” which parallels the website, is now provided when consumers apply for a home loan.
A good real estate agent has always been a valuable resource during the mortgage process. But a real estate agent has a vested interest in closing a deal. Enter the housing counselor, who can provide advice on buying or renting a home, loan defaults, foreclosures, and other credit issues. The CFPB provides a list, searchable by location, of housing counselors who are approved by the U.S. Department of Housing and Urban Development (HUD). Housing counselors can help consumers evaluate their loan options. Many work at little or no cost to the consumer (and of course, you can always hire a real estate attorney if you really want to get your ducks in a row).
Buying a home still involves stacks of paperwork. But these changes help consumers, especially first-time homebuyers, obtain a clear understanding of what their loan will cost them.
For more information, here’s a press kit from the CFPB. Happy home hunting!
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