As of Jan.1, 2010, lenders will be providing more straightforward information to potential borrowers and making it easier to understand the costs involved in obtaining a new mortgage.
It's not that they're turning over a new leaf or making a New Year's resolution. Instead, Jan. 1 is the date that a new Good Faith Estimate (GFE) form detailing the various charges and interest borrowers can expect to pay on a mortgage makes its debut.
The three-page form, which lenders are required to complete and provide to borrowers applying for a mortgage, is intended to make it easier for borrowers to compare mortgage offers from different lenders. It's required under new Real Estate Settlement Procedures Act (RESPA) rules that take effect that day.
Some critics within the industry have complained the three-page form will confuse borrowers even more, noting that the old GFE was only a single page. But other mortgage professionals say it will make it easier by clearly distinguishing between what the lender is charging and third party fees for completing the loan, charges that were often difficult to sort out in the past.
What does a borrower need to know?
So what does a potential homebuyer or someone looking to refinance an existing home mortgage need to know about the form?
The first thing is that there are actually two new forms. The first is the Good Faith Estimate itself, and must be provided when you apply for the loan. The second is the Settlement Statement, which breaks down and details all final costs, and is provided before the actual closing. The two are designed to allow the borrower to compare the estimated and final costs to ensure they are either unchanged or that any changes are within the limits allowed by law. Links to the new documents are provided here and here.
On the Good Faith Estimate, the main thing a borrower needs to be concerned with is the section titled "origination charges." These are all the fees that the lender is charging you for making the loan. In the past, lenders would sometimes pad their profits by tacking on processing and various other "junk" fees that made it hard to figure out just how much of the closing costs were going to the lender. Now, all a borrower has to do is compare origination charges to see exactly what different lenders would charge for issuing similar loans.
The origination charges section also details any points that are being paid or credited to raise or lower the mortgage interest rate. This enables borrowers to more accurately compare the true cost of offers from different lenders.
The second main item borrowers need to be concerned about is "settlement charges." This details all third-party costs, such as title insurance and transfer taxes. In some cases, the lender will choose the provider, in which case you want to compare the equivalent costs on a loan offer from another lender - there may be a significant difference.
This section also indicates services you can shop around for yourself. In the past, many homeowners were not aware they had an option to shop around for these services and typically just accepted whoever the lender recommended. But particularly in the case of title insurance, borrowers can often realize considerable savings by choosing their own provider.
An optional table that can be filled out by the lender shows how you can raise or lower your interest rate by opting for higher or lower settlement charges, and vice versa.
Can your rates, payments, loan balance increase?
The form also details your initial loan balance, interest rate and monthly payments, and whether any of these can rise during the course of the loan and if so, by how much. It also requires disclosure of any prepayment penalties and whether there is a balloon payment on the loan. Many of these elements were blamed for snagging unwary borrowers who obtained loans that later went bad in the subprime mortgage crisis, particularly in the case of adjustable rate mortgages.
Finally, the form spells out which charges on the GFE cannot increase at the time of settlement (as detailed on the Settlement Statement), which can increase up to 10 percent and which can change without limit. There's also a "shopping chart" that allows borrowers to compare terms on up to four different mortgages.