Why Rescission Periods (the right to cancel)?

What is a rescission period and why do they exist in the mortgage industry? A rescission period is basically a “cooling off” period in place after homeowners sign loan papers refinancing an existing mortgage. There can be multiple reasons why someone would want to refinance, and most often it’s to get a lower rate. But there are others too such as changing loan terms or refinancing out of a balloon note. Whatever the reason, a rescission period applies to all refinance loans when refinancing a primary residence.

Rescission Period Guidelines

The Truth in Lending Act spells out the guidelines for a rescission period. The basic guidelines allow borrowers to cancel their refinance application for any reason whatsoever as long as the cancellation notice is provided to the lender up until midnight on the third business day after loan papers are signed. Saturday, by the way, is considered a business day, while Sunday and legal holidays are not. This law applies to an existing mortgage, home equity loan and home equity lines of credit, or HELOC. Lenders are required by law to notify borrowers of their right to rescind and clearly spell out the process borrowers can take in order to rescind a mortgage application.

Let’s look at an example. A homeowner decides to refinance an existing mortgage. The loan is documented, approved and loan papers are sent to the settlement agent. The homeowner reviews the papers, signs and initials where needed and heads back home. Once home, the homeowner starts thinking about the signed loan and after a couple of days, decides to cancel. Recission paperwork is filled out and faxed back to the lender. The loan is canceled. Note that any prepaid fees to the lender such as an appraisal, credit report or various lender fees may not be refunded.

Consumer Protection

That’s really about it. Rescission periods are put into place as a consumer protection item. This provision was placed into the Truth in Lending Act to give borrowers time to reconsider and avoid any pressure to close on a refinance. When purchasing a home, there is no rescission period. A sales contract typically allows the buyers a specific period of time to withdraw the offer as long as this option is spelled out in the contract. Canceling and withdrawing an offer to purchase a home after a couple of weeks into the process can mean the buyers forfeiting their earnest money deposit. Yet again most contracts have provisions that spell out certain reasons the buyers can withdraw such as the property not appraising at the sales price or after the result of a disappointing property inspection.

Can Rescission Periods Be Waived?

Here’s another interesting facet of rescission periods…they can’t be waived. Even if the borrowers absolutely love the terms of their newly refinanced home loan and don’t want to wait for three business days before funding, the rescission period reigns supreme. And finally, a rescission period does not apply to a second home or investment property, just the primary residence.

When you apply for a refinance, you’ll soon receive your share of loan documents and disclosures and the Right of Rescission notice will be included with these papers. You’ll be able to review all the documents to make sure you’re clear on what you’re signing. I’ll be able to walk you through this process in person or over the phone to make sure you and I are on the same page and your loan papers are process, approved and signed seamlessly. You just can’t override the rescission period.