Beginning January 1st 2010, settlement fees and loan charges will need to be listed in detail on a new version of the good-faith estimates form that borrowers are required to get after submitting their mortgage applications.
This new measure is to eliminate the 11th-hour mortgage cost surprises and any and all unexplained junk-fee charges. As an example, currently "good-faith" estimates that lenders give upfront can at times state that closing costs on a particular property may be about $2,000, but by the time escrow closes these costs could be up to $3,500.
Furthermore, borrowers may have to come up with even more additional money to pay for these surprise costs because if they don't then the home purchase or refinancing could not proceed and could delay escrow even longer.
Even now consumers are still unprotected from closing cost surprises and remain victims of intentional low-balling of fees, but starting in January this will dramatically change.
Unfortunately, mortgage and bank lobbyists are working extremely hard to delay this new HUD rule from starting on January 1st. The new ruling will cover home real estate and mortgage transactions nationally.
The new rules send a very clear message to lenders and anyone else who low-balls upfront closing estimates or who adds on junk fees at closing. If a lender tries to do so after January 1st may find themselves having to pay the difference.
As of 2010, borrowers will begin to receive consumer-friendly versions of "good-faith" estimate forms within three days after submitting their mortgage applications. The new form will spell out all the loan charges and settlement fees. Charges will fit into three broad categories on this new form:
1. Fees that cannot increase from upfront estimates to final closing.
Charges in this category include the lender's or broker's mortgage origination, processing and underwriting charges. This is where junk fees can sometimes pop up out of nowhere or can increase significantly from estimates prior to closing. This category includes lender's or broker's loan discount charge or "points" which are based on interest rates quoted to the borrower and local transfer taxes.
2. Fee estimates that provide some additional room to increase by as much as 10% in the aggregate from upfront estimates.
Charges in this category that can increase include services required by the lender which they can choose their own providers such as appraisals. Also expenses that lender's pay for title insurance and settlement services in which the borrower can choose a firm from a list approved by the lender. These are just two examples.
It should be understood that any one of these items can increase more than 10% between the upfront estimate and closing, however the combined total of all the fees in this category may not be more than 10%. This is particularly important because title insurance and settlement charges are some of the biggest surprises that pop up at closing.
3. Fees that can increase without limit because the lender may not have control over since the amount was too difficult to predict weeks in advance.
Charges in this category include lender-required services where the borrower can choose the title insurance, escrow or any other settlement company that is not on the provided lender's list. Also, the cost of daily interest charges on the loan; homeowners hazard insurance; and the amount of the initial deposit that the borrower originally deposited into an escrow account.
The new HUD ruling also encourages loan applicants to hunt around before committing to one particular lender. The new form also includes space for comparing up to four lenders' "good-faith" estimates on interest rates, rate locks, prepayment penalties or balloon payments, just to name a few. The cost estimates that borrowers receive from each competitor will be required to remain available for 10 business days. However, interest rates can change unless they are locked in by the lender and the borrower.
Combined with the new "good-faith" estimate rules, which are scheduled to begin on January 1st, there will be a new standard closing cost statement which is called the "HUD-1." This is different from the settlement statements that are used today because the revised HUD-1 form will be locked into the "good-faith" estimates which will allow consumers to directly compare what they were told originally by the lender at the beginning compared to what the borrower is being asked to pay at the close of escrow. The last page of the new form itemizes the three categories of fees, listed above, from the "good-faith" estimate and compares them line by line with the actual closing fees.