I have always been wondering why we have two different disclosures (TIL and GFE) to serve one and the same purpose… Why can’t it be just one form with all a borrower has to know? The funniest thing, though, is the fact that both The Department of Housing and Urban Development (HUD - the author of the GFE/HUD1 duo) and the Board of Governors of the Federal Reserve System (the creator of the Truth in Lending document) recommended jointly to the Congress, among other quite sensible things, I am citing:
Combining and simplifying RESPA and TILA disclosures that are provided to consumers; and requiring information about the loan originator’s role and any requirements for escrow accounts and private mortgage insurance.
The depressing part here is that the report is dated July 17, 1998. The forms have not been combined, only the GFE and HUD-1 have been modified yet to become mandatory in 2010. The Truth in Lending disclosure is still in the queue. The recent activity of the Federal Reserve Board indicates that the problem is not ignored. The Press Release dated July 23, 2009 informs that The Federal Reserve Board proposed “significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (HELOCs)“.
… the key word being “closed-end”. Read the rest of this article »
The recently introduced new Good Faith Estimate (GFE) form triggered certain changes in the settlement documentation chain. Its long-time associate the Housing & Urban Development Settlement Statement (HUD-1) form has undergone a makeover, too. The guidelines for the usage of both documents went into effect on January 16, 2009, but they will become mandatory only on January 1, 2010.
Unlike the GFE that provides only the estimation of the settlement costs, the HUD-1 describes the real deal. The new HUD-1 form has clear references to the corresponding items in the GFE and a special section, where you can compare the GFE promises and their HUD-1 implementations. The Statement itemizes all charges imposed both on you as a borrower and the seller for the real estate transaction. It gives each party a complete list of their incoming and outgoing funds. Fees associated with the transaction but paid prior to closing are also included. They are normally marked “POC” for Paid Outside of Closing. RESPA states you should be given a copy of the HUD-1 at least one business day prior to settlement. In real life, however, entries may still be coming in a few hours before closing. The form is filled out by the settlement agent who will conduct the settlement, so make sure you have the name, address, and telephone number of this agent if you wish to inspect the form prior to closing. Have the agent go through the details with you and do not hesitate to ask about any suspicious increase (or decrease) from the estimate, about any charge you do not understand. Do not feel shy to find out exactly what you are paying for.
Before January 1, 2010 you may still be provided with old GFE and HUD-1 forms. These forms bear their old issues, incomprehensibility being one of them. If the potential lender only cared to offer you the old standard forms, you may give the whole deal a second thought. Note, if the GFE presented to you is a new standard, the following HUD-1 must also be new. The old GFE couples with the old HUD-1 only.
What good is the Good Faith Estimate you received from your potential lender? Let’s see…
At first sight, the information provided seems gold - origination fees, appraisal fees, credit report… you name it! And then you get several Estimates from different lenders, and compare, and think that you have made a fair choice until… well, actually, the closing. To many people it came as a shock - the actual cash charges happened to be a lot higher than any GFE had ever told them. The problem was, and still is for the old forms, that the document bore no clear indication of the possible changes in the prices. People relied too much on numbers that were just estimates, sometimes highly inaccurate ones. Moreover, no penalty was imposed on lenders, who intentionally provided inaccurate numbers. Originally intended to help a homebuyer compare mortgage offers and select a program best suited for his particular situation, the document ended up in being confusing and, what is worse, misleading. For years, the prices and charges quoted in too many GFEs had little to do with the real charges that borrowers had to face at closings. Tempers rose, and finally the government paid attention - the new Real Estate Settlement Procedures Act (RESPA) guidelines went into effect on January 16, 2009. The new Good Faith Estimate (GFE) and Housing & Urban Development Settlement Statement (HUD-1) can already be used, but become mandatory only on January 1, 2010. Read the rest of this article »
The Annual Percentage Rate (APR) was created with good intentions to make complicated things if not simple, then at least simpler. It even works in many cases! Unfortunately, it also fails in just as many other cases, which sort of devaluates it as a universally reliable tool.
