Shopping for a home loan might not be as easy as comparing carbs and calories on the backs of different cereal boxes, but borrowers are beginning to see more transparency and get the real skinny on paying closing costs, which can amount from 2 percent to 5 percent of their total home loan amount.
The bottom line, there seems to be less fat or “mortgage junk fees” associated with home loans nowadays. It’s been a positive consumer trend that has accelerated since the Great Recession home loan crisis.
“A lot of the bad actors responsible for abusive fees were simply forced out of the marketplace,” said Fred Peet, a South Burlington, Vt., real estate attorney. “The market sort of corrected itself.”
The market also got an assist in 2010 from the Department of Housing and Urban Development (HUD), which issued a new version of the Good Faith Estimate (GFE), an estimate of closing costs that all lenders must provide borrowers within three days of receiving their loan applications.
Meanwhile, the relatively new (July 21, 2011) Consumer Financial Protection Bureau (CFPB) has turned up the heat on abusive lending practices to encourage the development of “a more streamlined, efficient and educational process” with regard to home loan closings. The CFPB was responding to the outcries of consumers complaining that they were simply paying too much for a number of questionable real estate services.
“As a result of the new guidelines,” Peet added, “lenders now find themselves operating in a pretty narrow box.”
Trimming the fat
That box limits a lender from collecting a borrower’s funds and disbursing them as they see fit, often after adding a nebulous handling charge or some other such nonsense to pad the bill. For example, a lender might list $500 for Federal Express courier charges on the closing statement when it cost the lender only $50.
“Now third parties, such as couriers, appraisers, title, etc., have to be paid directly,” said Ted Rood, a national mortgage lender based in St. Louis, Mo.
Additionally, the GFE has been tightened up to the point that it now has to be reconciled within a “10 percent tolerance” of the HUD-1 Settlement Statement, the standard national form used to itemize fees charged to the borrower by a lender or broker.
“So, if your lender’s GFE estimate is for $50 and it turns out to be $300 on the HUD-1, the lender is probably going to have to eat it,” Rood said.
Despite government reforms and new protections afforded to borrowers, home loan hunters still risk being exposed to excessive lending charges. For example, because a GFE is issued after a borrower submits a mortgage loan application, how does the borrower reasonably compare the closing costs of, say, three different lenders, each of which might charge an application fee? To be fair to lenders, it costs them money and manpower to generate each GFE, which is why many feel they’re entitled to mark up their services, especially when borrowers are just kicking the tires looking for the best deal. If you’d like to run various mortgage loan scenarios, use our handy mortgage calculator below.
“There’s a workaround for that,” Rood said. “We prepare what we call a non-binding GFE, which is an estimate of our closing costs. Costs can be hard to pin down because, for instance, a title company might not yet have been selected.”
Rood further noted the borrower can later use this non-binding GFE to compare with the standard GFE and the HUD-1 Settlement Statement. In fact, he and many other lenders feel such a non-binding instrument is easier to decipher than the new HUD-mandated GFE.
“The new GFE is not so transparent,” Rood admitted.
Lender’s reputation still key
While a non-binding GFE saves the lender money and provides the borrower with at least a baseline for comparing costs, its value and validity ultimately depends on the lender providing it.
“You’re right,” Rood confirmed. “This early estimate is only as good as the person putting it together.”
So, a lender’s reputation counts perhaps more than ever in today’s heightened regulatory environment. At some point, instead of hair-splitting and dissecting every charge, borrowers will have to trust that their lender is working in their best interest.
Meanwhile, to provide unwitting borrowers with another layer of protection, the CFPB also has been ratcheting up scrutiny of joint ventures between real estate agencies and title companies, as well as between lenders and title companies. Because of the cozy connection involved in joint partnerships, borrowers can be steered toward using the partners’ services, even if others on the market are less expensive.
“With certain joint venture relationships you have to use their services, that’s just the way it is,” Rood said.
Although more transparency has come to closing costs, they can’t be totally avoided. Rightfully, lenders must charge for the services and expertise they provide. Successfully closing a loan involves many moving parts and subsequent fees, including origination and underwriting, credit checks, title searches, document preparation, government recordings and a long list of other items too numerous to mention here.
For now, when reviewing your GFE, seek out redundancies. If you want to know why you’re being charged separately for loan origination, loan processing and loan underwriting — when they all seem or sound the same to you — ask your lender for an explanation. If the explanation proves unsatisfactory, negotiate a reduction in your closing costs or walk away.
Like the nutrition label on your favorite box of cereal, a loan will list all the essential elements that go into the final product or closing. You may not recognize all the ingredients, but at least you’ll be better equipped at identifying the junk that’s not good for your financial health.