New mortgage rules curb closing-cost surprises.
Buying a home should be a joyful experience, but all too often, the mortgage settlement process leaves consumers confused, angry and paying more than they anticipated.The reason? Closing costs and fees that are significantly higher than the lender’s original estimates. Borrowers find themselves faced with two unappealing choices: Pony up or walk away and start searching for another house
Now, after years of wrestling with different factions of the mortgage industry, the Department of Housing and Urban Development has adopted rules designed to prevent last-minute closing surprises. The rules, which took effect Jan. 1, will reduce closing shocks and save home buyers money, says Timothy Dwyer, CEO of Entitle Direct Group, a title insurance company. In addition, he says, “You’ll be better informed and educated.”
The biggest change involves the good faith estimate, the form lenders give consumers when they apply for a mortgage. The good faith estimate isn’t new, but in the past, the document wasn’t particularly helpful to consumers, says Sylvia Alayon, vice president of operations at the Consumer Mortgage Audit Center. What has changed:
Lenders are now required to use a uniform three-page document when they give prospective borrowers a good faith estimate, says Vicki Bott, deputy assistant secretary for single-family housing at HUD.
Lenders also are required to provide the document within 72 hours after prospective borrowers apply for a loan.
This will allow consumers to figure out a loan’s total cost, including fees, and compare loan offers on an apples-to-apples basis, Bott says. “We encourage consumers to shop for the best rates and fees, and not just the best rate,” she says.
Many borrowers who bought homes during the housing boom later discovered that their loans contained hidden bombs that made their mortgages unaffordable. The new good faith estimate requires lenders to disclose features that could drive up costs. For example, the document requires lenders to disclose whether your interest rate will rise — as would be the case with an adjustable-rate mortgage — and if so, by how much. Lenders will also be asked whether the loan includes balloon payments or imposes penalties for paying the loan off early.
“All of these are really important questions,” says Helene Raynaud, vice president of housing for the National Foundation for Credit Counseling. “It will be able to raise red flags for consumers….”