Every mortgage comes with a stack of paperwork. Federal regulators are adding a few pages to the pile, with the goal of making it easier for borrowers to comparison shop.
The feds are revising the good-faith estimate of closing costs. Know as the GFE, the document is an itemized estimation of the fees and taxes on a mortgage transaction. Lenders and brokers are required to provide a good-faith estimate to mortgage applicants. GFEs are not standardized, and they're usually on one long sheet of paper, and they're head-scratchingly hard to understand.
By the beginning of 2010, the GFE will be standardized and expanded into a three-page document that's easier to comprehend. The estimated fees will have to be accurate. And the new GFE will encourage consumers to shop for mortgage deals.
The new good-faith estimate "will offer consumers more certainty about the loan they're agreeing to," says Steve Preston, secretary of Housing and Urban Development, or HUD. "And with the standardized GFE, consumers can shop much more effectively for the lowest-cost loan."
The housing department also standardized another document, called the HUD-1 statement. Like the good-faith estimate, the HUD-1 itemizes the fees and taxes on the mortgage. The difference is that the HUD-1 is not an estimate; the numbers on the HUD-1 are the final figures that the borrower pays. The new HUD-1 has three pages, and the final page has a section that allows the borrower to compare the estimate with the final numbers to see if the lender tried any funny stuff.
"We think this is very important," Federal Housing Commissioner Brian Montgomery says. "For the first time ever, consumers will now be able to easily compare the estimated loan offer with the one they actually agree to."
Regulators did more than tinker with the paperwork. HUD will require estimates to be accurate. Lenders will be required to stand by the origination fees they put on the good-faith estimate. The total figure for third-party fees, such as those for appraisals and tax services, will be prohibited from increasing by more than 10 percent from the estimated total in the good-faith estimate.
How they differ
Highlights of the revised and standardized documents:
- The first page of the GFE contains a summary of the loan. It spells out the loan amount, the term, the initial interest rate, whether the rate is adjustable and whether negative amortization is allowed, whether taxes and insurance are paid in escrow, and whether there is a prepayment penalty or balloon payment.
- The second page of the good-faith estimate spells out the lender's total origination fees and the third-party fees and taxes. A shaded box contains information about whether the borrower will pay points to get a lower interest rate or whether the borrower will take a higher rate in exchange for reduced closing costs. Yield spread premiums will be disclosed in this box, although it doesn't contain the words "yield spread premium" or "YSP."
- The third page is a work sheet with two tables. One makes it simpler for the borrower to compare the trade-offs between paying discount points and getting a lower rate, or getting a higher rate and paying less in closing costs. The other table, dubbed the "shopping cart," lets borrowers enter information from multiple GFEs so they can compare mortgage offers side-by-side.
- The HUD-1's third page is designed to allow consumers to compare the numbers in the GFE with the final numbers in the HUD-1.
HUD's priority was to make it easier to shop for the lowest-cost mortgage.