Know Before You Owe: The New Loan Estimate Mortgage Form
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Good news for prospective homeowners, the process for getting a mortgage has become a little easier… at least the paperwork has. The Consumer Financial Protection Bureau, or CFPB, has removed four forms from the process and replaced them with two new ones. Not only are the new forms more straightforward, but they also make it easier to compare mortgage estimates with the final offer.
Why the Change?
Before October 2015, lenders had to give you two different forms when you applied for a mortgage and then two additional forms when they made you an offer. This was the system for over 30 years due to various federal law and agency requirements. With overlapping information and confusing terms, the CFPB decided to condense the information into just two forms and simplified the language in 2012.
The Loan Estimate Form
When you apply for a mortgage, you will now get a single Loan Estimate form, which covers the key details of the offer, including the amount of the mortgage, the interest rate and what your monthly payments will be. The form also lists the closing costs, showing you exactly how much money you will need when you accept the mortgage offer.
This form also specifies in clear language whether or not interest rates can change, if there will be extra fees or penalties if you pay off the mortgage early, or if you can make oversized payments due at the end of a mortgage, also called "balloon payments."
The Closing Disclosure Form
When your mortgage is approved, and the lender gives you an official offer, you will receive the Closing Disclosure form. This form contains the same information, in the same format and in the same order, as the Loan Estimate form.
Putting the two forms side by side, you can see exactly what changes, if any, were made between the lender's estimate and the official offer. Because every financial institution uses the same forms, you can easily compare this estimate to others.
Taking Time to Compare
Buying a house isn't a decision to rush into. By law, you have three business days to review the Closing Disclosure form and ask any questions you may have. If there is something you don't understand, or an item in the disclosure form you don't like, use this time period to renegotiate better terms. Even if you accept the offer the moment it's given to you, remember that you have a three-day window if you change your mind.