If you'll be buying a house this year, you can expect to have a better sense of what your closing costs will be. The Department of Housing and Urban Development has made significant changes to the Good Faith Estimate.
The document used to be a tool lenders would give to borrowers early in the homebuying process so they'd know how much house they could afford. But as of this month, it's now a legally binding agreement.
Buyers 'Over a Barrel'
Lisa Satterfield is one of the most successful Realtors in Charlotte, N.C. In last year's depressed market, she still did over $7 million in business. Her specialty, she says, is taking care of her customers' every need. That's why it used to be frustrating when an otherwise smooth deal would get all jumbled at closing. Sometimes, she says, a buyer would be asked to pay higher closing costs than what lenders had listed on the Good Faith Estimate.
"The people got there and perhaps they were expecting a 1 percent origination [fee], and they get there and it's 1 1/2 percent," she says. "Something has changed with either their out-of-pocket expenses or their rate. And at that point, their feet are kind of tied."
Satterfield says borrowers had two choices: Either pay the extra money or walk away from the deal. Charlotte mortgage lender Bill McConnell says it really wasn't much of a choice at all.
"The homebuyer already had their belongings packed up on a moving truck. They are ready to move into their new home. At that point, they're really over a barrel," he says. "There's not a whole lot they could do other than pay the higher amount."
But under the new rules, that shouldn't happen. What's offered to a borrower on the Good Faith Estimate is not supposed to change. And if costs do go up, the lender has to pay the difference. McConnell says it's another step in weeding out shady brokers.
"It has raised the bar for all of us in the mortgage profession," McConnell says. "I think it is going to really make us think. We're not going to be just the middlemen between the consumer and a bunch of mortgage products. We're really going to be looked at more now as the licensed professionals that we are."
Rules Better But Not Perfect
But sudden jumps in closing costs had been happening for years. What really provided the impetus for change was the housing crisis. By the time HUD announced the new and binding Good Faith Estimate in the fall of 2008, it was clear many homeowners had signed up for mortgages they didn't fully understand or that turned out too good to be true. Millions were behind on their payments or facing foreclosure.
HUD Deputy Assistant Secretary Vicki Bott says the new document is meant to be clearer.
"It is up to the industry to provide consumers with the ability to have documents that are understandable to the layman versus just an industry expert."
But the new rules are not perfect. For instance, now a lender will only issue a Good Faith Estimate after a buyer has zeroed in on a specific house. But before buyers can get that far, they need to know things like an interest rate, down payment and monthly payments — things the old Good Faith Estimate used to provide sooner. So lenders are now issuing worksheets with that information.
"I have to be able to have somebody sit down with my client and say 'OK, in reality, this is what we're looking at,' " Satterfield says. "We can't call it a Good Faith Estimate anymore but they have to be able to disclose and work with a client as they make decisions."
Satterfield agrees with the intent to protect and inform homebuyers, but she thinks more improvements still need to be made.