Have Mortgage Rules Made It Tougher to Buy a House?

The “Know Before You Owe” mortgage rules that went into effect last October have slowed the homebuying process a bit, but overall it hasn’t made it more difficult — for buyers and sellers, anyway — according to mortgage adviser Casey Fleming.

“I have seen homeowners frustrated because the process took longer than they thought,” Fleming, author of loanguide.com, said. But buyers and sellers have extended their contracts “in every single deal that I’ve ever been involved in.”

Those delays stem from the new rules, which require additional paperwork and disclosures for lenders. The new, standardized forms spell out exactly how much a borrower must pay for closing costs and how much each monthly payment will be as the loan ages and potentially adjusts, right up until its term ends.

They’re great changes for buyers because they make the total cost of the mortgage very clear before they finalize the purchase. Lenders, however, have been “in a tizzy” over the changes, Fleming said.

“The problem is that there are very severe penalties (for lenders) for not getting it right,” Fleming said, offering an example of a lender who, because of a math error in determining the lifetime costs of an adjustable-rate mortgage — part of the new paperwork and disclosure rules — had to eat about $15,000 because of the error, even though it would have had no financial impact on the borrower.

In a nutshell, borrowers must now get the new standardized forms at least three days before closing on their loan. Before, changes could be made right up to and even during the closing.

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Before the change, homebuyers received the “HUD-1 Settlement Statement” — short for the U.S. Department of Housing and Urban Development — at closing, when they were already busy signing dozens of forms. (Note: It was always possible to ask for a preliminary HUD-1 several days before closing and some mortgage lenders did provide advance copies.) The HUD-1 looks a bit like an accountant’s ledger or an IRS tax form. Borrowers were also presented with a separate Truth in Lending Act (TILA) disclosure.

Both the HUD-1 and the TILA disclosure have now been replaced by a single “Closing Disclosure” form. This form is still several pages long, but designed to be easier to read. The cover page includes clear representations of monthly payments, total payments, closing costs, prepayment penalties, balloon payments and potential interest rate changes during the life of the loan. Everything on page one of the document is a direct response to complaints about many practices that tripped up consumers during the housing bubble.

The rest of the document bears similarity to the old HUD-1, with borrowers’ details on one side and sellers’ details on the other. Late fees and other terms follow. There’s an easy-to-use interactive guide to the paperwork on the Consumer Financial Protection Bureau website.

While lenders are still adjusting to the changes, Fleming said the processes should be smoothed out over the next several months. Overall, Fleming thinks the clarity of the new rules combined with the easing of mortgage underwriting through lower down-payment requirements and mortgages becoming available for people with lower credit scores make it a very good time for buying a new home. (You can check your own credit scores for free on Credit.com to see where you stand.)

“I see homebuying becoming far easier and far more possible than it was before,” Fleming said. “And from a consumer perspective, these new rules — they’re not perfect, but I see them giving the consumers more confidence in terms of their decision-making process because they’re going to see what they’re really spending and not just looking into some murky pond.”

If you want to get an idea of how much home you can buy, you can check out this home affordability calculator.