Monday, March 15, 2010

New HUD Rules for Settlement and the Closing Statement

[This article first appeared in the Chattanooga Times Free Press]

Q What is to be expected with the recent HUD rules for the real estate settlement and closing statement?

A Many prospective homeowners have been shocked and surprised when they arrive at the closing table. To date, most homeowners have only been supplied with a good faith estimate showing their potential closing costs and fees; none of which was set in stone. The difference between good faith estimates and actual closing costs has even forced some home- buyers to walk away from the home of their dreams that they were so close to owning.

Closing costs aren’t really that mysterious and scary, but each lender has his own fees and costs for items like appraisals and even title fees.

The mortgage industry has many factions, but after many years HUD has put new rules in place to curb the last-minute surprises at closing. These rules went into effect Jan. 1 and are designed not only to prevent unplanned closing costs for the home buyer, but to save them money as well.

The good faith estimate has the most significant changes and for good reason. For many home buyers, especially first time buyers, this document is their only guideline for the costs they are about to incur with buying a home. A Good Faith Estimate is given to borrowers, from their lender, when they apply for a mortgage. Most good faith estimates will change several times during the buying process and should definitely change when the property a buyer is interested in changes.

The new and improved Good Faith Estimate now requires the lender to disclose features that may drive up the costs. Information about increases in interest rates before closing is a major factor. This is most helpful for borrowers that are applying for an adjustable rate mortgage. If the loan includes a balloon payment or early payoff penalty, that must be stated as well.

The Good Faith Estimate now has to be on a uniform three-page document when given to the prospective borrowers, and home buyers should have a copy of their Good Faith Estimate within 72 business hours of applying for a mortgage. This document allows the borrower to figure out the total cost, closing costs and monthly payments before sitting down to sign the final paperwork on a home.

The new Good Faith Estimates will allow homebuyers to compare loan offers from different financial institutions as well. Shopping for the best deal could mean the difference between waiting and buying for many first timers. Since the new rules also require that lenders give mortgage applicants a copy of their settlement cost (the HUD-1) no less than one day before closing, homebuyers can walk up to the closing table confident about their financial decision. Lenders must make sure that the settlement figures match the good faith estimate line by line, allowing the borrowers to see any changes in costs.

While cost from third-party sources such as title insurance and appraisals are allowed to increase up to 10 percent from what is on the Good Faith Estimate and the actual fees at closing, lenders are no longer allowed to increase any fees charged by them.

Whether buying a home on the traditional market or purchasing a foreclosure or REO property, in the end, the settlement process of a mortgage, the closing, shouldn’t ruin the joy for prospective homeowners. These new rules by HUD will help eliminate the confusion many have experienced in the past and home buyers will be more educated before the big day.

Get answers to questions you might have about real estate from Randy Durham, who is president of the Chattanooga Association of Realtors and a broker with Keller Williams Realty. His column appears on Sundays. Send your questions to Business Editor John Vass Jr. at jvass@timesfreepress.com