TILA for first-time buyers: no rescission on a purchase, but APR and escrow rules bite
A first-time buyer’s purchase loan is fully covered by TILA, yet it carries no right to cancel after signing. The protections that actually matter are the APR math, the higher-priced-loan escrow and appraisal rules, and the ban on prepayment penalties on most first loans.
Every loan in the first-time-buyer toolkit — FHA, Conventional 97, HomeReady, an HFA first mortgage — is a consumer-purpose loan secured by a dwelling, so Regulation Z applies in full. What surprises most first-timers is the part that does not apply.
No three-day right to cancel on a purchase
The rescission right people have heard about covers refinances and home-equity loans on a home you already own. A “residential mortgage transaction” — a loan used to buy or build your principal residence — is exempt. Once you sign at the closing table, the loan funds and the deed records; there is no cooling-off period. The only pre-closing pause you get is the three-business-day Closing Disclosure window under TRID, so read that form as if it were the last chance, because it is.
Reading the APR like an underwriter
The annual percentage rate on your disclosures folds the finance charges into the rate: origination fees, discount points, the FHA upfront premium and the annual mortgage insurance, PMI on a conventional loan, and prepaid interest. That is why an FHA loan at 6.25% can show an APR near 7.3% while a conventional loan at 6.5% shows 6.8%. Comparing note rates across programs tells you almost nothing; comparing APRs on the same loan amount and term tells you what the insurance costs. Two cautions: the APR assumes you keep the loan to maturity, and it ignores the day PMI is cancelled, so a buyer who plans to drop PMI in five years should also compare the “In 5 Years” figure on page 3 of each Loan Estimate.
Higher-priced mortgage loans: escrow and appraisal
If your APR exceeds the average prime offer rate (APOR) by 1.5 percentage points or more on a first lien, the loan is a higher-priced mortgage loan. Lower credit scores, lender-paid mortgage insurance and small loan amounts push first-time buyers over that line more often than they expect. Consequences: the lender must escrow taxes and insurance for at least five years (most low-down-payment programs escrow anyway), and, unless the loan is a qualified mortgage, must obtain a written appraisal with an interior inspection — and a second appraisal at its own expense when the seller bought the property less than 90 days earlier at a price more than 10% lower, or within 180 days at 20% lower. That flip test protects buyers of freshly renovated houses; FHA adds its own 90-day resale restriction.
Prepayment penalties and ARM paperwork
FHA loans cannot carry a prepayment penalty, and conventional qualified mortgages may only include one under narrow limits that almost no first-time program uses. If a Loan Estimate shows “yes” in the prepayment penalty box, ask why before you proceed. For an adjustable-rate loan — rarer for first-timers but offered on some HFA products — Reg Z requires the program disclosure and the CFPB’s adjustable-rate handbook with the application, then a notice 210 to 240 days before the first rate change. Our ARM vs fixed guide explains what those notices will look like.
What to check
- Confirm the purchase loan has no rescission period: your review time is the Closing Disclosure window, nothing after signing.
- Compare APR to APR on identical loan amounts and terms — the gap between FHA and conventional APRs is the cost of mortgage insurance.
- If the lender says the loan is “higher-priced,” ask whether an escrow waiver is off the table and whether a flip second appraisal applies.
- Check the prepayment penalty box on every Loan Estimate; FHA never allows one and most conventional first-time programs do not either.
Frequently asked questions
Can I cancel my first mortgage in the three days after closing?
No. The Truth in Lending right of rescission covers loans on a home you already own, such as refinances and home-equity loans. A loan that finances the purchase of your principal residence is a residential mortgage transaction and is exempt. Your protection is the three-business-day Closing Disclosure review before signing, plus any contract contingencies negotiated with the seller.
Why is my FHA APR so much higher than the quoted rate?
Because Regulation Z counts the upfront mortgage insurance premium (1.75% of the loan) and the annual premium as finance charges, along with origination fees and points. A conventional loan with PMI shows a smaller gap, and a loan without mortgage insurance shows the smallest. The APR is the cleaner number for comparing two programs; the note rate determines your actual monthly principal and interest.
The rule in full: Truth in Lending Act (TILA) and Regulation Z. The borrower profile: First-time home buyers. Related guides: FHA vs conventional for a first-time buyer: which loan wins, and when · 3% down conventional loans: HomeReady, Home Possible and Conventional 97 · Closing costs explained: what is negotiable, what is not · ARM vs fixed-rate mortgage: when an adjustable rate makes sense.
Other federal rules for first-time home buyers
RESPA · TRID disclosures · ECOA · Fair Housing Act · HMDA · SAFE Act / NMLS · ATR / QM · HOEPA · HPA / PMI · Servicing rules · FCRA · Flood insurance · MARS rule · SCRA · LO compensation
TILA / Reg Z for other borrowers
Conventional borrowers · Veterans · Self-employed · Investors · Retirees · Bad credit · Foreign nationals · Physicians · Heroes · Rural buyers · Condo & second home · Refinancing