TRID – How This Change in the Mortgage Industry Affects You!

KNOW BEFORE YOU OWE

Change is afoot in the mortgage industry.  Welcome to TRID which goes into effect on October 3, 2015.   This new rule primarily does two things:

1.         It simplifies and consolidates some of the required loan disclosures, and

2.         It changes the timing of some activities in the mortgage process.

TRID is an acronym for TILA/RESPA Integrated Disclosure.  Only in the mortgage world would we make an acronym out of acronyms... so let's break this down a little further. TILA is the Truth in Lending Act and RESPA is the Real Estate Settlement Procedures Act.  The CFPB modified both rules in its TRID final ruling, consolidating four existing disclosures into two new forms:  The Loan Estimate (LE) and the Closing Disclosure (CD).  It changes the way mortgage loans are disclosed (so long Good Faith Estimate) and how mortgage loans close (good-bye HUD-1 Settlement Statement).  TRID is the latest (but likely not the last) mandate by the Consumer Financial Protection Bureau (CFPB, the Dodd-Frank spawned agency) to protect consumers in financial transactions, including mortgages.

Two Important New Documents:

The Loan Estimate (LE) combines the old Good Faith Estimate (GFE), Truth-In-Lending (TIL), and the servicing disclosure (which told you whether your loan could be sold). The LE uses large print and simple language to set forth loan terms and the costs associated with getting a mortgage.  It is arranged in a way that makes it easy to understand at a glance the loan amount, rate, principal and interest payment, and the progression of the loan over time.  After reviewing this document, the borrower must indicate their intent to proceed with the loan – this can be done by telephone, email, or in writing (by mail or other delivery).

The Closing Disclosure (CD) combines the TIL disclosure, the Itemization of Amount Financed, and the HUD-1 Settlement Statement into one, easy to read, document that is a mirror of the LE.  The goal of CFPB in developing the LE was to allow borrowers to be able to compare what they were told they were paying to obtain a mortgage (LE) to what they are actually paying (CD) at the table.

These two documents, once implemented and understood, should go a long way toward simplifying the lending process and helping consumers (the goal of the CFPB) understand the terms and costs of the loans they are obtaining.

TRID is an alphabet soup of changes – now more than ever you need a professional loan officer who works for a company that understands the rules and knows how to timely deliver your mortgage! 

7 FACTS ABOUT THE NEW PROGRAM

1.         Preapprovals and pre-qualifications are unchanged by the rule.

The more time and effort the applicants invest in learning about home loans and defining what they want and what they’re capable of financing before they select a home, the smoother the path from contract to closing will be and the more targeted the shopping process can be.

2.         The application process begins with a Loan Estimate (LE). 

The application process typically begins after the buyer has identified a property.  Lenders must provide LE’s within 3 business days after the buyer has provided the lender with 6 key pieces of information.  Although lenders may accept and consider income verification documents and other information voluntarily provided, they cannot require this documentation as a condition of providing an LE.  Issuing an LE does not mean that the lender has approved or denied the loan.  By issuing the LE, the lender has committed to honoring the fees described in the LE as long as the loan is later approved without any changes in circumstances affecting the loan application. 

Tip:  The lender must provide the LE within 3 business days, but there is no set time frame for the applicant to receive it. 

3.         Applicants must indicate their intent to proceed.

Once the applicants have compared Loan Estimates and determined which loan best meets their needs, they need to let the lender know.  If the applicant is silent, the lender cannot assume an intent to proceed.  There may be different requirements for what applicants need to do to indicate their intent to proceed with the lender.   Generally, lenders won’t move forward with an application without a clear indication from applicants to proceed with the loan.  And, after 10 business days without that indication, the lender is no longer required to honor the terms initially offered in the LE.   After 10 business days without an intent to proceed, the file can be closed and the applicants will need to start over with a new application.

4.         Once the applicants indicate their intent to proceed, lenders can charge fees.

Until the applicants indicate their intent to proceed, lenders can’t charge any fees in connection with a mortgage application, including an application or appraisal fee.  The only exception is a reasonable fee for the credit report.

