If you tried to get a mortgage in 2010 then you may have noticed something a little different about the process. New laws were passed that made changes in how things were done when people obtained mortgage financing. These changes regulate how banks, closing attorneys or title companies disclose closing costs on loans. These changes were put into effect January 1, 2010. The goal of this reform to Respa (Real Estate Settlement Practices Act) was to give consumers more transparency in the loan process.
One of the largest changes was to the GFE or Good Faith Estimate. This is the document that a lender will give to you when you apply for a loan. It is basically a break down of the costs of obtaining a loan. For example, it would show you what the bank might charge you, how much money you needed in an escrow account to cover property taxes and insurance, title insurance costs, closing attorney fees etc. One of the major issues consumers had in the past was that the actual costs often times far exceeded what was on their Good Faith Estimate. The GFE could say closing costs of $5,000 but when it came time to come to the closing table they needed $7,000 in order to close the transaction.
A few of the changes to GFE:
1) RESPA created a ‘tolerance range’ for various closing costs on the Good Faith Estimates.
* Closing costs quoted for lender origination charge are not allowed to change
* Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
* Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
2) There is now a worksheet like page on the GFE that allows consumers to compare different loans terms so they can shop for the best deal.
3) Yield spread premiums which are fees that lenders pay to mortgage brokers now have to be disclosed. For example, lets say a mortgage broker can arrange you a loan for 5.25% to buy a home. Let’s assume that the actual lender of the money provides that money at 5%. The lender will compensate the mortgage broker for originating that loan. If the mortgage broker convinced you to pay 5.5% then the lender would provide higher compensation for the higher interest rate. These fees now have to be disclosed.
4) Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
5) Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
Although, a bit of a headache when it comes to closing time I think the goal of this change is good. I have had people either right before closing or at the closing table be a bit surprised at how much more the actual closing costs were compared to the costs on the GFE when they started the loan process.
