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New closing statement changes: the HUD-1

 
Important change to help consumers during the mortgage process
 
The U.S. Department of Housing and Urban Development recently issued long-anticipated mortgage reforms that will help consumers to shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers.  HUD now requires, for the first time ever, that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs.  HUD estimates its new regulation will save consumers nearly $700 at the closing table.
 

"Consumers need and deserve to know what they're getting themselves into before they sign on the dotted line.  After carefully considering the concerns of consumers and the different businesses in the housing sector, we have developed an approach that empowers the average family to shop for the most appropriate loan to meet their needs."

 

The new standardized GFE and HUD-1

 

Summary:

 

  • For the first time ever, HUD nowrequires mortgage lenders and brokers to provide borrowers with an easy-to-read standard Good Faith Estimate (GFE) that will clearly answer the key questions they have when applying for a mortgage including:
  • What's the term of the loan?
  • Is the interest rate fixed or can it change?  
  • Is there a pre-payment penalty should the borrower choose to refinance at a later date?
  • Is there a balloon payment?  
  • What are total closing costs?
  • HUD estimates that by improving upfront disclosures on the GFE, and limiting the amount estimated charges can change, consumers will save nearly $700 in total closing costs.
  • Based on substantial public comment, HUD withdrew a proposed requirement that closing agents read and provide a 'closing script.'   Instead, to borrowers in favor of a new page on the HUD-1 Settlement Statement that allows consumers to easily compare their final closing costs and loan terms with those listed on the GFE. 
  • HUD's new Good Faith Estimate has been reduced from four to three pages, including an instructional page to help borrowers better understand their loan offer.  In addition, the GFE will consolidate closing costs into major categories to prevent junk fees and display total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. HUD will specify the closing costs that can and cannot change at settlement. If a fee changes, HUD will limit the amount it can change.
  • To help borrowers compare their Good Faith Estimate with their HUD-1 Settlement Statement, each designated line on the final HUD-1 will now include a reference to the relevant line from the GFE.  Borrowers will now be able to easily compare their estimated and actual costs in the same manner many commenters suggested.
  • HUD will require lender payments to mortgage brokers (often called Yield Spread Premiums) to be disclosed in a more meaningful way.  These payments are directly dependent on the interest rates that consumers agree to. To ensure that HUD's new requirement will not create a consumer bias against brokers, the Department did rigorous consumer testing and found the new Good Faith Estimate helped consumers to select the lowest cost loan nine-out-of-10 times, regardless of whether the loan was originated by a lender or a broker.
  • Loan originators will be required to provide borrowers their Good Faith Estimate three days after the loan originator's receipt of all necessary information.  To facilitate shopping, loan originators could not require verification of GFE information (tax returns etc.) until after the applicant makes the decision to proceed. 
  • HUD will allow lenders and settlement service providers to correct potential violations of RESPA's new disclosure and tolerance requirements.  Lenders and settlement service providers now have 30 days from the date of closing to correct errors or violations and repay consumers any overcharges.

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    5 Tips for Deciphering Your Home Loan’s Good-faith Estimate                   

     

     

    Knowing how to read your good-faith estimate can help you save money on your home loan.

    When you apply for a mortgage, the lender has three days to give you a good-faith estimate of the fees and interest rate you’ll pay, as well as other loan terms. Here are five tips for using the new three-page form to your advantage.

    1. Know which fees can increase and by how much

    In the past, lenders provided an estimate of the costs involved in getting your home loan, and if those costs rose by the time you closed on your home, tough luck. The good-faith estimate shows some fees the lender can’t change, like the loan origination fee that you pay to get a certain interest rate (commonly called points) and transfer costs.

    The form also lists the charges that can increase by up to 10%, like some title company fees and local government recording fees. The lender must cover any increase over that amount.

    Finally, the good-faith estimate lists the fees that can change without any limit, such as daily interest charges.

    2. Look for answers to basic loan questions

    In the summary section, lenders explain your loan’s terms in simple language. Can your interest rate rise? If so, a lender must spell out how much the rate can jump and what your new payment would be if it does. Can the amount you owe the lender increase, even if you make your payments on time? If it can, a lender must show you the potential increase.

    3. Evaluate the “tradeoffs” on a loan

    In the new “tradeoff table,” you can ask lenders to provide details on the tradeoffs you can make in choosing among home loans. If you’d like the same loan with lower settlement charges, how will the interest rate change? If you’d like a lower interest rate, how much will your settlement charges increase?

    4. Compare apples to apples with the shopping chart

    Included on the good-faith estimate is space for you to list all the terms and fees for four different loans, so you can make side-by-side comparisons.

    5. Know what’s missing from the good-faith estimate

    The new form lacks some key information, such as how much you’ll reimburse the sellers for property taxes they’ve already paid on the home. It also doesn’t tell you the amount of money you’ll have to bring to the closing table. Some lenders have created supplemental forms providing that information. If yours hasn’t, ask for it.

    By: G. M. Filisko

    G.M. Filisko is an attorney and award-winning writer who has encountered many settlement statements that bore no resemblance to the lender’s good-faith estimate. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.