Payment information can be obtained only after the lender provides the LE and the applicants have expressed their intent to proceed.    Since lenders cannot collect payment information in advance, they may require applicants to provide payment for an appraisal, application or other loan processing fees immediately after or as part of confirming their intent to proceed with the application. 

5.         A changed circumstance may mean a revised LE or CD.

A lender is responsible for providing accurate pricing information for the loan requested, based on the best information reasonably available to the lender at the time the disclosure is provided.  However, if the information about the applicant, the proposed loan, or the property was incorrect or changes, a revised LE may be issued.  This can be referred to as a changed circumstance.  A new LE can reflect changed rates and terms caused by the new information.

Not all changes require the lender to issue a revised LE.  Minor changes, for example when the seller agrees to pay for a specific cost not included in the original agreement, do not require the lender to issue a revised LE.  In that case, however, the loan may need to go back to underwriting – so it’s best to notify the lender of any changes as soon as they are known. 

Common reasons why an LE may be revised include:

a.         Applicant decided to change loan programs or the amount of the down payment.

b.         The appraisal on the home came in higher or lower than expected.

c.         Applicant’s credit status changed, perhaps owing to a new loan or a missed payment.

d.         The lender could not document overtime, bonus, or other income provided on your client’s application.

e.         Unexpected fees developed such as condo certification fees that were unknown at the time of the application. 

If changes occur later in the mortgage process, lenders may need time to respond.  For example, if your client requests a different loan program late in the process, an appraisal or underwriting step may need to be repeated.

6.         Applicant must receive the CD at least 3 business days prior to closing.

Lenders need to make sure that the borrowers receive the CD at least 3 business days before closing.  This gives the borrowers time to review a summary of the final loan terms.  Borrowers should no longer be faced with significant changes from the lender and be pressured to sign on the same day.

The CD can be compared with the information contained in the initial or revised LE.  Flexibility has been built into the rule to accommodate small, last-minute changes typical of purchase transactions.  However, when changes to the transaction are significant, a new 3-business day review period is required.  Since large, last-minute changes should be rare, an additional review period should also be rare.  Most settlement issues, such as adjustments to seller credits to account for repairs, that are currently addressed as late as the day of closing can continue to be handled at closing without requiring a new 3-business-day review period.  However, the lender will need an updated underwriting approval of any additional seller credits so these should be communicated immediately to the lender.

TIP:  The CD must contain the buyer’s and the seller’s real estate brokerages’ and agents’ names, addresses, state license ID numbers, email addresses, and phone numbers.   If this information is unknown, the form cannot be completed.  Agents will need to communicate this information as early in the transaction possible to prevent delay.

7.         Extra 3-day reviews are unlikely.

While most changes that come up in the last few days before settlement will not delay a closing, there are three major changes to loan terms that will require the lender to issue a revised CD and will trigger a new 3-day business-day review period.  These are:

a.         The APR (annual percentage rate) increased by more than 1/8 of a percent for regular loans (most fixed rate loans) or 1/4 of a percent for irregular loans (most adjustable loans).  A decrease in APR will not require a new 3-day review if it is based on changes to the interest rate or other fees.  (Note: Lenders have been required to provide a 3-day review for these changes in APR since 2009.)

b.         A prepayment penalty is added, making it expensive to refinance or sell.

c.         The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.

No other changes require a new 3-day review.  Any other changes in the days leading up to closing do not require a new 3-day review, although the lender will still have to provide an updated disclosure.

For example, the following circumstances do not require a new 3-day review:

a.         Unexpected discoveries on a walk-through such as a broken refrigerator or a missing stove, even if they require seller credits to the buyer.  However, the lender must be notified immediately of any additional seller credits to obtain an updated underwriting approval.

b.         Most changes to payments made at closing, including the amount of the real estate commission, taxes and utilities proration, and the amount paid into escrow.

c.         Typos found at the closing table.

 

 

I look forward to seeing you at the closing table soon!

 

 

Diane Pyshos, A & N Mortgage Services, Inc.

