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.
A fair question – what difference does it make if it says on the paper in block letters “NO WORD OF TRUTH HERE”, I’ll just throw it away – gets a hopefully effective and efficient answer in the new RESPA. The year of 2009 allows lenders to choose which forms to use, but the usage of the new forms also implies, that the lender has to comply with the other new requirements, namely:
- Use the new standardized Good Faith Estimate form (GFE). Unlike the old form, which was rather a flat list of items, the new one has a clear structure of categories, no “junk fees”;
- Provide a clear summary of the loan terms and total settlement charges on page one of the GFE. Tests proved that the summary is actually useful for comparison-shopping. However, you should always bear in mind the unavoidable issues of all mortgage price quotes – they get outdated within 24 hours, mainly the Interest Rate & Points if they are not locked. You cannot lock them with every lender you comparison shop. Even if all lenders provide you with perfectly accurate GFEs, but all of different dates, the comparison results may still be quite misleading;
- Provide more accurate settlement services cost estimates on the GFE. The costs subject to changes are differentiated from the unchangeable costs, there is a special section explaining which charges can change (and how much) and which cannot;
- Ensure borrowers are aware of final loan terms and costs at settlement
- Clarify HUD-1/HUD-1A instructions
- Clarify HUD’s current regulations concerning discounts
The new GFE also offers a special tradeoff table section, where the lender can suggest a couple of alternative mortgage plans based on the borrower’s situation. The tests conducted by HUD proved this section very useful for borrowers. Unfortunately, lenders are not required by law to fill it out, so if you want this comparison information, you have to ask for it explicitly.
Now, how do you know if the GFE you have received is an old or a new form? Does it look like this or like that? The former is the old form, and the latter is the new one. It is more or less clear what to expect from a lender with a new form, as it has already chosen to comply with all the other regulations accompanying the new GFE and HUD-1. An old-standard GFE, however, still bears its issues: poor comprehensibility, possible inaccuracies due to many reasons including lack of legal liability for errors. If you choose to commit yourself to an offer described by an old form, I would suggest two steps to prevent too much disappointment and stress at the closing:
- ask the lender to provide you with the HUD-1 form at least 1 day prior to closing, not at closing itself – you have to have time to compare the HUD-1 and the GFE and prepare questions over everything that seems unclear;
- make it clear to the lender, that if the actual charges at closing happen to be a lot higher than declared in the GFE, you will NOT close.
No matter if the form is new or old, it is an estimate and should be treated as such. Certain unintentional inaccuracy may occur, too, as, for example, large lenders operating nationwide are not always familiar with local customs, for example regarding the buyer’s cost for title insurance. In one county it is customary for the seller to pay for title insurance, while in the adjoining county the buyer pays it. However, you personally do not always have to follow the customs of the area, for your mortgage you can negotiate who pays what and on what terms.
And finally – close at the end of the month. As all mortgage payments are due on the first of the month, you can avoid or reduce the prepaid interest due by closing on or near the last day of the month.