"Bottom-Line it For Me"
The new requirements include a crystal-clear statement showing the buyer's costs for a mortgage.
These disclosures became a requirement thanks to the Real Estate Settlement Procedures Act, which came into effect on January 1. With a recently-reported 20% increase in foreclosures over last year, and no immediate end in sight for the real estate market as a whole, these requirements - and their benefits for home buyers - are credited with speeding the closing time lines for new mortgages.
The new disclosures make it easy for home buyers to compare loan offers and closing services, rather than being shoe-horned into a standard loan package. When prospective home buyers can glance at a short document explaining the bottom-line cost of each loan offer on the table, it's easier and quicker to choose a loan responsibly.
In addition to stimulating the process of borrowing a mortgage, the new disclosures have helped consumers save an average of $700 in mortgage costs, according to HUD.
Before this requirement, each lender decided its own method of explaining costs to a potential borrower. Some lenders might hand-write a few figures while verbally glossing over the details, while another might provide pages and pages of typed, itemized material.
The new standardized, plain-language disclosures are a boon to the financial layman, finally giving a straightforward answer to the simple request: "Bottom-line it for me."
What is the Good-Faith Estimate?
One of the new required disclosures is a good-faith estimate showing the settlement charges and terms of the proposed loan. It's broken down like this:
Page one gives an expiration date for the offer, a summary of the loan's terms, the interest rate, and initial amount of the loan. It states whether the mortgage has a fixed or adjustable interest rate, whether the payments are balloon-structured, whether there is a prepayment penalty, and whether an escrow account is required. The first page then gives an estimate of the settlement charges.
Origination and settlement costs are itemized on the second page.
Page three details whether each charge can, or can't increase at time of settlement, including which costs are capped at no more than a 10% increase during the closing.
With all these limits on fee increases now well-defined, lenders are required to be precise with their estimates or risk covering the increases themselves.
At the bottom of the third page is a worksheet to help potential borrowers compare and project the loan's bottom line with other offers.
One of the few clear omissions from the good-faith estimate, is the borrower's down payment and monthly payment for the mortgage.
Some mortgage experts think those two figures should have been included, since first-time home buyers won't always calculate their obligations correctly before accepting a loan. Despite the usefulness of these newly-required disclosures, there are still additional costs, such as taxes, insurance, and so on, which can surprise those first-time home buyers who are so critical to the recovery of the real estate market.
The New Mortgage Lending Playing Field
All this adds up to a new mortgage-borrowing climate, in which borrowers are greatly rewarded for the effort of comparison shopping.
The time borrowers used to spend boggling over cryptic financial terminology and formulas, can now be spent visiting multiple lenders, closing services, and other related professionals. In the end, a responsible home buyer can save easily hundreds, and sometimes thousands of dollars, and all it costs them is a bit of leg work.
Not every home buyer will do that leg work, but those who do will be rewarded in savings.
Right now, mortgage rates remain low; however, they're expected to rise before the end of 2010. Along with that increase in interest rates, it's likely there will also be an increase in comparison shopping in all aspects of the home-buying process.
The new requirements include a crystal-clear statement showing the buyer's costs for a mortgage.
These disclosures became a requirement thanks to the Real Estate Settlement Procedures Act, which came into effect on January 1. With a recently-reported 20% increase in foreclosures over last year, and no immediate end in sight for the real estate market as a whole, these requirements - and their benefits for home buyers - are credited with speeding the closing time lines for new mortgages.
The new disclosures make it easy for home buyers to compare loan offers and closing services, rather than being shoe-horned into a standard loan package. When prospective home buyers can glance at a short document explaining the bottom-line cost of each loan offer on the table, it's easier and quicker to choose a loan responsibly.
In addition to stimulating the process of borrowing a mortgage, the new disclosures have helped consumers save an average of $700 in mortgage costs, according to HUD.
Before this requirement, each lender decided its own method of explaining costs to a potential borrower. Some lenders might hand-write a few figures while verbally glossing over the details, while another might provide pages and pages of typed, itemized material.
The new standardized, plain-language disclosures are a boon to the financial layman, finally giving a straightforward answer to the simple request: "Bottom-line it for me."
What is the Good-Faith Estimate?
One of the new required disclosures is a good-faith estimate showing the settlement charges and terms of the proposed loan. It's broken down like this:
Page one gives an expiration date for the offer, a summary of the loan's terms, the interest rate, and initial amount of the loan. It states whether the mortgage has a fixed or adjustable interest rate, whether the payments are balloon-structured, whether there is a prepayment penalty, and whether an escrow account is required. The first page then gives an estimate of the settlement charges.
Origination and settlement costs are itemized on the second page.
Page three details whether each charge can, or can't increase at time of settlement, including which costs are capped at no more than a 10% increase during the closing.
With all these limits on fee increases now well-defined, lenders are required to be precise with their estimates or risk covering the increases themselves.
At the bottom of the third page is a worksheet to help potential borrowers compare and project the loan's bottom line with other offers.
One of the few clear omissions from the good-faith estimate, is the borrower's down payment and monthly payment for the mortgage.
Some mortgage experts think those two figures should have been included, since first-time home buyers won't always calculate their obligations correctly before accepting a loan. Despite the usefulness of these newly-required disclosures, there are still additional costs, such as taxes, insurance, and so on, which can surprise those first-time home buyers who are so critical to the recovery of the real estate market.
The New Mortgage Lending Playing Field
All this adds up to a new mortgage-borrowing climate, in which borrowers are greatly rewarded for the effort of comparison shopping.
The time borrowers used to spend boggling over cryptic financial terminology and formulas, can now be spent visiting multiple lenders, closing services, and other related professionals. In the end, a responsible home buyer can save easily hundreds, and sometimes thousands of dollars, and all it costs them is a bit of leg work.
Not every home buyer will do that leg work, but those who do will be rewarded in savings.
Right now, mortgage rates remain low; however, they're expected to rise before the end of 2010. Along with that increase in interest rates, it's likely there will also be an increase in comparison shopping in all aspects of the home-buying process.