1945 North Elston Avenue, Chicago, IL   60642

Office:  312-909-9718, Email:  dianep@anmtg.com

NMLS License #137800, Company NMLS License #19291

                                                                                   

                                                                      

 

 

 

 

Not All Down Payment Funds Are Created Equal!

Anatomy of a Down Payment

When you decide to purchase a home, one of the first questions you’ll be asked when it comes to financing is, “How much of a down payment can you make?”  The down payment is the amount of money you put towards the purchase price of a home including the percentage down plus closing costs.  If you would like to put 10% down toward a $300,000 purchase price and your closing costs are $4,000, the total funds needed would be $34,000.  Some lenders may also require “reserves” which is extra cash or assets you have after the closing.  Reserves ensure that you have a financial cushion in case of any unforeseen circumstances that might impact your income or expenses.

Most conventional loans require a minimum down payment of at least 5% from the borrower’s “own” funds.  Some special loan programs such as those provided through IHDA, FHA or USDA do not have a borrower “own” funds requirement.  Your mortgage consultant will guide you through the program differences to choose the best option for your situation.

           Borrower's "own" funds are those funds which have been in the borrower's bank accounts for over
             two months as verified by the most recent two months' statements without any large deposits
             appearing.  Large deposits are defined as a single deposit that exceeds $1,000 or is sometimes
             tied to a percentage of your total monthly qualifying income for the loan.  Generally speaking,
             large deposits are acceptable under some circumstances as described further in this newsletter. 
 

So, what types of assets are eligible for your down payment and what are some red flags to watch out for?  To help you understand the types of assets that are considered eligible to apply toward your down payment, I created this guide for easy reference. 

1.            Bank Accounts:  Bank accounts include savings accounts, checking accounts, certificates of deposit, and money market accounts to which you have immediate access.  Lenders need to review at least your last two months bank statements prior to your loan application.  If you receive quarterly and yearly bank statements that are more than 30 but less than 90 days old, they will be accepted as long as you can verify that the funds are still available.  If you have a joint bank account and one or more of the account holders are not part of your loan application, you’ll need to provide a signed letter from each of those holders confirming that you have access to all of the funds in the account.
 

Large, non-payroll deposits, typically larger than $1,000, need to be sourced.  If the large deposit is not from the borrower’s “own” funds, they may or may not be accepted as eligible assets to use toward the down payment.  Some examples of deposits to be questioned and verified are:  secured loans, business assets, gift funds, reimbursements, proceeds from the sale of assets, transfer of minor accounts, and trust funds. 

2.            Secured Loans:   Any borrowed funds must be identified for down payment eligibility as an acceptable source.  Generally speaking, any funds borrowed and secured against borrower’s “own” assets are eligible.  For example, if you borrow funds from a 401k account, these are acceptable funds for your down payment.

 3.            Business Assets:   May be an acceptable source of funds for down payment, closing costs and financial reserves when a borrower is self-employed and the individual federal income tax returns have been evaluated  by the lender, including, if applicable, the business federal income tax returns for that particular business.  The borrower must be listed as an owner of the account and the account must be verified.  The lender will request a business cash flow analysis from your accountant to confirm that the withdrawal of funds will not have a negative impact on the business. 

4.            Gift Funds:  Gift funds from a relative are usually an acceptable source of funds, however, the lender must perform an evaluation to quantify how much of the down payment must be from the borrower’s “own” funds.  For example, let's say the purchase price is $200,000 and the borrower wishes to put down 10%.  The minimum down payment from borrower's "own" funds is 5%, or $10,000.  The remaining $10,000 plus closing costs may come from gift funds.   If borrower is making a 20% down payment, all funds may be from a gift.  If acceptable, the gift must be verified by a donor’s gift certificate and paper trail showing the transfer of gift funds.

5.            Wedding Gifts:  May be acceptable with a copy of the wedding certificate and invitation.  Acceptability is conditioned upon the underwriter’s judgment based upon a number of other underwriting factors including debt ratios, credit score, and percentage down.

