What to Expect Under the New Laws Affecting Mortgage Financing

Effective October 3, 2015, most new mortgage applications will have to comply with the requirements of the Truth in Lending/Real Estate Settlement Procedures Act Integrated Disclosure laws, ("TRID"). TRID is our law-makers' response to the mortgage foreclosure crisis we have all endured over the past several years. This article attempts to provide relevant information to those seeking mortgages in the Sarasota area under this new environment.

BACKGROUND

Many mortgage Borrowers who lost their homes during the mortgage foreclosure crisis complained that the mortgage application process included too much paperwork that was difficult to understand and had the procedure been simpler, they may not have chosen the specific mortgage program which resulted in their default - or they may not have purchased a home at all during the no-income verification era.

Unfortunately, the new process does not reduce the paperwork. It also will add some new costs to the mortgage application/closing process. Most professionals believe that the new procedures will add time to the process as well.

WHAT TO DO BEFORE YOU SIGN A PURCHASE AND SALE AGREEEMENT

The law encourages "mortgage shopping" by Borrowers. Homebuyers planning to finance their purchase should shop mortgage rates BEFORE looking at homes. So, where should one shop? Generally, a Borrower has three choices: Use a bank or mortgage broker located within the community in which they are purchasing a home; use a bank or mortgage professional from their home town; or use an internet lender.

In my opinion, banks and mortgage brokers located outside of the community in which the home is located should be avoided unless the Borrower has a "special" relationship with their bank. In other words, if the Borrower is a private banking client or otherwise has substantial assets with their local bank, then applying for a mortgage with their local bank might result in a stream-lined process. However, keep in mind that closing costs and transaction customs differ from state to state and sometimes even county to county within the same state. The failure of an out of town mortgage professional to research local costs and customs has the potential to cause last minute problems and/or delays.

Internet mortgage lenders have become more popular lately and generally my clients are satisfied with the service; fees and interest rate they receive from such companies. However, it is my experience that most mortgage professionals located within the community in which the home to be purchased is located will match or beat the rate and fee structure offered by an online lending company.

It is probably becoming clear to you that I recommend the use of a bank or mortgage broker who works within the community in which the home to be purchased is located. It has been my experience over the past 25 years that Borrowers receive superior customer service when working with a professional that they may encounter within their community in the future. Faceless mortgage lenders do not have the same incentives to provide you with excellent service. With new laws, forms, and procedures in effect customer service becomes more important.

Lastly, with regard to the use of a local bank or mortgage broker, when you choose a professional located within the same community as your home, you are investing in your community! What better way to support your new neighbors?

NEW FORMS/NEW PROCESS

Enough about shopping for a mortgage. Now that you have selected your mortgage professional, what's next? First, be prepared to provide recent Tax Returns, Bank Statements, and Pay Stubs promptly. Your loan application will require specific information regarding your income, debts, assets, and credit. Anything out of the ordinary, such as intermittent bonus or overtime, may require that a Borrower provide a detailed explanation and/or paper-trail.

The Florida Association of Realtors/Florida Bar Purchase and Sale Contract has been modified in response to the new law. It is wise to have your attorney review the contract to ensure that your rights under the new law are protected.

Perhaps the most striking difference under the new law is that it requires a six page Closing Disclosure, (CD") be delivered to the Borrower at least 3 days prior to "Consummation", (formerly "Closing"). The CD takes the place of the HUD-1 Settlement Statement and the disclosure timing requirement is designed to provide sufficient time for the Borrower to compare the final loan terms with those that were initially quoted. The CD should not be ignored as it will include important information such as the interest rate, monthly payment, and cash to close, among other things, (recall it is 6 pages). It is my opinion that the CD should be explained in detail to the Borrower by the mortgage professional. It is important to note the benefits of hiring an attorney to conduct your closing. For example, if you are unable to timely obtain a satisfactory explanation from your mortgage professional, your attorney will be able to step in and assist with an explanation and to ensure your rights are protected.

The CD will generally be provided to a Borrower directly from the lender. The lender may send the CD by regular mail or email. Previously, the HUD-1 Settlement Statement was prepared by the settlement agent, (attorney or title company) conducting the closing. Generally the settlement agent has an incentive to provide prompt and accurate customer service to the buyer, seller, and Realtors. Therefore, settlement agents are accustomed to rushing to provide all of the parties interested in the closing with final closing figures, documents, and other details. Under TRID, these final figures will come directly from the lender and not the settlement agent. It is presumed that this will cause frustration to all of the parties, especially the Realtors because they will not have direct contact with the lenders. Also, settlement agents are not allowed to share the CD with the Realtors until receiving authorization to do so from the Borrower. Our firm will be preparing an authorization form as part of our file set-up process because we feel that a Realtor's role should not be diminished by the new law.

Another major change in the process and forms under TRID relates to the way the cost of title insurance is disclosed. Title insurance pricing differs from state to state. TRID, however, is a federal law and the title insurance calculation and disclosure thereunder will be shown differently than Floridians have become accustomed to. Previously, the cost for title insurance was calculated based upon the cost for the Owner's Title Insurance Policy which is based upon the purchase price of the property. Then a small amount, ($25-$250) was charged to simultaneously issue the title policy to the lender. Under TRID, lenders will show the cost of title insurance for the lender's policy as the only required amount. It will then show the additional amount of title insurance that protects the Borrower as an optional amount.

Many in my profession fear that the benefits of the Owner's Title Insurance Policy will not be explained to the Borrower and the Borrower may forgo purchasing the policy to save a couple hundred dollars. It is important to compare the cost and benefits of purchasing such policy with the attorney representing you prior to the consummation (formerly "closing").

The Consummation, including the document signing and disbursement, will still take place in the office of the settlement agent and once the wrinkles are worked out of the new system it may turn out to be a more efficient process. At Gibson, Kohl, Wolff & Hric, P.L. we remain committed to protecting our clients who are purchasing or selling real property and look forward to assisting you through the new process.

For more information, consider visiting these links:

http://www.consumerfinance.gov/knowbeforeyouowe/

https://www.fntgflorida.com/media/public/2015/02/25/why_you_need_owners_title_insurance_brochure.pdf