Good Faith Estimate And Hud-1 Forms Get A Face Lift

Perhaps you've heard thestory from family, friends or colleagues; their unfortunate tales of unexpected costs and fees that surfaced in the days leading up to, or even on the day of their home closing. You may be wondering how did your friend's closing costs end up being so much higher than originally presented by their lender. Will this happen to you? Fortunately, the answer is "no."

As of January 1, 2010, The U.S. Department of Housing and Urban Development (HUD) has adopted new rules to which mortgage lenders must adhere. These rules were adopted to eliminate surprises at closing.

A Standardized Good Faith Estimate

Lenders have always been required to give borrowers a listing of all expected closing costs in the form of what is called a Good Faith Estimate (GFE). Before now, there was no consistency with the GFE forms. Each lender could use its own version; presenting different information in a different manner.

Now, lenders must use a standardized, three-page form. This form must be presented to you, at no charge, within 72 hours after you apply for a loan. The form is very well laid out and documented in easy-to-understand terms.

The highlight of the new GFE is that it clearly spells out:

Charges That Cannot Increase
There are a handful of fees that lenders are now forbidden to change. These are the ones that they can control; such as origination fees and processing fees.
Charges That in Total Cannot Increase More than 10%
Fees from third party services (selected by your lender) such as appraisals, surveys, and title insurance will not raise more than 10%. If for whatever reason, your lender exceeds these 10% tolerances, he must reimburse you.
Charges That Can Change
Your initial escrow deposit, daily interest, homeowners insurance, and third party services chosen by you are not subject to the10% maximum as the lender does not have control over these factors.

Money is a poor compensation for all the time we lose making it.

The GFE must also include features of your loan that could drive up your mortgage costs at some point in the future. These might be an adjustable rate loan, balloon payments, pre-payment penalties, etc. The dollar amount of these changes must be disclosed to you.

Trading Upfront Costs for a Lower Interest Rate

Agreeing to pay additional points in exchange for a lower interest rates and vice versa is common practice. You will now be able to see a clear chart, called a tradeoff table, that details how this exchange will affect your monthly payments. See exactly what your loan will look like with lower settlement charges and what it will look like with a lower interest rate. It is all laid out right before you.

A Much Improved HUD-1 Settlement Form

A "HUD-1" is the common real estate settlement form used by closing agents. The HUD-1 form itemizes all charges imposed upon a borrower and the seller of the home. It gives both parties a complete list of their incoming and outgoing funds. The problem with HUD-1 forms was that they bore little resemblance to the costs originally presented on the GFE. To make things worse, these HUD-1 forms only need to be given one day before closing. You can imagine your panic if the numbers on the form are not what you expected.

Today's HUD-1 form is a fantastic upgrade. A section titled "Comparison of Good Faith Estimate and HUD-1" is an extremely helpful feature. Just as the heading states, you are able to compare line-by-line the costs on your original GFE to those on the HUD-1. It couldn't be clearer. This section is broken down by those costs that cannot increase, those that can increase by 10%, and those that may increase; just as we've seen on the GFE.

Mortgage Shopping Made Easier

Not only will these new guidelines and forms reduce shock on closing day but your Good Faith Estimate will serve as great tool for mortgage comparison shopping. You can now compare apples-to-apples as you will have in hand the total cost of all fees from each lender and each lender's GFE will have the exact same information.

Whew. Don't you feel better now?