Mortgage Disclosures: What They Mean for Your Loan
Mortgage Disclosures: What They Mean for Your Loan
In years past, most people who applied for home mortgage loans received a Good Faith Estimate and Truth in Lending Disclosure. Both of these forms detailed the specifics of the loan.
As of October 2015, the disclosure is now called a "Loan Estimate." People with loans that do not fall under the new laws requiring these disclosures may still receive a Truth-in-Lending Disclosure.
This guide shows the differences between these disclosures, what changed with the law in 2015, and what to look for in these documents before you sign.
What is the Good Faith Estimate?
Prior to October, 2015, mortgage lenders were required to provide mortgage applicants with a Good Faith Estimate (GFE). This form showed a variety of aspects about the loan, including:
- loan amount
- loan term
- initial interest rate
- whether or not the rate or payment could change
- date that the GFE expires
- details about late payments, partial payments or prepayment penalties
- escrow account information for property taxes
- estimated settlement charges (also known as closing costs)
- information about tradeoffs (such as a lower settlement cost in exchange for a higher interest rate)
The form also gave some blank space to compare rates from other lenders. The purpose of the GFE was to have a summary of the loan details on just a few pages.
What is a Truth-in-Lending Disclosure?
By comparison, the Truth-in-Lending Disclosure was designed to summarize the total costs you could expect from your mortgage loan. The form shows:
- annual percentage rate (the interest rate plus prepaid finance charges)
- the total interest you pay over the life of the loan
- the total amount the lender finances
- estimated total amount you will pay over the life of the loan
- payment schedule, including amount, number of payments and frequency
- existence of prepayment penalties
- whether or not a future buyer could assume the loan
This form is primarily used to understand the extent to which you are obligated to make payments on the mortgage loan, if you accept the loan and make payments on it as planned.
How Does the Loan Estimate Differ from These Forms?
The new form, called a Loan Estimate, is intended to eliminate some of the overlap in these disclosures and to make the summary shorter and more to-the-point. Instead of five pages to review, the Loan Estimate only has three contained within three sections.
The first section shows the terms of the loan, such as interest rate and length of the loan. It also has check boxes next to each item to indicate if that aspect could change over time (or will change, such as an adjustable-rate mortgage that may increase after a specified period).
The second section details expected payments, noting an eventual drop in cost if your homes equity exceeds the need for private mortgage insurance. The third section describes all the different closing costs with a total cost, which includes the downpayment.
What Forms Do I Get at Closing?
In the past, a home buyer would have received a Final Truth-in-Lending Disclosure and a HUD-1 Settlement Statement. The new Closing Disclosure makes it easier to see the final terms of the loan. While the Loan Estimate is merely an estimate of the loan terms, the Closing Disclosure is the final paperwork you sign to receive funding from the lender and close on your loan.
The closing disclosure summarizes the different costs that are expected as described in the original estimate. However, some numbers may have changed based on issues brought up during underwriting. You should note these differences and ask about each one.
Why are These Documents Important for My Mortgage?
The Consumer Finance Protection Bureau, a division of the United States Federal government, assisted in the creation of these new documents. This new federal agency was created to assist and protect consumers and borrowers. As a result, these estimates are required so that borrowers can see, at a glance, all the information you need about the specifics of your loan. That way, it makes it easier to shop around for other loans.
In almost all cases, lenders must provide you a Loan Estimate for most types of mortgage loans. You can collect the various estimates and compare them to determine which loan is the best for your needs.
Am I Obligated to Accept the Loan Once I Receive the Estimate?
The Loan Estimate is not a guarantee that you have or even will receive the money from the lender. The law requires that a prospective lender provide you the estimate within three business days of receiving your application or relevant information such as a bank statement or income verification. At this point, the underwriting of the loan has yet to occur.
As such, you should not consider the loan estimate as a guarantee that the lender will give you the mortgage. You can freely use the information to shop around and compare.
What Happens if I Do Not Receive a Loan Estimate?
There are two scenarios in which you may not receive a Loan Estimate. The first involves special types of mortgage loans, which call for different kinds of disclosures. For example, if you requested a mortgage loan through certain types of homebuyer assistance programs, or if you are buying a home that is not secured by real estate (such as a mobile home), your loan may be governed by other laws.
The second scenario is likely related to the lender or your application, including:
- rejection of your application prior to the conclusion of the three business days
- incomplete or missing information from your application
- lender refusal to provide the estimate
If you have given the lender all necessary information and they still refuse to send you a Loan Estimate, you should look for a new lender and consider filing a complaint with the CFPB. These estimates are designed to protect your interests, so a lender who does not comply with federal law in this regard may not be keeping your best interest in mind.
There are many details related to your mortgage. Keep your Loan Estimate forms organized as you shop for a mortgage loan, so that you know what to expect from each lender from whom you request a loan. With this information, you can see loan terms with a quick look and no unpleasant surprises.