Refinance mortgages are pretty much the same as with a loan used to buy the house. With a few minor details, a mortgage loan for a refinance acts like a purchase money loan. Both loans need a loan application. Both loans have approval guidelines lenders must follow and other similar features. But with a refinance, there is a ‘rescission’ period for most refinanced loans. Purchase money loans do not have a rescission period. What is a rescission period?
A rescission period is sort of a ‘cooling off’ period where the borrowers sign their closing papers at the settlement table but the loan doesn’t officially fund and record until three business days after papers are signed. This provision has been in place since the federal Truth in Lending Act, or TILA, was implemented years ago.
The goal was to provide a degree of consumer protection against lenders who didn’t exactly ‘shoot straight’ when it came to counseling, processing and approving a loan. When someone rescinds a mortgage loan, all lender fees and third party fees collected at the settlement table paid for by the borrowers will be returned.
A rescission can be for most any reason at all. Perhaps the borrowers ultimately decided the refinance wasn’t in their best financial interest after all. Or, they could rescind the newly refinanced loan because they just didn’t like the color of the settlement agent’s office. This rescission is made in writing and included with the original loan package. Lenders are also required to provide borrowers with guidelines on how to rescind should they so choose.
Borrowers are also obligated to provide evidence the notice to rescind was made within the three business day period. This is why the rescission request should be made in writing. If push came to shove, a verbal request can’t be proven it was made within the required time frame.
Lenders are very aware of the rescission period and take it very seriously. They know that after all the work performed to process and approve the loan can go straight out the window of the borrowers ‘pull the switch’ and send a written notice by email, fax or hand delivery.
Say for example someone locks in an interest rate when refinancing an existing home loan. They sign their loan papers and wait. But during that period, interest rates have fallen to the point where it makes sense to start looking around for a better interest rate. Knowing this, lenders can be in a position to offer the new lower market rates in hopes of keeping the loan in-house.
Yet when time is of the essence and the lock will soon expire, borrowers should be aware that if the existing lender does not lower interest rates to current market levels, cancelling a loan at one lender and resubmitting to another risks interest rate moves while the newly applied for refinance is waiting on getting the transferred loan into a position where interest rates can be locked per the lender’s internal policy.
This is a guideline that really can’t be waived. It’s hard-coded in the industry. Whether or not someone thinks a ‘cooling off’ period is even needed, the three-day period still applies.
