Disclosure rules expected to delay mortgage process
Many mortgage lenders have prided themselves on quick closings, building their clientele by wrapping up financing and paperwork within a month of home buyers’ signing contracts. But the 30-day closing may soon become as rare as a traffic-free run to the Cape in the summer.
New federal disclosure rules designed to simplify the financial reporting involved in purchasing homes and give buyers more time to understand mortgage documents could also trigger delays in closings as real estate agents, lenders, title companies, and lawyers shift how they handle loans.
In the past, lenders, attorneys, and title companies worked somewhat independently, providing buyers with the different documents on different schedules, making it easier to make last-minute changes. But under the new system, lenders must provide consumers with one document at one time, requiring lenders to gather all the information from different parties before moving ahead with closings.
As a result, closings this fall could take up to 60 days — even for mortgage lenders that have long sought to do quick turnarounds and get people into their new homes in about a month.
“It’s going to be pretty disruptive,” said Richard Vetstein, a Framingham real estate attorney. “It has a potential to make it a very messy fall market for sure.”
For buyers and sellers, the changes mean they will have to gather documents, such as IRS filings going back two to three years to verify their income, and get them to mortgage companies sooner.
A buyer can’t apply for a loan and then go off on vacation for two weeks and expect it to close on time, said Amy Tierce, the regional vice president for Wintrust Mortgage, a Chicago-based lender with offices in Needham. If a lender has follow-up questions, buyers will need to answer them promptly to make sure the final documents are done on schedule.
Consumers, added Tierce, should also be prepared to seek extensions on their interest rate locks because of possible delays. Real estate industry officials expect delays to become rare as they get used to the new rules and the process becomes more efficient.
But initially at least, it may be more difficult to do back-to-back closings, involving a homeowner completing the sale of one house and the purchase of another on the same day, industry experts said. Ensuring that two sets of buyers have all their paperwork done at the same time could be trickier, so consumers might have to sell on one day, buy on another, and crash at a hotel or a friend’s place in between.
The changes, which go into effect Oct. 3, were included the Dodd-Frank Act, the law aimed at overhauling the US financial system following the housing bust and financial crisis that followed. The crisis was blamed in large part on home buyers taking out loans they didn’t always understand and ultimately could not afford, leading to widespread foreclosures that undermined the financial system.
Under the new rules, truth-in-lending forms and the settlement statement from the federal Department of Housing and Urban Development will be combined into one disclosure form. This form will break down all the costs of buying a home, from the interest rate on the mortgage to dues owed to home- owners’ associations to fees for recording documents at the Registry of Deeds. All that information has to be provided to a buyer three days before the closing for review.
In the past, only the basics about the loan amount, interest rate, and monthly payments were provided by the lender to the borrower three days in advance. Other settlement documents could be finalized on the closing day.
Once the new rules go into effect, most lenders will want all the costs settled at least a week before the closing, so they have time to draw up the paperwork and send it to the buyers in time, experts said. Banks and mortgage lenders said they have bought software and trained staff to meet the new requirements.
“It’s going to be a good thing,” said Ed McDonald, president of Salem Five Mortgage Co., a subsidiary of Salem Five bank. “It’s going to force everybody to be efficient.”