New Law Keeps Lenders From Screwing You at the Closing Table

1.18.10

There is nothing like buying a home, to have you shelling out money in a million different directions. For years, one of the biggest potential ‘gotcha’ has been closing costs:

Plenty of home buyers have found themselves at the closing table, ready to sign the myriad documents that will officially make them new homeowners–only to get nasty sticker shock. What was originally supposed to cost them, say, $2,500 in closing costs, has turned into $3,000.

The Good Faith Estimate, a tally of the fees associated with a mortgage loan due at closing, is exactly that – an estimate. Often these costs, which are provided by mortgage brokers and lenders to borrowers within three days of getting a loan application, escalate by closing time.

But on Jan. 1, new federal rules adopted by the Department of Housing and Urban Development took effect, mandating the use of a redesigned, simplified Good Faith Estimate form. The idea behind the revision: to avoid those closing-table surprises.

The new rules require lenders to use a standardize form for their good faith estimate. It also puts limitations on how much these ‘estimates’ can waiver:

1. Fees that cannot change from the original GFE to final settlement. These include the lender’s origination and underwriting charges, and the credit or “points” based on the specific interest rate chosen.

2. Fees that can increase up to 10% at settlement. These include services required and recommended by the lender. If the borrower selects a third-party provider (for title services, title insurance and recording charges) from the lender’s approved list, the fees cannot increase by more than 10% from the upfront estimate to the final.

3. Fees that can change without limit. These include charges from service providers (for title insurance) chosen by the borrower, but not recommended by the lender. This category also includes things like daily interest charges, homeowner’s insurance, as well as flood and pest insurance, if necessary. It encourages borrowers to do their own shopping. “It prevents the worst abuses of price escalation on third-party charges for service providers selected by the lender,” says Guttentag.

The new rule hasn’t been adopted without any criticism. One main cause of concern still deals with lenders gouging consumers. Although lenders can not substantially change the fees quoted in the good faith estimate at the time of closing, lenders can still quote inflated fees in the initial good faith estimate. The best protection from this gouging is to shop around. Compare good faith estimates from various financial institutions.

Remember, even if you have banked at the same bank for 40 years, they might not have you best interests in mind. By shopping around, you could literally save yourself thousands of dollars. And remember to check out “How to Save Thousands in Closing Costs“.