6.            Stocks, Stock Options, Bonds and Mutual Funds:  Vested assets in the form of stocks, government bonds, and mutual funds are acceptable sources of funds for the down payment, closing costs and reserves provided their value can be verified.  The lender must verify the borrower’s ownership of the account or asset.  The value of the asset and any related documentation must meet underwriting requirements and the asset must be liquidated prior to closing and the paper trail submitted for approval. 

7.            Retirement Funds:  These include IRA, SEP IRA, 401(k), KEOGH, and other IRS qualified retirement plans.  They may be verified with a copy of the most recent monthly quarterly statement which states that you are the account owner, as well as the value of the account.  If you will be liquidating the funds, this will need to be done prior to closing and the paper trail documented.  Watch out for penalties which can equal at least 10% of your balance plus taxes on the withdrawn funds.  If you are borrowing from a 401(k), the lender will need to see the note and terms of your loan and the paper trail for the deposited funds.  When funds are used to meet reserve requirements, you aren’t required to withdraw the funds from the account.  All retirement accounts require written conditions under which borrower has access to the funds. 

8.            Individual Development Accounts (IDA):  An IDA is a matched savings account that helps people save towards the purchase of a lifelong asset, such as a home.  If you have one, you must have regularly deposited money that is matched by a municipality, non-profit or religious organization, your employer, or a regional Federal Home Loan Bank.  IDA’s may be used to meet down payment requirements.

9.            Trust Accounts:  Funds disbursed from a borrower’s trust account are an acceptable source for the down payment, closing costs and reserves provided the borrower is the beneficiary and has immediate access to the funds.  All trust accounts require written conditions under which borrower has access to the funds. 

10.          Net Proceeds from Sale of Real Estate:  If you currently own a home that is listed for sale that will close prior to your purchase, your lender will allow the net sales proceeds to be used towards your down payment.  Generally speaking, the lender will use 90% of the sale price minus your mortgage balance.

11.          Sale of Personal Property:  You can use the proceeds from the sale of your personal property as a source of funds for down payment, closing costs and reserves.  An example would include the sale of a car or musical instrument.  The bill of sale, closing statement and verified deposited funds are required. 

12.          Cash Value of Life Insurance:  This may be an option if you have an insurance policy that accumulates value (sometimes called a “whole life policy”).  You may be able to use some or all of the policy’s value toward down payment, closing costs and reserves. 

13.          Bridge Loans:  If you happen to have a home for sale, some bridge loans are a form of second mortgage secured by your current home.  By using funds from this loan, you may be able to close on a new home before selling your present home.  In other words, bridge loans help “bridge” the gap between money that you expect from sale proceeds of your current home and money applied toward your new purchase loan, when there is a time gap between the two transactions.  Your mortgage consultant will help you understand if you are eligible for this type of financing.

14.          Foreign Assets:  If you’ve been employed or have maintained accounts overseas, you can use these funds, provided certain requirements are met. 

15.          Note Receivable:  In layman’s terms, a Note Receivable is an IOU.  Officially, it’s an asset that contains a written promissory note from another party.  For example, if you lent someone money and they have repaid the loan, the note and paper trail of repaid funds going into your account will be required for eligibility. 

If you need more information or would like assistance determining if your assets are eligible to be included as your down payment, I would be happy to help you!  Please contact me at:

Diane Pyshos, Senior Mortgage Consultant

A & N Mortgage Services, Inc.
Email:    dianep@anmtg.com
Phone: 312-909-9718
Licensed in IL, IN and MI
NMLS #137800 Company ID #19291

Note:  There may be tax implications or penalties associated with liquidating certain accounts.  Please consult your accountant for further guidance.   We do not provide tax advice.  We are not a licensed insurance agency.  There may be penalties and tax implications associated with surrendering your policy.  Please consult with your insurance provider and accountant for additional guidance. 

 

 

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[1]  Borrower’s “own” funds are those funds which have been in the borrower’s bank accounts as verified by the most recent two months’ statements without any large deposits appearing (typically larger than $1,000).  Generally speaking, large deposits are acceptable if they are eligible secured loans, eligible gift funds, verifiable reimbursements, verifiable loan repayments, and eligible business funds.  The list of acceptable funds is contained in this newsletter.