Shopping for a Mortgage is Easier Than Ever, Thanks to GFE
Not anymore. Thanks to new federal rules that went into effect on January 1, the mortgage process has never been more transparent and easy to understand.
The centerpiece of the Department of Housing and Urban Development effort is a standardized Good Faith Estimate that all lenders must provide to borrowers. The 3-page form is written in plain English and clearly discloses to borrowers the actual costs of their mortgages, including interest rates, fees and penalties. it also explains which fees are subject to change, and which are not. In addition, closing agents must provide borrowers with a new HUD-1 settlement statement that compares borrowers' final and estimated closing costs.
The new standardized forms are intended to help borrowers shop around for the best mortgage deals on an apples-to-apples basis, whether they are refinancing or buying a new home. "Shopping for your loan is probably the most important step in your home-buying process," HUD points out in a settlement cost booklet it published that explains the changes and that lenders must provide to borrowers. "The type of loan product and your interest rate will not only influence your total settlement costs, but will determine the amount of your monthly mortgage payment," the agency notes.
Closing costs can account for between 3 and 5 percent of a sale price, so those surprises can pack a punch to the wallet. And at that point in the process, borrowers have little leverage to negotiate. The agency figures that the disclosures and ability to comparison shop could save consumers, on average, $700 in mortgage costs.
The changes to the the Federal Real Estate Settlement Procedures Act address a longstanding issue that came to a head during the housing crisis. Good Faith Estimates have long been required under RESPA, but in the past, they weren't very helpful. For one, they estimates were not legally binding, and often bore little resemblance to final costs. Secondly, the estimates varied widely, with lenders using different terminology for fees, or sometimes omitting fees altogether, making it difficult to compare mortgage offers.
"If we learned anything from the current crisis it's that it is hard for borrowers to make responsible decisions if they don't have all the necessary information," said HUD Commissioner David Stevens. "I believe these changes will take away much of the uncertainty borrowers have about the accuracy of disclosures."
Clearer disclosure should help prevent borrowers from taking on mortgages they can't afford, as many did during the during the housing bubble. The new Good Faith Estimate requires lenders to disclose features that could drive up costs down the road -- for example, if your interest rate will rise and, if so, by how much. Lenders must also now disclose whether the loan includes balloon payments, yield spread premiums, or imposes penalties for paying the loan off early.
The forms also make clear which charges cannot increase at settlement, and which can. Charges that cannot increase are generally those controlled by the lender, including the origination charge and processing fees. Fees for third-party services, such as appraisals and title insurance, can increase no more than 10% from the estimate, as long as the borrowers use lender-approved providers. The limit doesn't apply if borrowers use their own third-party providers.
Plain English forms, no hidden fees, and cost savings? Now that is good new for borrowers.
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