But the rules around finances, disclosures, lending choices, and agreement terms are so complicated that they could make anyone's head spin. So as a home buyer, especially a first time homebuyer, how can you make sure you know everything you need to know before you owe a mortgage? CFPB know before you owe
First of all, it's important to understand what the federal government is doing to try and protect homebuyers. After the housing bubble burst, the government stepped in to try and make sure that those applying for mortgages understood what they were getting into before they made the final choice to sign for their mortgage.
Those applying for mortgages
previously would get a handful of very complicated disclosures laden with financial terms that were complicated even for those who worked within the industry.
When Know Before You Owe went into effect in 2015, these many disclosures were simplified into two. You should receive:
Total cost of your home
- A Loan Estimate which makes it simpler to compare loans from different lenders and see where the differences will be in terms of total cost. This helps homebuyers make more informed decisions about their lender and their loan choice.
- An estimate of the closing costs. Closing costs are often surprising to many homebuyers who have not been through the process before. Lenders are now required to give this disclosure to customers to make sure that they have enough liquid cash to cover closing expenses and don't run into trouble at the last minute.
When you make a bid on a home, you give a set dollar amount that you're willing to pay. If you could pay for your home in cash, you might pay just that amount; for most buyers, however, they will be applying for a mortgage to cover 80% or 90% of the cost of their home. Since they will be paying interest on that borrowed money, the total cost of their home will be much higher than what they said they'd pay in cash.
Most buyers anticipate that this is the cost of borrowing money from a bank or lender, but knowing the difference between the "sticker price
" and the cost of the loan over 30 years or so can help buyers make more informed choices.
This is especially true when buyers are shopping at the upper end of their "approval" limit. Just because a lender approves them for a certain mortgage amount doesn't mean they should spend that much on a home, and buyers sometimes forget that. Seeing the total loan cost can help make that difference in cost more real. Exact loan terms
All loans have different rules. Can you make an early payment? Can you buy a home before selling
yours? Can you make an extra payment? If you do, does it go to the principle, or does it just go towards future payments?
All of these terms can be acceptable in different situations, but knowing which ones apply to you is crucial. If you put together a bunch of cash and send it in, expecting it to pay down your principle and reduce the lifetime cost of your loan, but then find out it has only paid your next six or eight months in advance, you might be very frustrated.
Finding out how to handle these situations ahead of time will help smooth the process. Can your loan be sold?
One detail that is often missed in closing documents is whether or not the lender has the right to sell your loan
in the future. The lender might do this as a provision against running into financial trouble themselves, because they are concerned that you are a credit risk and want the option of selling your loan if you make late payments or approach default.
If they are a predatory lender looking to offload your loan to another company under less beneficial terms. If your loan can be sold, find out in what conditions this can happen and whether or not your loan terms can change if it does.
Since your mortgage will be a huge part of your financial life for decades to come, don't let yourself be rushed into signing before you're ready. Ask questions as you sign all documentation, ask for clarifications, ask for statements to be put into writing, and make sure that you understand everything you're agreeing to. After all, your mortgage documents are legal contracts, and you will be expected to adhere to them in the future.