Your Complete Guide To The Right Of Rescission

Certain federal laws protect consumers from predatory lending practices. One of these is the right of rescission, which allows borrowers to cancel some loans within 3 days of signing without penalty.

But the right of rescission only applies to certain loans. It doesn’t apply to all transactions, like purchasing a new home or a mortgage loan on a vacation property.

In this article, we’ll go into greater depth and cover what right of rescission means, when it applies and when to exercise this right.

What Is The Right Of Rescission In Real Estate?

Enacted under the Truth in Lending Act (TILA) and under federal law, the right of rescission acts as an escape from buyer’s remorse. The three-day right of rescission applies to borrowers who are refinancing or taking out an equity line. It’s a form of consumer protection that allows you to cancel certain types of contracts by the third business day when you’ve signed the promissory note, received a Truth in Lending disclosure or Closing Disclosure form and received two copies of a notice explaining your right to rescind from your lender.

TILA doesn’t only protect consumers’ rights against lenders. It also requires credit card providers to provide full transparency on their offerings. This includes terms and conditions regarding services, limitations, usage, annual fees and interest rates.

Understanding Regulation Z

Regulation Z, or Title I of the Consumer Credit Protection Act (CCPA), prohibits certain practices related to mortgage and loan payments. Regulation Z and TILA are often used interchangeably, but Regulation Z is only one part of the Truth in Lending Act. This measure covers a variety of loan products, from home loans to credit cards, installment loans and some types of student loans.

Under Regulation Z, lenders and credit card companies must disclose important information about interest rates and how fees and other charges are calculated. This regulatory measure also prohibits lenders from engaging in unfair practices. Under TILA and Regulation Z, consumers have the right to rescind an open-ended credit product where the consumer has a security interest in their principal dwelling.

Which Types Of Loans Qualify For The Right Of Rescission?

The right of rescission doesn’t apply to every type of loan. However, it does apply to loans where your lender provides two copies of a notice to rescind: These loans qualify for the right of rescission:

• Mortgage refinance with a different lender
• Cash-out refinance with your existing lender
• Home equity loan
• Home equity line of credit (HELOC)
• Home equity conversion mortgage (HECM)/reverse mortgages
• Bridge loan secured by the principal residence

Here are loan products where the right of rescission does not apply:

• Home purchase
• Second home
• Vacation home
• Investment property
• Refinancing a mortgage with the same lender
• Business loan secured by the primary residence

When Does The Right Of Rescission Period Start?

If you’re taking out a loan that qualifies for a right of rescission, you have until midnight of the third business day after the transaction to cancel the contract. Your rescission period doesn’t start until you’ve: 

• Signed the credit contract (promissory note)
• Received a Truth in Lending disclosure or Closing Disclosure form
• Received two copies of a notice of your right to rescind

The first business day after these events happen is day one. Business days include Saturdays, but not Sundays or public holidays. For example, if all three of the above events occur on a Friday, you have until midnight Tuesday to rescind your contract.

Extending Your Right Of Rescission Timeline

Certain circumstances may allow you to extend your right of rescission timeline. If you can prove that you never received the closing disclosure or two copies of the notice of your right to rescind or they were inaccurate, then it could be extended up to three years.  

The closing disclosure is a notice lenders and creditors are required to provide. Under Regulation Z, lenders must properly inform borrowers of the conditions of the loan, and one way to ensure this happens is to provide a closing disclosure. This document explains the annual percentage rate (APR), finance charge, amount financed, total of payments and payment schedule of the loan you’re taking out.

Reasons To Consider Rescinding Your Mortgage

There are several circumstances where borrowers might consider exercising their right of rescission. For instance, you might be second-guessing your mortgage refinance or whether you can afford your new monthly mortgage payment. Or, a major life event happens, like the loss of a job or a death in the family, and you risk foreclosure if you keep the loan. No matter the reason, you aren’t required to explain this to the lender. 

Another reason to rescind your mortgage is because of a TILA violation. It’s the consumer’s right to be properly informed of the loan’s terms and conditions and the creditor is liable for any violations. Another TILA violation is if the lender guides you toward a loan product that isn’t best for you to collect a commission or fee. Again, this violates TILA and is a reason to rescind your mortgage. We recommend working with a real estate attorney if you believe you’re in one of the above situations.

How To Exercise Your Right Of Rescission

There isn’t a universal way to exercise your right of rescission. However, your lender may have their own procedure. You should be informed of this procedure when the lender gives you the TILA disclosure and copies of the notice of rescission.

If you choose to cancel the contract within three business days, then your right of rescission must be in writing. Make sure to deliver it to your lender or have it postmarked before midnight on the third business day.

Once the lender receives your rescission, they have 20 days to refund all fees. Keep in mind that you can’t change your mind once you rescind your contract.

Reasons To Waive Your Right Of Rescission

In some cases, like a personal financial emergency, borrowers can waive their right of rescission to receive loan funds faster. You must give the lender a dated written statement that describes the emergency and your wish to waive this right. But this doesn’t mean your lender has to acknowledge your waiver.

FAQs: Real Estate Rescission Rights

Here are frequently asked questions related to real estate rescission rights.

What happens if I rescind my mortgage?

If you rescind your mortgage within three business days, the lender has 20 days to cancel the process and refund fees. You will also have to return any funds received.

What is required for the right of rescission?

To rescind a qualified mortgage, you must provide a written statement to your lender within three days of closing and after signing the promissory note. You can use the form provided to you by the lender or write your own letter.

What is an example of the right of rescission?

Here’s an example of how the right of rescission works. On Friday, your rescission period starts when you sign the promissory note for your mortgage refinance with your new lender. You also receive your closing disclosure and two copies of the notice of your right to rescind. By Tuesday at midnight, your three days are up and you no longer have the right to cancel the loan.

The Bottom Line: TILA Allows Borrowers To Back Out Of A Mortgage Loan

Your lender should go over your right of rescission when you receive your paperwork as required by TILA and Regulation Z. Once you sign the promissory note and receive the closing disclosure and two copies of a notice of your right to rescind, you have until midnight of the third business day after the transaction to get out of the mortgage.

Are ready to start the home buying process? Apply for an initial mortgage approval to see what rates and terms you qualify for with Rocket Mortgage®.