The APR looks a lot like an interest rate, because it is also a percentage. However, it is quite a different parameter. The APR is the sum of the interest rate and a theoretical percentage rate derived from other then the interest, fees associated with a mortgage: points, pre-paid interest, origination fees, attorney and notary fees, closing agent’s document preparation fees, PMI. Third party services, such as appraisals or credit reports, are not included. The purpose of this rate is to summarize all the costs of a mortgage into one number and help a potential borrower make a more informed choice. The borrower should be able to compare mortgages by comparing their APRs. Ideally, a mortgage with the APR of, say, 6.25% should be a better deal than a mortgage with a 7% APR, implying that the latter’s closing costs are higher. The APR is usually higher than the quoted interest rate, but it does not influence your real monthly payments. The monthly payments are dependent on the interest rate; the APR is a purely technical theoretical parameter developed to assist the choice of a potential borrower. It immediately gives one the overall idea of the costs involved. Read the rest of this article »
The concept of mortgage brokers disclosing the real wholesale mortgage prices to their customers has caught my eye again recently, as it is being promoted by some most respectful mortgage experts and advisors. Some of them sound very enthusiastic about it; some see the panacea for predatory lending in it. Well, there seems to be quite some good common sense in it, but somehow certain aspects of the deal keep me puzzled and wondering.
When one wants to borrow some money to, say, buy a home, he can either shop for a retail lender with the best offer himself or hire a broker to find the best deal on the market. The advantages of having a broker are obvious – a broker being constantly in the business has a far better knowledge and understanding of the mortgage market and procedures, he can provide his customer with a better deal. Well, at least in theory. The disadvantages are also obvious – the costs of the service. Moreover, a conventional broker tends to work for a commission, which s/he does not tell the customer in advance, which, in its turn, leaves a lot of room for tricks and speculations. Read the rest of this article »
A few words about the procedure of getting a mortgage. I have noticed, that a lot of people, especially first home buyers, find themselves pretty much at a loss as to where to start, where to look and who to turn to, if you want to buy a home.
Certain details may fluctuate in our turbulent times, but the big conceptual steps remain the same, for they are not based on the whims of the market, but rather on common sense developed from them. Let’s take a walk, step by step.
Step One: first of all, you have to estimate how much of a home you can afford. Our Affordability Calculator can be of great help here. You can fiddle with parameters like Down Payment or Interest Rate to find out the maximum rate you can agree to and the most sensible amount to put down. In real life, however, you have to be prepared for other influential factors to pop up, your credit score being probably the strongest. Generally speaking, the affordability estimate you are making in the very beginning reflects only your personal financial capability; the credit score is important at a later stage, when a lender decides on the terms of your mortgage. I am drawing your attention to the score now only to point out, that if your score is far from perfect, the ideal combination of, say, the interest rate and the down payment you have calculated for yourself, may not be possible in real life. The low credit score puts you in no position to wish a lot from the lender, you will rather have to agree to whatever the lender offers to you. It should not stop you from shopping around for a better deal, though. On the contrary - the lower the score, the harder you have to look for both conventional and non-conventional offers. Even a minor difference in the initial conditions may make a big difference in the long run. Read the rest of this article »
These two painful words and three painful digits… Unfair is another word that you hear a lot next to them. Why unfair? Why do many people feel that their credit score is rather random than calculated according to some consistent rule and/or some common sense? Let’s take a closer look.
The Fair Isaac Corporation developed software for calculating the score. That is why it is called the FICO score. The Fair Isaac Corporation is only the author of the software, though. The score is actually calculated by the three responsible bureaus: Equifax, Experian and TransUnion. Ideally, all credit granters are expected to report their borrowers’ credit activities to all the three bureaus. The bureaus collect the information (independently) and produce a credit report each for anyone with a credit history. Each individual credit user can request one credit report a year from each bureau without any charges. For the most reliable information about how to do it, read the government page.
Even if you are not planning to take out a loan, it is recommended to request all the three reports every 12 months and study them thoroughly. Your credit score, when you need it, will be derived from the data in these reports, so it is very important to make sure they are accurate, and correct the mistakes, if any, as soon as possible.
The three reports, as they arrive, may differ in the information presented. Read the rest of this article »
