What Is the Right of Rescission?

What Is the Right of Rescission?

I'm here to explain the right of rescission directly to you—it's a legal protection from the federal Truth in Lending Act (TILA) that lets you, as a borrower, cancel specific types of home loans within three days after closing. You can do this without any questions from the lender, and they have to release their claim on your property and refund all your fees within 20 days once you exercise this right.

Key Takeaways

Let me lay out the essentials for you. This right comes from TILA and gives you three days to cancel certain home loans after closing. It's no-questions-asked, meaning you don't need to justify your decision. The lender must drop their property claim and return all fees within 20 days. As part of the process, lenders have to provide you with a notice about your rescission rights. If you want to use this right, you need to send written notice to the lender within that three-day window.

Understanding the Right of Rescission

You should know that TILA was passed in 1968 and has been updated since then to stop unfair credit practices. It requires lenders to give you key details about home loans, including when you can cancel them. The right of rescission exists to shield you from shady lenders, offering a short cooling-off period to rethink your choice.

Not every loan qualifies, though. It only covers loans where your current home is collateral, like some home equity loans, HELOCs, reverse mortgages, and mortgage refinances. It doesn't apply to loans for buying or building a new home, or for second homes or investment properties.

Also, if you're refinancing with the same lender without borrowing extra cash, this right doesn't kick in. The same goes if the lender is a state agency. But remember, the FTC notes you might have other cancellation options under state or local laws. Eligible homes include houses, condos, mobile homes, or even houseboats.

How the Three-Day Cancellation Rule Works

This is often called the three-day cancellation rule, and it gives you three business days—including Saturdays but excluding Sundays—to back out of the loan for any reason, with no penalties.

The timer starts only after you've signed the contract at closing, received the TILA disclosure from the lender, and gotten two copies of the notice about your right to cancel. According to the FTC, if you didn't get these or if they're wrong, you could have up to three years to cancel. Otherwise, you have until midnight on the third business day.

Keep in mind, when you're buying a home with a mortgage, there's no right to cancel after signing closing documents. But for refinancing, you do have until midnight of the third business day to rescind.

How to Exercise the Right of Rescission

The lender has to give you a notice that explains your right and how to use it. To cancel, you need to send or deliver a written notice to the lender stating you're rescinding the loan. The law, from back in the day, even allows telegrams, but you can't just call or talk to them in person— it has to be in writing.

As the rules state, notice counts when you mail it, file it for telegram, or deliver it to the lender's business address if using another method.

How Long Is the Right of Rescission?

You get just three business days, starting once you've signed the contract, received the TILA disclosure with loan details, and gotten two copies of the rescission notice.

What Happens if I Don't Receive the TILA Disclosure or the Notice of My Right to Rescind?

If you can show you never got these documents or they're inaccurate, the three-day period can stretch to up to three years.

How Do I Cancel My Loan Agreement?

The process should be detailed in the paperwork from your lender. Typically, you write your intent to cancel and send it to them before the deadline.

Does the Truth in Lending Act Apply to Auto Loans?

TILA doesn't give a rescission right for auto loans, but it does require lenders to disclose things like APR, fees, monthly payments, and total costs before you sign.

What Is the Cooling-Off Rule?

This is an FTC rule for certain purchases—not real estate or vehicles—where sellers must explain your cancellation rights and provide forms. Like rescission, it lasts three days in applicable cases.

The Bottom Line

In short, the right of rescission gives you a quick window to cancel specific home loans if you reconsider. If you're about to sign and have doubts, check first if this right applies to your situation.