The final step in buying a home, known as the “closing” or the settlement process, has all too often turned what should be a cheerful occasion into a time of confusion or anger over unexpected costs. Much to the dismay of buyers and sellers, mortgage lenders have been known to increase their costs at the closing. For the seller, this can be especially catastrophic as the buyer may consequently decide to opt out of the deal at the last minute.
Much of that ‘bait and switch’ game is now over, thanks to the efforts of HUD (Department of Housing and Urban Development). Effective January 1, 2010, a standardized Good Faith Estimate (GFE) must be used by all lenders and provided within 72 hours after prospective borrowers apply for a loan. Establishing a uniform GFE will allow consumers to compare quotes easily from various lenders. Borrowers will now be able to assess the impact of a lower interest rate and higher upfront fees and vice versa.
Lenders are required by law to give mortgage applicants a copy of the final settlement costs (known as the HUD-1), at least one day before the closing. However, in the past, borrowers often found substantial cost increases in the HUD-1 compared to the GFE. The new HUD rules will make it much more difficult for lenders to change costs. The HUD-1 format will also be changed to include a line-by-line comparison to the new GFE, making it easy to identify any changes in costs.
Lenders are now prohibited from increasing costs they control, such as origination and processing fees. Costs from third-party services, such as appraisals and title insurance, can increase no more than 10% over the GFE, as long as the borrowers use providers selected by the lender. The limit does not apply if borrowers select their own third-party providers.
HUD has published a guide for home buyers, “Shopping For Your Home Loan: HUD’s Settlement Cost Booklet.” The booklet contains completed examples of both the GFE and the HUD-1 forms and is a great tool to prepare buyers and sellers for the closing. How about a high-five for HUD!
