The right of rescission is a little-known—but very valuable—part of the home loan process. This federally protected right can come into play when you are refinancing or taking out a home equity loan or line of credit. Essentially, the right of rescission allows you to change your mind about a loan and walk away without a financial burden sitting on your shoulders.
Of course, there are limitations to when homeowners can and can’t exercise their right of rescission. So what are your rights when it comes to opting out of a loan? Below, our experts share how you can get out of a sticky financial situation.
What is the right of rescission?
The right of rescission falls under federal consumer protection laws that dictate what lenders can and can’t do. Called the Truth in Lending Act, these laws allow for borrowers to have a cooling-off period in which they can change their mind after signing loan paperwork. If you do change your mind, that’s when you get to exercise your right of rescission.
So how long do you have to change your mind and cancel the transaction? Three days from the date of closing, says Clint Bonkowski, director of mortgage lending at the online bank, Laurel Road.
“When a buyer exercises the right to rescind, the lender will withdraw the loan, and no funds will be disbursed,” he says.
Limits on the right of rescission
If you’re a homeowner, you may be wondering whether the right of rescission applies to you. It may, but there are limitations on the law.
- Time limit: If you let more than three days lapse between signing the paperwork and speaking up, it’s too late. You’re now locked in to that loan contract.
- Types of loans: Borrowers can only use this step to cancel refinance transactions, home equity loans, or home equity lines of credit (HELOC), says Richard Pisnoy, principal at the Silver Fin Capital Group in Great Neck, NY. That means you can’t use the right of rescission to walk away from a traditional home mortgage.
- Types of properties: “The right of rescission is for primary residences only,” Pisnoy says. “A loan on a second home or investment property will fund the same day as the closing.”
How to exercise your right of rescission
Does your loan meet the standards of the right of rescission? If the answer is yes—and you’re having a major case of borrower’s remorse—it’s time to act.
You should have been provided with copies of the right to rescind document at closing, Bonkowski says, so check your paperwork.
“One of the copies will be signed, stating the buyer has received the form,” he says (this is actually required by federal law too!). “On the notice itself, the lender will provide instructions on how to exercise the right to cancel.”
To exercise your right of rescission, most lenders require the buyer to sign the right to rescind document and mail it to a specific address. But the process may vary depending on your lender. If you’re not sure what your bank requires, pick up the phone and call to find out. An emailed or faxed copy of the right of rescission document may also be acceptable.
How to avoid having to cancel your loan
Let’s hope you never get into a situation where you regret signing a loan contract, but there are a few things you can do to make it less likely that you’ll need to exercise your right of rescission.
Mat Ishbia, President and CEO of United Wholesale Mortgage in Pontiac, MI, suggests working with an independent mortgage broker who can explain the process to you face to face.
He also reminds us of the importance of never signing a contract without reading it first: “Make sure that you review your documents up front with the broker, so that it’s not a surprise at closing.”