Understanding New Know-Before-You-Owe Mortgage Forms

Federal requirements for mortgage forms that became effective in 2015 should make it easier to understand the obligation you're taking on.

If you will be taking out a mortgage loan or have taken one out in the past, you’ve probably heard or read about the required (at least for now) Good Faith Estimate, HUD-1 Settlement Statement, and Truth-in-Lending disclosure forms. While these forms have been used in mortgage transactions for years, they will soon be going away. Recently, Congress directed the Consumer Financial Protection Bureau (CFPB) to create new, simpler forms that borrowers can more easily understand for use in most mortgage transactions. The new disclosures -- called a “Loan Estimate” and “Closing Disclosure” -- will be used in transactions where the borrower submits a mortgage application on or after October 3, 2015. Read on to learn in which types of mortgage transactions the lender must use these forms, why the new forms are better than the older ones, and at what point you’ll receive them in the mortgage process.

Covered Transactions: When Lenders Must Use the New Forms

The Loan Estimate and Closing Disclosure (commonly called “Know Before You Owe” disclosure forms) must be provided in most closed-end consumer mortgage transactions. (A closed-end loan is one where you get the entire amount upfront and it must be repaid by a specified date.) The forms are not required for:

  • home equity lines of credit (HELOCs)
  • reverse mortgages
  • mortgages secured by a mobile home or by a dwelling that is not attached to land, or
  • loans by a creditor who makes five or fewer mortgages per year.

Why the New Forms Are, in Fact, Better

The new forms use clear language and their design is supposed to make it easier for borrowers to locate key information about their mortgage loan. (Many consumers found the older forms to be confusing.)

Contents of the New Forms

The new forms come in an easy-to-read, plain-English format that includes information about the loan such as:

  • the loan amount
  • the monthly principal and interest amount
  • the amount of mortgage insurance you must pay (and for how long)
  • the estimated escrow amount you’ll have to pay each month
  • an estimated total monthly payment
  • the interest rate
  • the estimated taxes, insurance, and assessments you must pay (even if you won’t have an escrow account)
  • whether the loan includes a prepayment penalty if you pay it off early
  • whether the loan includes a balloon payment
  • closing costs, and
  • other important information about the loan.

The New Loan Estimate Form

The Loan Estimate form replaces the Good Faith Estimate and the initial Truth-in-Lending disclosure. (Learn more about the Good Faith Estimate and Truth-in-Lending disclosure.) It is designed to help you understand the key features, costs, and risks of the loan that you have applied for.

When You’ll Get the Loan Estimate Form

The lender must deliver the Loan Estimate to you (or place it in the mail) not later than the third business day after receiving your application, and not later than the seventh business day before consummation of the transaction. ("Consummation" is when you become contractually obligated to the lender, which depends on applicable state law. This could be when the loan documents are signed, for example.)

The New Closing Disclosure Form

The Closing Disclosure replaces the HUD-1 Settlement Statement and revised Truth-in-Lending disclosure. (Borrowers have typically been given an updated version of the Truth in Lending disclosure at the closing. Learn more about the HUD-1 Settlement Statement and Truth-in-Lending disclosure.) The Closing Disclosure is also designed to help you better understand all of the features, costs, and risks of the mortgage transaction.

When You’ll Get the Closing Disclosure

The lender generally must ensure that you receive the Closing Disclosure no later than three business days before consummation. This time frame is supposed to give you time to review the terms of the deal, as well as compare the final costs to the costs as stated in the estimate, so you can bring up any questions that you have before you get to the closing table.

Where to Read More About the New Forms

You can find out more about the new Loan Estimate and Closing Disclosure forms, and how they can help you better understand your mortgage loan, at the CFPB’s online Know Before You Owe page. (You can also look at blank copies of the actual forms.)