February 2010: Get Real


One of the most stressful aspects of buying a home? The closing —signing a bunch of documents you may or may not fully understand (are you buying a house or signing away a limb?), forking over a big check, and, perhaps worst of all, discovering your estimated closing costs far exceed what you were originally quoted by the lender.

Closing cost discrepancies occur because what’s written on the Good Faith Estimate (GFE), a tally of lender/broker fees and settlement charges that come with a mortgage loan due at closing, is exactly that—an estimate. It’s a ballpark number, an inadvertent underestimation of fees by the lender. But some unscrupulous lenders have been known to purposely lowball their estimates to lure borrowers away from competitors. And unsuspecting borrowers are hit with an unwelcome surprise at the closing table—sometimes in the thousands of dollars.

But on January 1, the federal government put into effect new rules mandating the use of simplified, redesigned Good Faith Estimate forms in order to curb closing cost surprises.

The new rules require all lenders to use the same standardized three-page form, issued by the Department of Housing and Urban Development, for their Good Faith Estimates. The new forms are designed to facilitate comparison shopping by consumers. The forms contain boxes that allow consumers to compare quotes and estimates of up to four potential lenders at a time. Under the old rules, lenders used their own forms—some more transparent than others—which made it difficult for borrowers to know if they were getting a good deal, or whether all fees were adequately disclosed.

The new rules also mandate that lender fees, such as underwriting charges, can’t change from application to closing. They allow only up to a 10 percent difference for estimates in other areas such as title insurance. If closing costs exceed the estimate, the lender, not the borrower, eats the cost.

Some fees, though, have no cap. These include charges from service providers (for title insurance) chosen by the borrower, but not recommended by the lender—homeowner’s insurance, flood and pest insurance, etc.

Consumer groups have applauded the changes but some lenders say consumers may end up getting hit with costs in other ways since it costs lenders to comply with the new regulations: investing in new software and training employees to use it.

But real estate attorney Richard Carter at Kunka, Milnor, Carter & Inigo in Charlottesville doesn’t see that as a particularly valid concern. “We plan to absorb those costs,” he says. Carter’s firm has only just started using the new forms during closings because they don’t apply to loans made before January 1. “It’s just a matter of getting used to them. They’re very similar to what we had.”

But some lenders are sidestepping the new standardized forms by coming up with “worksheets” or “loan scenarios,” essentially the same potentially misleading Good Faith Estimates as before. Lenders defend the use of such forms by saying HUD is forcing them to provide ironclad estimates that sometimes can’t be accurately predicted early in the process, such as those involving title and settlement services. 

Be that as it may, if you’re looking for full transparency when shopping for a loan, and want to comparison shop, be wary of any lender who resists using the new standardized HUD forms. You may end up paying more at the closing table.

Find a copy of the form on HUD’s website, hud.gov.