The real estate closing process has changed. For those of you that don't know, the "closing" is just the final meeting in which the buyers and sellers review all of their final documents, review their loan packets for the last time, sign those forms and actually take possession or transfer possession of the home. Fortunately for the consumer, the closing process has changed for the better. It is causing some stress and anxiety amongst real estate professionals as we get used to the new structure, but it will be a change for the better. The changes actually took effect October 3rd. However, since most real estate transactions go into escrow for at least 30 days before they close, the new system will soon be experienced by buyers, sellers and real estate professionals. Before I explain the new process, let me explain the old one.
Stay with me here because this can get a bit confusing:
The old process required disclosures from the lender about the costs of a mortgage, which was brought on by TILA (The Truth in Lending Act). The old system required that the lender deliver to the borrower a disclosure known as the GFE (Good Faith Estimator), which was a preliminary estimation of how much the borrower would owe the lender and their monthly obligation (there were actually four separate disclosures that had to be delivered to the borrower throughout the process by the lender, but those were less crucial than the HUD-1 and the GFE). The old closing process required all of the important information and fees to be disclosed in the "HUD-1 (AKA HUD)," which was a slightly confusing document designed to chart all of the fees and costs associated with the purchase or sell of the home. The HUD, which is the map of all of the costs and credits that are involved in the purchase of the home, was a result of RESPA (Real Estate Settlement Procedures Act). In 2013, it was revealed by the CFPB (Consumer Financial Protection Bureau) that in 2015 the major disclosures (brought forth by TILA and RESPA) would be combined into two new disclosures known as TRID (TILA-RESPA Integrated Disclosure) to be delivered to the borrow at two crucial moments in the process. Not only would these disclosures be combined, but they would be streamlined and made easier to understand for the borrower. The point of TRID is to protect the consumer. It was enforced by the Consumer Financial Protection Bureau, after all.
Got it? Let's move forward:
At the end of the day, TRID is used to make certain that lenders disclose to the borrower exactly how much their mortgage will cost and that those figures stay the same or extremely close by the time the borrower is ready to close on their new home. TRID is going to map out all associated closing costs like attorney fees, Realtor fees, insurances, taxes and will be much easier to understand. But, it's also going to make the entire process of disclosing related mortgage costs and fees innumerably easier for the borrower to understand.
I recently read an article from CNN Money titled, "How The Mortgage Process Just Changed" that explains some of the changes and shows images of the new forms. One of the biggest differences now is that the lender has to provide a "Loan Estimate Form" to the borrower within three days of them submitting their mortgage application. Once the borrower has received this form, they can visit other lenders to compare the costs. The Loan Estimate will not have a ton of information. The Loan Estimator will mainly disclose the cost of the monthly principal, interest and mortgage insurance (if needed), as well as some associated lender's closing costs.
The next disclosure is the "Closing Disclosure Form" and it will have to be delivered to the borrower no later than 3 days prior to the closing. The purpose of this document is to disclose to the borrower how much they are actually going to pay and give them the opportunity to contest any issues with those costs. The borrower should compare their original Loan Estimator Form to the Closing Disclosure Form and insure that there are no discrepancies between the two, unless the lender and borrower have already come to terms with changes earlier in the process.
All in all, this is a good change. It is meant to protect the borrower and provide more transparency to the borrowing process. The borrower will more easily be able to see what they're paying for and what those charges mean, rather than being told that they owe Y and not X at the closing table. However, the entire real estate industry is anxiously preparing for this new process. It is going to be challenging. Essentially, our entire closing process has been uprooted and our familiar ways are gone. The mortgage providers are really taking the brunt of the responsibility here, but both the agents and attorneys have to make some changes, too. The agent is now encouraged to satisfy all contingencies as early as possible and acknowledge them to the lender. We are also being told that we should extend the entire escrow period by at least 15 days to make room for these 3 day periods on the disclosures. That means that a typical transaction will not take 45. The attorneys are now asked to complete their title work as swiftly as they can and return that to the lender so they can factor those charges into their Closing Disclosure. I only say those last few things to encourage anyone buying a home in the next couple of months to be patient with their friendly real estate professionals as they learn the new operation. Once we are all familiar, this will be a great improvement that will help out the borrower in major ways!
As always, if you or anyone you know needs help buying or selling a home, I would be glad to help. The fall is a great time to buy or sell as the inventory in the market starts to thin out. It means both more negotiating power for the buyer and less competition for the seller. Let me know if you have any real estate questions or concerns!
Troy Franklin Gandee