Although a loan may help you finance your home purchase, it also comes with various costs. These are connected with taking out, closing, and carrying the loan. A document called the Truth-In-Lending Disclosure, or TILA, will help you figure out exactly what to expect in the way of immediate and long-term loan costs.
When you apply for a loan, you will receive several disclosure documents from your lender. Two of these documents, the Good Faith Estimate (“GFE”) and the Truth-In-Lending Disclosure (“TILA”), should be given to you no later than three days from the date of your initial loan application. By explaining the loan costs, the combination of the GFE and TILA will help you shop for loans.
The GFE is the primary source of information for you: It discloses an estimate of the fees that you will incur by taking out the loan, including loan application and origination fees, points, and document preparation fees, together with third-party fees for credit reports, appraisals, inspections, and title insurance, and estimated government fees such as transfer taxes and recording charges.
The TILA discloses calculations using the estimates from the GFE, together with estimated interest assuming that you keep the loan for its stated term. While the GFE will help you understand what you will be spending at or before the closing to receive the loan, the TILA is supposed to help you understand the full economic effect of your loan.
Although they are standard forms, the format of both the GFE and the TILA can vary from lender to lender, or depending on the loan programs you are shopping such as mortgages with balloon payments, or adjustable rates.
This article will explain what you can learn from the TILA. For more information on the GFE, see Nolo’s article: “Home Buyers: How to Read Your HUD-1 Statement”.
The Basic Truth-In-Lending Disclosures
Key information you’ll find within the TILA includes:
- The annual percentage rate (“APR”). This is a percentage that looks a lot like an annual interest rate, but is always higher than the interest rate, because it's calculated by combining the interest paid over the life of the loan together with prepaid finance charges. The idea is to show you the complete picture of how much you’re really paying per year to carry the loan. The charges included in the APR are the loan origination fee, discount fee, points, mortgage broker fee, tax/flood service fees for the life of loan, assumption fee, premiums for credit life or disability insurance (insurance to pay off your mortgage should you become disabled or die during the loan term), mortgage insurance premiums, lock or commitment fee, application fee, lender's attorney fee, and settlement or closing fee. But the APR isn’t a perfect measurement. Bankers, economists, consumer groups, and other mortgage professionals often criticize the APR because it omits some third-party fees that you will ultimately pay prior to your closing, such as for the credit report, appraisal, lender's inspection, lender’s title insurance policy, lender’s escrow, mortgage recording, and hazard insurance. Further, the APR will not include fees for items you may be required to provide for your closing depending on the particular loan or transaction. For example, depending on your loan requirements, your purchase contract, or local custom, you may also be required to pay for title searches and updates, title insurance policy endorsements, a survey, a pest inspection, tax and flood certifications, a mortgage notary, and mortgage transfer taxes; but the cost of these items will not be included in the APR. Critics further berate the APR because it does not accurately reflect how loan fees relate to monthly payments. The APR amortizes all of the up-front, lump-sum fee payments you will make at or prior to your closing over the entire life of the loan — meaning that the APR is calculated to assume that you will not pay these fees up front (even though you do make these payment at or prior to the closing) and that you will not prepay any monthly payments, make any additional payments, refinance your loan, or sell your home prior to the end of the loan term.
- Finance charges. This is a dollar amount, comprising the total of the interest to be paid over the life of the loan, your mortgage insurance premiums, and prepaid finance charges. Like the APR, the figure shown assumes that the loan will continue throughout its stated term without you selling the house, refinancing, prepaying your mortgage, or making additional payments. Also, as with the APR, many of the fees you will pay in connection with your loan are not included in the total shown.
- Amount financed. This is a dollar amount intended to show you the amount of credit the lender has extended to you, meaning credit that you do not pay for up front at the closing, but pay out over time. It is calculated as the principal amount of the loan, minus most of the charges being paid out of loan proceeds, such as points and certain closing fees, as shown in your GFE. This disclosure shows you the part of your loan that is being financed rather than being prepaid in fees and interest.
- Total payments. This is the amount of money that you will pay by the end of the loan term if you make every payment on time for the entire life of the loan. It assumes no prepayments, additional payments, refinances, or sales prior to the end of the loan term.
- Payment schedule. This includes three disclosures: 1) the amount of payments, which is your monthly payment usually, but not always excluding amounts paid into property tax and hazard insurance escrows; 2) the number of payments, assuming all payments are fully made on schedule; and 3) when payments are due monthly, and the date monthly payments first become due.
- Prepayment. Whether or not your loan has a prepayment penalty will be disclosed by the check in the box for “may” or “will not have to pay”. A second checkbox will tell you whether you “may” or “will not be” entitled to a refund of interest paid in prior years.
- Assumption. The lender will tell you whether a future buyer may assume the loan or not. If a buyer may assume the loan, it will further state whether the loan may be assumed under its original terms, or only subject to additional conditions.
The TILA will disclose other terms and requirements of your loan, such as whether you will be required to furnish hazard, flood, or private mortgage insurance (often referred to as “PMI”), or whether you will be charged fees for late payments.
Disclosure of Special Features of Your Loan
In addition to the key disclosures described above for all loans, the TILA will disclose different features of your particular loan.
If you applied for a variable rate loan, the TILA will disclose that the rate can change, and that a rate change will change the APR. This section will refer you to a separate disclosure of the terms of the variable rate.
The payment schedule will disclose your balloon payment, if your loan will require a final balloon payment.
The TILA will disclose whether your loan has a demand feature, meaning an acceleration clause requiring you to pay up early, but it will not characterize or describe it. Some common demand features include acceleration due to a violation of the terms of the note or mortgage, or a due on sale clause. You should read your loan commitment, the note, and mortgage to determine when your loan may become due earlier than the loan term end date.
Some loans require additional security (collateral) beyond the house itself. The TILA will disclose if you are giving a security interest in personal property or goods.
Tips for Using your TILA
Due to the issues described above concerning APR, finance charges, and the amount financed disclosed in the TILA, the information within it may be of limited help in understanding your loan all by itself. However, when compared to another TILA for a similar loan, the TILA may help you determine which loan costs less or has fewer restrictions.
If the base interest rates of the loans you are comparing are the same, the APR can tell you which loan is more expensive, because the APR includes other fees you will pay in connection with the loan. With all its flaws, the APR can show you which loan has the largest upfront fees.
Since the APR and finance charges tend to exclude loan fees you will pay at or before the closing, review the TILA along with your GFE, which will include many of the fees missing from the TILA disclosures.
You will be given an updated version of the TILA at the closing. Compare that TILA with the one you were given when you first applied for the loan to make sure that they are similar, and that any increases are within the amounts of tolerance shown in your GFE and in the HUD-1 prepared for the closing. For more information on the HUD-1, see Nolo’s article: “Home Buyers: How to Read Your HUD-1 Statement.”
The TILA disclosures should not be contrary to any of the terms of your note and mortgage, nor to any advertisements you were given to interest you in the loan that you purchased. Ask your loan officer to explain what’s going on if the terms are not the same, or if you do not understand any of the terms or other disclosures described in the TILA.