Revised estimate gives clarity on closing costs

If real estate is about location, location, location, then it can be said that the mortgage process is all about paperwork, paperwork, paperwork.

And with it comes confusion.

However, a newly revised Good Faith Estimate has standardized the form across the mortgage industry and attempted to clearly disclose and explain key loan terms and closing costs. Put into effect Jan. 1, the Good Faith Estimate developed by the federal Department of Housing and Urban Development simplifies the search for a home mortgage and holds the lenders to the estimate for 10 days.

"It makes it much easier for the consumer to compare because they have the exact same form," said Vicki Bott, HUD's deputy assistant secretary for single-family programs.

The standardized three-page form shows the loan terms and settlement charges to be paid if the loan is approved. It also contains a section to encourage consumers to compare mortgage loan offers between lenders.

And it allows consumers to compare each Good Faith Estimate fee to the relevant line on the final HUD-1 form consumers must sign at the settlement table when closing on the purchase of a house.

"It's extremely important consumers ask their lender for a good faith [estimate] and then to shop lenders to understand what is available in the marketplace," Bott said.

The two most important things consumers should keep in mind are the kind of loan and how much it will cost, she said.

"The good faith has clearly tied those two pieces of information together," Bott added.

But not all in the mortgage industry are lauding the changes. Some say the Good Faith Estimate is no longer what it should be — an estimate — but is instead a binding contract for brokers and bankers. In order to compensate for any mistakes, they often estimate the fees higher to protect themselves.

"I think it's misleading to the consumer," said Michael Parsons, president of Nationwide Home Mortgage in Rockville and the incoming president of the Maryland Association of Mortgage Professionals. "It's not really an estimate anymore. It's a guarantee of fees. Since we're held to those fees, we're giving higher-than-normal estimates so if you make a mistake it goes in the favor of the consumer."

The problem Parsons has with overestimating is that this is the same stage when he's trying to sell his services to the consumer. If he overestimates too much, the consumer goes with another lender offering a better price; if he underestimates, he's responsible for the difference.

Still, Anna Custer, executive director of nonprofit Live Baltimore, said the home-buying process can be confusing and intimidating, especially for first-time buyers. The new estimate form is a step in the right direction, she said.

"Any opportunity to improve transparency and make the mortgage business easier to understand for the consumer is a good step," Custer said.

She always recommends homeownership education classes before anyone purchases a home, so consumers can equip themselves with the information they need to move forward. Much of the home purchasing process comes down to shopping not just for the perfect house but also the right lender.

"If you're a first-time homebuyer, a lot of this is going to be a foreign language. Part of the process is shopping around for a lender that you're comfortable with," Custer said. "This is the biggest investment you're going to make in your life — you shouldn't sign a piece of paper if you don't know what it means."

To help you even more, we've provided a breakdown of the specific fees on the revised Good Faith Estimate, with the help of our three experts: Vicki Bott, HUD's deputy assistant secretary for single-family programs; Anna Custer, executive director of Live Baltimore; and Michael Parsons, president of Nationwide Home Mortgage in Rockville and the incoming president of the Maryland Association of Mortgage Professionals.

For more information, visit hud.gov and read HUD's settlement cost booklet.

Summary of your loan — All loan terms are explained here, including the number of years you're financing the loan; the interest rate; monthly payment; if that rate will change; mortgage insurance; if the loan balance can be raised; and if there's a penalty for prepayment (prepayment occurs if, for example, you choose to refinance your loan).

Escrow account information — An escrow holds funds needed to pay property taxes, homeowner's insurance and other property-related charges. Consumers usually pay an initial amount of escrow at settlement. This allows you to pay property taxes and insurance through your monthly mortgage payment. If your lender doesn't require an escrow, you'll have to pay these directly when they are due.

Summary of settlement charges — This adds together page one with estimated settlement charges on page two. When comparing lender offers, use this page.

Origination charge — The cost of the lender's or mortgage broker's fee for originating or putting together the loan.

Points or credit for specific interest rate If box one is checked, the interest rate is part of the origination charge. If box two is checked, you opted to pay a higher interest rate in exchange for a reduced origination charge or settlement charges. If box three is checked, you paid points (a point is equal to 1 percent of your loan amount) to reduce your interest rate but will pay higher origination charges.

Required services we select — Refers to charges required to complete the settlement process such as an appraisal, credit report, flood certification and tax service. The companies providing these services are chosen by the lender.

Title service — Guarantees that the home has no other liens on the property and that you are the undeniable owner. It also ensures the accuracy of the title and protects the lender against claims by others against your new home.

It's a service you can shop for. Prices vary greatly, but be careful to compare what services and limitations on coverage are provided.

Check that the company is reputable and ask about hidden fees.

Companies such as EasyTitleQuote.com and FreeTitleQuote.com offer easy online price comparisons.

Owner's title insurance — The lender's title insurance does not protect the homeowner. This is not required but ensures claims by others against your new home and protects you against any mistakes in guaranteeing the title.

Required service "that you can shop for" — This includes services that the consumer can select and are required for settlement. An example is a property survey or termite inspection, where the consumer can choose the company that provides the service.

Government recording charges — Also called recordation fees for state and local government to create a public record of the deed and any documents related to the loan. County rates vary between Frederick County's $6 per $500 of the transaction and Baltimore, Howard and Prince George's counties that charge $2.50 per every $500 of the transaction.

Transfer taxes — Charges by the state and local government to record the transfer of title to the property from one owner to another.

Maryland first-time homebuyers are exempt from this charge.

The Maryland state transfer tax is 0.5 percent. County and city transfer tax rates vary, with Baltimore County and Baltimore City having the highest rate at 1.50 percent and several counties — Carroll, Cecil, Frederick — having a 0 percent transfer tax rate.

Initial deposit for your escrow account — This is the initial money collected to start an escrow account that pays future recurring charges such as property taxes and homeowner's insurance.

Daily interest charges — This is the charge for the daily interest on the loan from the day you settle to the first day of the following month when your regular monthly mortgage payment would kick in.

Homeowner's insurance — If you're borrowing money to purchase a house, homeowner's insurance is required. This contains the yearly charge for homeowner's insurance.

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