The Department of Housing and Urban Development (HUD) under RESPA revised the Good Faith Estimate, HUD-1, and HUD-1A through regulation adopted in 2008 which became effective January 01, 2010. The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, passed in 1974. The purpose of the act is to help consumers become better shoppers for settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. RESPA requires borrowers to receive disclosures at various times. A Good Faith Estimate is required to be delivered within three (3) days of giving the six required items mentioned here:
- Social Security Number
- Monthly Income
- Property Address
- Property Value (Estimate)
- Loan Amount
Fees disclosed on the new Good Faith Estimate are grouped into three categories:
- Fees that cannot increase from the initial estimate to closing
- Fees that may vary as much as 10 percent from the initial estimate to closing
- Fees that may increase without limit, because the lender has no control over them or may be difficult to predict in advance.
- Fees in the no tolerance group: lender fees, mortgage broker fees, processing, underwriting, and discount points.
- Fees in the 10% variance group: appraisal, recording fees, credit report, flood certification, tax service, mortgage insurance, and guarantee fee. Title closing and title insurance are included in this group when selected from a provided list by the borrower. Any single fee could vary by more than 10%, the combined total of the fees in this group may not increase by more than 10%.
- Fees in the unlimited increase group: homeowner’s insurance, per diem interest, and setting up the initial escrow account. Title closing and title insurance are included in this group when they are not selected from a list provided by the lender.
The New Good Faith Estimate – The Positive:
As a customer, you have a minimum of 10 days to shop for various settlement services. The Good Faith Estimate is now longer an “Estimate” but an Etched in Granite Guarantee of Fees charged by the Mortgage Broker and Lender. This very fact will eliminate any companies still that would attempt to bait and switch consumers by offering low fees, and then increasing at closing. The format of the new Good Faith Estimate may not be modified from the version prescribed by HUD; this will make it easier for consumers to compare GFEs from one lender to another.
The New Good Faith Estimate – The Neutral Items:
The overall costs for closing a loan have not decreased, and none of the items have gone away, and no new items have been added because of the new Good Faith Estimate. The borrower will be asked to provide a commitment to the loan and to moving forward prior to locking in the rate and terms. If the borrower does not provide their commitment to moving forward with the loan by the end of the shopping term, minimum 10 days, then the lender no longer has to honor the terms. If the terms do happen to change during the process then this will trigger another 10 day grace period. A very important part for the customer to pay attention to is how long the interest rate being offered is good through. Because of MDIA (Mortgage Disclosure Improvement Act of 2009), the APR at closing cannot be off by more than 1/8%, if it is it must be re-disclosed and have a 3 day waiting period. So, the interest rate will need to be locked in at least 5 days prior to closing with most investors requiring 10 days. Interest rates are very fluid so guaranteeing an interest rate for any length of time is very difficult, since the interest rate could change.
The Lender and Broker are responsible for the accuracy of fees that are typically paid for by the seller, ie. Owners Title Policy. A seller’s closing cost concession is not shown on the new Good Faith Estimate. The proration of taxes is not shown. Proration of taxes is a credit given to the buyer when taxes are paid one year after assessment, since the new buyer’s first bill would be for a time period when they were not living in the property.
The two most important pieces information everyone wants to know when purchasing a home:
What is my total monthly payment? The Principal, Interest and Mortgage Insurance is included, but not the Taxes and Insurance. Sure everyone can just add the cost, but wouldn’t it makes more sense to just include the total payment, it was on the old Good Faith Estimate. With a USDA Home Loan, you don’t have to worry about the added expense of mortgage insurance.
How much money will I need to close? If you are using a USDA Home Loan this doesn’t become as much of an issue, but still something you want to know.
How to Compare and Choose Mortgage Lenders?
If you need to compare mortgage lenders, keep reading for a breakdown of the four major selection criteria you should be looking at – interest rates, lending requirements, customer service and stability and reputation.
One of the primary factors when deciding on a mortgage company will be the interest rate that they quote you and the overall cost of the loan over the long term.
Before you start comparing quotes, though, make sure you have a complete picture of the total cost, including closing costs, penalties for extra payments, private mortgage insurance, and legal fees.
While you don’t want to find yourself in a mortgage that you simply can’t afford, you may find yourself comparing lenders based on their lending requirements, particularly if you’re self-employed or work in contract positions.
House buyers with unorthodox or non-standard applications may need to compare mortgage lenders based on their leniency levels and willingness to be flexible when it comes to freelance workers or small business owners. So, look for a mortgage company that focuses on your target market.
One mortgage lender may offer you a great rate, but can they provide an office location in your hometown that’s staffed with friendly customer service agents? Or will they provide you with a phone number for a call center halfway across the world?
While wholesale mortgage lenders or online lenders can offer slightly lower rates, they often can’t compete with your local savings and loan – an institution that offers daily service, friendly faces and is a business that’s actually dedicated to its community.
Stability and Reputation
One of the major drawbacks of obtaining a loan through a wholesale mortgage lender or a mortgage broker is that you may wind up with a mortgage that is simply sold on the open market. This means that instead of dealing with the friendly storefront representative who took your application, you could wind up doing business with a foreign firm or unreliable service provider.
When you compare mortgage lenders, it’s important to look beyond the lowest rate or most lenient lending requirements and look for a company that’s reliable and has a strong reputation for doing good business. After the recent foreclosure and mortgage crisis, many Americans are learning this lesson the hard way.