Right of Rescission

Have you ever made a decision you later regretted, only to wish you could have taken it all back?

Well, you might be in luck.  The “right of rescission” period is a provision under the Truth in Lending Act that essentially gives homeowners who are refinancing their mortgages a chance to mull things over before committing to the new loan terms.

If a homeowner decides to refinance their mortgage, once loan documents are signed, they will have the right to rescind for a period of three business days.

The right to rescind is essentially the “right to cancel” the mortgage transaction and have any fees refunded if they aren’t happy with the loan for any reason.  It’s basically a consumer protection mechanism.

Technically, all fees should be refunded to the consumer if they choose to rescind the mortgage. This includes all lender fees (application, processing, etc.), broker fees, and third party fees, such as title and appraisal fees, whether paid to the lender or directly to a third party.

The only non-refundable fees are those paid by a consumer to a third party that take place outside of the credit transaction, including things like building and zoning permits.

Assuming the borrower wants to rescind the mortgage, they must provide written notice to the lender during the rescission period. The bank/lender must then take the necessary steps to indicate that the transaction is terminated by canceling loan documents, filing the release/termination statements in the public record, and refunding fees to the borrower.

This must take place 20 calendar days after receipt of a notice of rescission.

Rescission Period = Time to Change Your Mind

During the rescission period, the borrower has the opportunity to assess the situation and make absolutely certain they want to go through with the transaction.

At this time, they can think things over and change their mind if need be. And most importantly, if at any time during those three days they decide they want to back out entirely, they can do so without penalty.

Perhaps you felt pressured by your bank or mortgage broker, or feel you were a victim of predatory lending. This would be a great time to rescind the mortgage and go someplace else, or not even go through with the transaction at all.

When the Right of Rescission Period Begins and Ends

The rescission period begins at midnight the day after loan documents are signed, and ends three business days later, including Saturdays, but not Sundays or federal holidays.

At midnight on the third business day the rescission period is over, and the signed loan documents become official.

Example of a right of rescission period:

If loan documents are signed on Monday, the rescission period begins Tuesday, and ends Thursday night at midnight. On Friday the loan could then fund and record.

If loan documents are signed on Thursday, the rescission period begins on Friday, and ends Monday at midnight because Sunday doesn’t count as a business day.

In certain circumstances, you may also be able to waive your right of rescission to speed up the loan process, though there must be extenuating circumstances, specifically a “bona fide personal financial emergency.”

The bank or lender cannot fund the loan until the rescission period is over.

There Isn’t a Rescission Period on All Mortgage Transactions

However, the rescission period isn’t available for all mortgage transactions.

It is limited to refinances on owner-occupied properties only! Purchase transactions do not have a rescission period.

Additionally, vacation/second homes and investment properties do not have a rescission period, even if it is a refinance transaction!

Also, there is no right of rescission if the borrower is refinancing their loan with the same mortgage lender the loan was originally financed with.

*For cash-out refinances financed with the same original lender, the cash-out amount is the only portion that carries a rescission period.

Home equity lines always have a right of rescission period, unless the entire line amount is used to fund a purchase transaction.  For example, it is quite common for a HELOC to be used entirely as a purchase-money second mortgage, meaning no rescission.

Make sure you know your (pardon the pun) rights when it comes to the right of rescission. Loan officers and mortgage brokers may not give you all the facts, or they may lie to ensure the mortgage funds and they receive their commission, so stay informed.

Lastly, and this goes without saying, be sure you’re 100% clear on the rescission rules for your particular mortgage before you sign, not after…don’t be afraid to ask questions early on to avoid any misunderstanding late in the game.


27 Comments

  1. HORACE January 31, 2013 at 4:31 pm -

    Do I have a right to rescission on my owner occupied 3 family property?

  2. Colin Robertson February 1, 2013 at 2:03 pm -

    Horace, it depends on the rest of your loan scenario, as discussed above, but whether it’s one or four units is not an issue, so long as it’s owner occupied.

  3. Henry February 28, 2013 at 1:43 pm -

    My Wife and I signed our closing docs almost 3 weeks ago. Now the bank requested more documentation before they release the funds and they only gave us 4 hours to provide the documentation, if not we will lose our lock and the rate will go up almost .75%. I know this post is about rescission and our rights, can the banks do this, rescind on us even after we were approved and signed the closing docs?

  4. Colin Robertson February 28, 2013 at 4:10 pm -

    Henry,

    It sounds like the bank is trying to get you to fulfill all conditions and fund the loan before the lock expires. It’s not an issue of rescission.

    This can happen pretty frequently – locks expire, are often extended (at a cost to the borrower) when the loan process takes longer than anticipated. If possible, try to work with them to close ASAP to avoid a rate hit.

  5. deri ross March 20, 2013 at 9:33 am -

    i signed documents and the rescission started…2 days later, the title company lost some paperwork (a deed from VA) and i had to sign some extra documents. They told me the rescission had to start all over…is this correct?

  6. DB April 9, 2013 at 8:18 pm -

    If the seller wasnt truthful about water leaks on the sellers disclosure & we find mold after closing behind walls do i have the right to rescind the sale? the neighbor confirmed that the seller told him he had water leaks.

  7. Colin Robertson April 10, 2013 at 1:52 pm -

    DB,

    There is no rescission period when it’s a purchase, as noted in the post above. And your issue does not really involve the loan, but rather the purchase itself.

  8. Danielle April 11, 2013 at 2:11 pm -

    Closed my home refi in Illinois on March 29. Funds were disbursed to original mortgage and I received my cash out. I was laid off and then bank verified employment on April 8th (in which I was not verified). Can the bank cancel my loan???

