What is rescission in real estate? Know how to exercise it

Do you want to back out of a mortgage contract after you’ve already signed it? You ought to know what is rescission in real estate. This legality gives homebuyers a chance to rethink their loan decision. If you’re in the process of buying a home, understanding this option can protect you in certain situations. 

So, what is rescission in real estate? 

Real estate rescission is an important consumer protection tool that gives homebuyers the chance to reconsider their mortgage contracts within a set time frame. This process is governed by the Truth in Lending Act (TILA), which makes sure lenders clearly explain the terms and conditions of a loan, so buyers aren’t misled.

TILA allows three business days to rescind the contract, which include Saturdays but not Sundays or federal holidays. This provides a reasonable period to think things over. This rescission right ensures buyers are well-protected. They feel more secure and can make informed decisions when purchasing a home.

Why is it important to know what is rescission in real estate?

If you’re buying a home, knowing your right to rescind a mortgage contract is crucial. It offers a safety net against rash decisions and lets you walk away from a potentially bad deal without financial consequences. By understanding your rights under the Truth in Lending Act, you can go through the home-buying process with more confidence and peace of mind. Know that if you never received the TILA disclosure or notice of rescission, or if these documents were incorrect, you may have up to three years to use your right of rescission.

How does the right of rescission work?

The right of rescission gives you until midnight of the third business day after the real estate transaction to let the loan lender know you want to back out of the deal. You can notify them by mail or any other written form of communication.

Once you’ve told the lender you’re backing out, the financing agreement is canceled, and you’re no longer responsible for the loan or any related charges. 

If you decide to cancel the mortgage contract within the three-day period, the lender has to refund all the fees you’ve paid, including closing costs or interest. The mortgage contract becomes null and void, and you’re off the hook for any obligations under the original agreement. This can be a huge relief if you have second thoughts or discover unfavorable terms after signing.

The mortgage lender then has 20 days to refund any money you’ve paid and release any claims on your property. They also need to complete any other steps to officially end the deal. If you received any money as part of the transaction, you’ll need to return it once the lender has done their part.

What are the key components of rescission?

• Transparency: TILA requires lenders to lay out all the details about the mortgage in a clear and understandable way. This transparency is meant to help you make an informed decision. Under TILA, you can cancel the contract within a specific time frame if you decide the terms aren’t right for you.
• Time frame: You’ve got three business days to back out of the mortgage contract starting the day after you sign it. It’s important to remember that business days include Saturdays but not Sundays or federal holidays. This period gives you some breathing room to mull over your decision.
• Written notice: If you decide to cancel the contract, you need to send a written notice to the lender. This notice should clearly say that you want to cancel the mortgage agreement. It should clearly outline the process, including the timeframe and how to submit the written notice. Once the lender gets your notice, they’re required to cancel the contract and refund any fees you’ve paid.

What are the correct steps to exercise the right of rescission?

If you want to back out of your mortgage agreement, here’s how to use your right of rescission:

• Sign and submit the notice of rescission to the lender or the closing agent to cancel the loan. You can also write a letter. Just make sure you deliver or mail it positively by midnight on the third business day after the transaction.
• Once the lender receives two copies of your notice, they have 20 days to give you a full refund. Keep in mind that once you cancel the loan, there’s no turning back. 
• If you got any money as part of the real estate deal, you’ll need to return it to the lender once they’ve canceled the loan.

When can you use the right of rescission?

If your loan is for your primary residence, you can back out within three days of signing the agreement with your lender. This right doesn’t apply to loans for vacation homes, rental properties, or investment properties.

Moreover, you can’t use this right for the mortgage you originally took out to buy your home. However, you can use it for a home equity line of credit (HELOC), home equity loans, and refinances.

Also, know that you can only exercise the right of rescission if you’re dealing with a new lender or if the new loan amount is larger than the unpaid principal on your current mortgage with your existing lender.

You also can’t use the right of rescission if:

• The contract states that a state agency is the lender.
• You’re renewing optional insurance premiums.

Key takeaway

The right of rescission lets homeowners back out of certain financial contracts such as refinance, home equity loans, and HELOC deals. And, get all their money back. You can only use this option within three business days after signing your mortgage contract. 

So, if you’re having second thoughts about a mortgage refinance or a home equity loan, you might have some legal wiggle room to back out, thanks to the right of rescission. Just remember, this benefit is available only in specific situations and for a limited time.

Written by Ramona Sinha. August 11, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.