Anyone who has purchased or refinanced a few homes has probably learned to dread the closing statement, which all too often included a pile of new or inflated fees that your lender had never before mentioned.
By the time you saw them, you were committed to a loan -- and probably a house -- and objecting to those fees would mean walking away from a much-anticipated deal. Most borrowers have just grumbled and paid up.
Those days are nearly gone forever, thanks to new government rules on real estate settlement that go into effect in January.
“This is a watershed moment for consumers, in the best possible way,” said Jeff Lazerson, president of an online loan brokerage company called Mortgage Grader. “Lenders can no longer bait you in by lowballing a price and then deliver the gotchas when you close. In this new world, the bait-and-switch goes away.”
Consumers will also be entitled to easier-to-read disclosure statements. But “easier,” in the world of home mortgages, doesn’t mean self-explanatory. The Department of Housing and Urban Development has published 52 pages of frequently asked questions on its website, trying to clarify the rules for brokers.
For consumers, the rules usher in two new basic disclosure forms and provide penalties for lenders who lie. The first new disclosure -- called a good-faith estimate -- is given to you while you’re still shopping. The second one shows up when you are wrapping up the details and about to sign on the dotted line. This is known as a settlement statement, and it will help you compare what you were promised with what you got.
There are a variety of new disclosures on this good-faith estimate, but the ones to watch fall into three categories -- the loan summary, the charges for settlement services and the trade-off table.
The loan summary spells out how much you’re borrowing, the term of the loan (or number of years you’re paying) and the initial interest rate on the loan.
If the loan rate is adjustable, this summary also graphically illustrates when the rate can be altered, how high it can go at its first adjustment and how that rate hike would affect your monthly payments.
This section also demands that lenders include a worst-case scenario that spells out just how high the loan rate and payment can rise over its lifetime.
Additionally, if there are prepayment penalties, your lender has to disclose here the most you’d have to pay in fees to pay the loan off early. (In the past, consumers complained that disclosures about these fees, which can amount to tens of thousands of dollars, were buried in the disclosure documents, so they never knew they existed until they faced a bill.)
Settlement charges are the fees you pay to process the loan, including for home appraisals and title insurance. They have been among the most contentious consumer issues because these are the fees that many lenders would bait and switch, Lazerson said.
This new disclosure statement not only spells out what these charges are, it tells you which services you can shop for and which you must buy from the lender or its pre-authorized vendors. That distinction is important because any charge that the lender controls cannot be boosted -- by a penny -- from the time the loan is agreed upon until the deal closes, unless there’s been a “changed circumstance.”
What’s a changed circumstance? A significant event that would affect whether you could qualify for the loan. Some examples:
* A couple decided to divorce between securing a loan and closing it, leaving only one wage-earner to make the payments.
* One of the borrowers died.
* A natural disaster wreaked significant damage on the home.
* The home’s estimated appraised value was vastly greater than the real appraised value, making it questionable whether a borrower could still qualify for the loan.
In other words, a changed circumstance is something rare and usually something far more unpleasant than having your loan rate rise.
Also new is something called a trade-off table. This chart highlights things lenders and sophisticated borrowers already know but consumers might not realize.
Consider the dreaded “points.” These are simply an upfront fee that’s calculated as a percentage of your loan amount. If you pay more points, you get a lower interest rate, but if you don’t have enough cash to pay upfront, you can accept a slightly higher interest rate on the loan. You’ll in effect finance those fees over time.
This comparison table shows you what this trade-off will cost you every month and let you figure out just what all these fees can cost you over the life of the loan.
You’ll need a calculator, though. The form doesn’t do the math for you -- nor does it suggest what the numbers mean.
To make this chart meaningful, you need to multiply the figure in line four (the monthly change) by the number of monthly payments you’ll make (that’s 360 for a 30-year loan) and add the amount listed on the final line of the chart that’s labeled “How much your total estimated settlement charges will be.” Do that for all three columns on this chart, and you’ll find just how costly it can be to finance your upfront fees over time.
The second new disclosure document, also known as HUD-1, is called the “settlement statement.” Good news. There’s just one thing to pay attention to here. On the third page of this form there’s a side-by-side comparison of the fees you were quoted in the good-faith estimate versus what you’re paying in real life.
The comparison is conveniently broken into three parts: The first section shows the charges the lender controls. These charges can only fall from estimate to reality. If they rise, the lender owes you a refund.
The second section, which includes title insurance costs, government recording fees, notary charges, document preparation fees and a variety of other charges, cannot increase by more than 10% from the estimate.
The final section lists the charges that can swing around without penalty. For those who are refinancing, these include daily interest charges on your loan. To understand them, you have to realize that any new loan you get must pay off the old loan.
These charges reflect the interest that’s accruing on your old loan while you are working on getting a new one. The faster you complete the refinancing process, the fewer daily interest charges you incur.
But the bank is not in control of how quickly you fill out your application and provide verification of your income and employment, so the rules don’t penalize the bank if these charges end up higher than anticipated.
However, if the charges in the first section of this form have risen at all, or the charges in the second section have risen by more than 10%, you are due a refund, Lazerson said.
The new rules say that if you ask for a refund, the lender must comply within 30 days. If it doesn’t, Lazerson said, you should report the lender to HUD and take it to small-claims court.
“The beauty of the new law is that it really is all about the consumer and doing what’s best for them,” he said. “The consumer is the king.”