  9. Wendy May 20, 2013 at 1:20 pm -

    We had to refinance a line of credit in Nov of 2012. More than a month after signing the loan documents, the bank officer mailed back dated right to rescission forms with a letter asking us to sign and return them to the bank. We did not reply and have now received a second set of these same forms with the same request to sign and return to the bank. Is this legal? What actions, if any can we take against this institution?

  10. Tyson August 29, 2013 at 3:12 pm -

    Colin, does the right of rescission apply when converting a construction loan (refi) from one lender to another?

  11. Colin Robertson August 29, 2013 at 11:40 pm -

    Construction loans are generally considered “residential mortgage transactions” and thus not subject to rescission, unless they are secured by a principal residence, but ask your lender to be sure. Check out Section 226.23 of Regulation Z. It’s complicated.

  12. tina October 11, 2013 at 12:54 pm -

    collin, do i have a resicission period in cook county illinois if my home went to sherif sale? we were at the final step to complete a shortsale but the bank was dragging there feet complete all the paperwork. it went to sherif sale 10-04-13, do i still have an opportunity to complete a short sale?

  13. Colin Robertson October 15, 2013 at 2:34 pm -

    Tina,

    This article refers to the rescission period associated with new mortgages and refinancing.

  14. anach October 23, 2013 at 8:49 am -

    can this be abused by borrowers in an attempt to get lower rates?

  15. Colin Robertson October 23, 2013 at 10:47 am -

    It’s possible that a borrower could rescind if they no longer wanted to refinance. But going through the process over and over again isn’t something most borrowers are up for.

  16. Gerald January 30, 2014 at 7:04 pm -

    I signed a home loan purchase agreement for a house. (not a re-fi or investment property). This was on Monday, today is Wednesday. I used the advice of my realtor and found the interest rate I will be paying is going to be 4.75% and the origination fee is $1,200.00. Today I compared rates ( I know, should have done that first) and find I can get a 4.25% rate with a $470.00 origination fee. What would be the next best step?

  17. Colin Robertson January 31, 2014 at 10:01 am -

    Gerald,

    It sounds like you just signed a purchase contract, meaning you can still shop around anywhere for your mortgage. Obviously the 4.25% rate with $470 fee sounds a lot better than the 4.75% rate with $1,200 fee. But make sure you’re dealing with a reputable lender, and that ALL costs are considered when making comparisons.

  18. Mel April 4, 2014 at 5:24 pm -

    In Michigan when does the right of rescission start?

    Buying a Freddie Mac home, has 10 calendar day cancellation period re:inspection/condition.

    Signed on 3/26. If my 10th day is on on Saturday,then how do I cancel?

    Thanks

  19. Colin Robertson April 4, 2014 at 7:26 pm -

    Mel,

    This article is about mortgage rescission, not the inspection contingency related to a real estate contract. Ask your real estate agent.

  20. Maddy June 16, 2014 at 6:49 am -

    Does the right of rescission also apply to refinance fees before the papers are signed? We have not signed the closing documents yet, but have paid the app fee, appraisal charges, etc. I’m wondering if we would still be protected under this law and be eligible for the refunds. Please advise, thanks!

  21. Colin Robertson June 16, 2014 at 8:23 pm -

    It’s supposed to apply to ALL the fees associated with the loan, as mentioned in my article. But most borrowers probably wouldn’t sign loan docs and then rescind just to get those fees reimbursed. They would likely work out a deal with the broker/lender if they were unhappy with anything prior to signing, assuming they still want the loan.

  22. sandra June 30, 2014 at 10:34 am -

    Colin,
    i just bought land at eagle rock resort yesterday 28 june, 2014 now i regret buying it. Can I cancel my purhcase and get my deposit back of $2,000

  23. Colin Robertson June 30, 2014 at 12:33 pm -

    Sandra,

    A right of rescission applies to non-purchase loans and the mortgage itself.

  24. George July 21, 2014 at 1:48 am -

    Colin,

    I had a cash-out refinance on my residence from another lender. I received a letter and a check of 22000 dollars from the new lender which says

    :”The truth in Lending Act requires that we notify a borrower at least three business days before a mortgage loan closing if a borrower’s Annual Percentage Rate increases during the application process. We recently discovered that a revised Truth in Lending Disclosure was provided to you at closing, but was not sent to you three days in advance of closing. The increase in the APR resulted in additional Finance Charges to your account.
    To address this error, we are refunding the Finance Charges that you previously paid in excess of the amount disclosed to you in the last Truth in Lending Disclosure that you received prior to closing. We have enclosed a check with this letter in the amount of 22000. This check includes the amount of excess Finance Charges you previously paid as well as the amount projected through the life of your loan.
    Then I received FORM 1099-Misc which included 21000 under other income.(I am on salary and have no other income)
    So when I filed my taxes I included this as Income and had to pay very high taxes on it.
    Is this considered income?
    Did I have to pay Taxes on this amount?
    Is there a way not to pay taxes on this amount or spread it out?

    Thanks for your response

  25. Colin Robertson July 21, 2014 at 8:53 am -

    George,

    It sounds like you need to speak with your CPA or tax specialist to sort out this issue because taxes could be pretty significant on that amount. They should be able to advise you. Sorry I can’t be of assistance.

  26. George July 21, 2014 at 7:18 pm -

    Thanks for responding to my inquiry.

    Your comments on this site is very informative and helpful. I read all the questions and your answers everytime I have questions about real estate and finance.

    I wish I did some research and found this site before I refinance, I would have done things differently.

    I will recommend your site and your knowledgeable comments and advice.

    thanks again for your time.

  27. Colin Robertson July 21, 2014 at 7:46 pm -

    Thanks for the kind words George, and sorry I can’t be of any help on this specific matter. If you have time, let us know what the issue was so others can avoid similar missteps in the future. Good luck!

Leave A Response