mortgage

New form helps to estimate closing costs

Mortgage closing costs must be estimated accurately under federal guidelines that went into effect at the beginning of 2010.

The new rule caps a 17-year effort to help consumers save money on closing costs. The regulation meets other goals, too: It forces brokers and lenders to provide accurate estimates of closing costs, makes it easier for consumers to compare loan offers, and prevents lenders from pulling switcheroos shortly before closing.

Among the highlights:

  • The good faith estimate of closing costs, known as the GFE, is now a standardized, three-page form.
  • The GFE has an easy-to-understand summary of the loan's terms.
  • The lender has to stand by the good faith estimate for 10 days, giving you a week and a half to shop around.
  • The lender has to stick with the estimate of its own fees.
  • The final costs for third-party charges (such as appraisal, title insurance and pest inspection) have to bear a close resemblance to the figures on the estimate, although there is some wiggle room.
  • The GFE has two charts to help you compare loan offers. One tackles three loan scenarios from one lender (the one that prepared the GFE). The other chart helps you compare loan offers from a variety of lenders.
  • Finally, the GFE and the final summary of costs that you get at closing have been designed with the intention of helping you compare them side-by-side. The goal is to allow you to see whether the lender lowballed fees on the estimate and jacked them up later.

Regulators have fielded plenty of criticism for the new GFE they cooked up. It subtly narrows your choices of service providers, it doesn't spell out exactly how much money you need to bring to closing, and it makes it impossible to get a loan preapproval (although you can still get a prequalification). The form also does not tell you whether you can afford the loan.

Wrangling with RESPA

Changes in the GFE come courtesy of a revision of rules implementing the Real Estate Settlement Procedures Act, or RESPA. For three decades, consumer advocates have complained that the regulations didn't offer enough protection: Lenders could bait and switch with impunity. The Clinton administration was stymied in attempts to revise the rules; ditto with George W. Bush's first term. But the Bush administration wrangled these consumer-friendly revisions shortly after the 2008 election and the Obama administration allowed them to go into effect.

One fundamental change is the standardized GFE. Although the 35-year-old RESPA law encouraged lenders to provide good faith estimates, there was no steadfast requirement that they do so, and each lender could come up with its own version of the GFE. Now, a lender is required to give you a GFE within three days of applying for a loan, and the document is standardized by the Department of Housing and Urban Development.

The three-page document has several sections. A section on the first page summarizes the loan, explaining in clear language the loan amount, interest rate, whether the rate is adjustable, whether the loan allows negative amortization and whether it has a prepayment penalty or balloon payment.

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