By Ron Bell, Director of Brokerage Operations - New Home Star
There have been plenty of changes in the financial realm that have affected the new home sales industry. Beginning October 3, 2015 the Consumer Financial Protection Bureau will roll out some of the most sweeping changes to the mortgage industry since the introduction of RESPA in 1974. The changes are intended to provide equality and clarity of the lending process to the public. Some of the changes could affect transactions for new homes.
Builders should be aware of these 3 major changes:
1. Two new disclosure documents
The Loan Estimate
The Good Faith Estimate and the initial Truth-in-Lending disclosure will be combined into a new form called the Loan Estimate. The bank will give this to the buyer no later than three business days after submitting a loan application. The definition of a loan application will also change. After October 3, the lender must receive certain information from the potential borrower before it is considered an actual loan application and the three-day clock starts. Lenders must have:
1. Borrower Name
2. Loan Amount Requested
3. Address of Property (TBD will no longer be acceptable)
4. Monthly Income of the Borrower
5. Estimated Value of the Property (For builders this is the sales price)
6. Social Security Number
Builders active in the presale of communities that have not assigned numeric addresses should be especially aware of number three. Lot and filing numbers will no longer be sufficient for the application.
The Closing Disclosure
The second document will combine the HUD-1 and final Truth-in-Lending disclosures. This form will detail the exact costs of the transaction. The bank will provide a Closing Disclosure to the seller at least three days before the loan completion date (see "New waiting period" below).
Each new form should be easier to understand. Today, the separate documents can sometimes contradict one another. Once October 3 rolls around, borrower confusion should be a thing of the past.
Settlement Disclosures will no longer be combined. The bank will be responsible for the Closing Disclosure that details the buyer's loan, while the title company will prepare the seller's disclosure.
2. New waiting period
The bank must deliver final numbers to the seller three to seven days prior to closing, depending on how information is delivered. This waiting period is unavoidable.
3. The clock can start over
Right now, the banks and title companies are able to change the HUD-1 Settlement Statement, which will become a part of the new Closing Disclosure, on closing day. Under TRID, if changes are made after the three-day clock starts, the three-day waiting period could restart. Builders can limit this scenario by maintaining timely communication with the buyer's lender, and by sharing any change orders that affect the final price as soon as possible.
Not everything will cause time to relapse. For example, if you discover a missing appliance during your walk-through, you won't have to wait longer. Only changes that affect the loan product or buyer's APR will cause the clock to restart. After TRID, three scenarios will make the clock restart:
1. The annual percentage rate increases more than 0.125% for a fixed-rate loan or 0.25% for an adjustable-rate loan.
2. The Buyer is presented with a new prepayment penalty that will make it expensive to refinance or sell their new home.
3. The loan completely changes. This may include a change from a fixed to an adjustable-rate mortgage.
During the transition to TRID there will be the inevitable learning curve delays for banks and title companies. Some loans could be pushed as much as two weeks. Once the process is better understood, the industry loan processing times should return to what is currently being experienced. Smart sales associates of any builder will be proactive in educating their current and future customer to prepare for these new steps in the closing process. These new rules are designed to make things easier, but without the proper care will make some closings very uncomfortable.
Disclaimer: The content presented in this article is intended for information purposes only and not to be used as legal advice.
Ron Bell is currently working with various builders to develop and execute successful sales strategies. His role as the Director of Brokerage Operations with New Home Star is the result of 15+ years of industry experience, working previously as a broker associate, management consultant and former chair of the HBA Sales and Marketing Council.