Tuesday, July 28, 2009

Buying a Beach City Home: New Rules Will Affect Escrow Closing Dates

It seems that the folks in D.C. are still very busy trying to close the barn door ... long after the barn has burned down. While I give them marks on one hand for trying to fix a number of problems within the home lending sector ... you have to wonder if they actually give much thought to how changes in laws will affect real people.

You also have to wonder why they don't fix the biggest problem in the industry... the lack of regulation of the fees charged by lenders to borrowers. While there has been lots of talk over the years about regulation nothing ever seems to make it out of committee.

The Mortgage Disclosure Improvement Act contains some major changes that may affect your escrow closing date on all loans that are covered under RESPA related to an owner occupied residence. The second change covers new regulations concerning the financial information you provide to your lender if you are obtaining a conforming loan.

Changes to Truth in Lending:

Starting on July 30, 2009 the following changes will be implemented:

1. Within 3 business days a lender must provide a borrower an initial good faith estimate of the terms of the loan and the lenders charges.... however a lender must now wait a minimum of 7 business days after the initial disclosure is sent to close the loan.

2. If the initial good faith estimate changes because... the interest rate goes up or down by more then 0.125% or there is a change in the fees the borrower is charged by $100 or more... then a new disclosure must be given to the borrower and the escrow can't close until at least 3 business days after the borrower has received the revised disclosure. There are a number of items that can trigger either of the above situations and extend the escrow period by 5-6 days.

This may not seem like a big deal... but if you have locked in a specific loan rate and your lock is set to expire and you suddenly have to do a new disclosure it could be very expensive if you have to extend the rate. This could also raise some issues if you are buying a home that is part of an exchange... the rules are very specific about closing dates and a late closing could create tax consequences for a seller.

I expect that what will happen is that buyers and sellers are going to have to make some major compromises on closing dates and taking possession if there is even a hint that the original estimate might be changed.

Income and asset documentation changes:

The second change will go into effect on September 1, 2009. The changes will affect credit scores, income calculations, income from stocks bonds and mutual funds, asset documentation, retirement assets and trailing spouse income. There will also be major changes in the requirements on owner occupied 2 unit properties. You will need more money down and higher FICO scores.

Here are a few highlights:

1. Credit, income and asset documentation can't be older then 90 days. So if you got qualified in March you would need to submit new information by July.

2. Lenders now must compare your filed Federal tax return to the income you are stating. Pay stubs will not be enough by themselves.

3. If your spouse is a trailing spouse and doesn't have verifiable new employment on the date you move you can't count the expected income until the spouse actually has a job.

4. You can now only use 70% of the value of your Stocks, bonds and mutual funds assets... previously you could use 100% of the value.

5. If you are retired then you can only count 60% of your retirement assets rather then 70%.

While many of the changes being enacted by Congress are meant to curb previous excesses as we saw with the change in Appraisal rules... sometimes good intentions are not enough.

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