What Is the Right of Rescission on Home Loans?

What Is the Right of Rescission?

The right of rescission is a provision of the Truth in Lending Act (TILA) that was designed to protect consumers from predatory lending practices.

The provision allows you to back out of certain home loan agreements within three days of closing without penalty—more specifically, you'll have until midnight of the third business day. What's more, the lender must return any funds you paid at closing.

Learn more: Can You Back Out of a Home Offer?

What Loans Have a Right of Rescission?

The right of rescission applies only to certain types of home loans, including:

• Mortgage refinance loans
• Home equity loans
• Home equity lines of credit (HELOCs)
• Most reverse mortgages

That said, you can't cancel a contract on a new home purchase. There are also other limitations that may impact your ability to back out of an agreement on loans that may otherwise qualify:

• If you're refinancing your mortgage loan with the same lender, you can only exercise it on the portion of the new loan that's higher than the original principal amount.
• The right of rescission doesn't apply to second homes, including vacation homes and investment properties.
• You can't exercise your right of rescission on loans where the lender is a state agency or if you're renewing optional insurance premiums.

When Does the Right of Rescission Period Start?

The right of rescission period is three days long and begins once three things occur—typically all at the time the loan closes:

• You've signed the promissory note.
• You've received the TILA disclosure document, also called the closing disclosure.
• You've received two copies of a notice that states your right to rescind the agreement.

Once the clock starts, you have until midnight three business days later to cancel the contract. The TILA dictates that Saturdays are considered business days, but Sundays and holidays aren't.

So, if you were to close on a mortgage refinance on the Friday before Presidents Day, you would have until the end of the following Wednesday to submit your request.

How to Exercise the Right of Rescission

You're not required to provide a reason when you submit your request to rescind your contract, but it may be worth considering in a few different situations:

• Your financial situation has changed, and you're no longer able to afford the loan.
• You've found a better deal from another lender.
• You've simply changed your mind.

If you've decided to cancel your contract, here are some steps you can take:

1. Sign and submit your notice. There's no standard practice for this process, but lenders are required by law to disclose how it can be done. The lender is also required to provide an address to which requests can be sent, but if an address wasn't provided, you can simply send the form to the address provided for monthly payments.
2. Keep proof of submission. Your request is considered submitted at the time you send it, so be sure to retain proof that it was mailed or otherwise communicated to the lender within the three-day window.
3. Wait for a response. Once they've received your request to rescind the contract, the lender is required to provide a refund of any costs you incurred within 20 days.
4. Return any funds you received. If you received money or property in the transaction, you can hold on to it until the refund has been provided, but you'll need to return it after that occurs.

How Does the Right of Rescission Affect Credit?

Exercising your right of rescission doesn't impact your credit at all or even your odds of getting another loan in the future. It's not something that lenders can report to the credit bureaus.

That said, if you're canceling the contract because you want to apply for a loan with another lender, it's important to note that your credit reports will show the hard inquiries for both loan applications, and having multiple inquiries in a short period not related to rate shopping could negatively impact your credit score.

Learn more: Do Multiple Loan Inquiries Affect Your Credit Scores?

Frequently Asked Questions

Prepare Your Credit Before Applying for a Home Loan

Before you apply for a home loan, refinance, HELOC or any other loan, it's important to make sure your credit is in good shape.

You can get free access to your Experian credit report and FICO^® Score^☉, which can help you evaluate your credit health and determine areas where you can take action. This process of improving your credit can take some time, but the long-term savings are well worth it.