At the Portland Housing Center, aspiring first-time buyers take a class called “HomeBuying 101,” in which they are encouraged to shop three loan officers before deciding on the person to guide them through their first mortgage transaction. In this course I teach a section called “Shopping for Your Loan,” designed to help folks understand the terminology and do the number-crunching to compare loan quotes. But more and more I am encountering even seasoned home loan shoppers who are confused when they try to compare quotes from different lenders…and for good reason.
In 1974 Congress passed the Real Estate Settlement Procedures Act (RESPA) to help consumers make informed choices when purchasing a home. Among other things, the law permanently changed the way mortgage bankers presented their products to their customers by instituting the Good Faith Estimate (GFE), designed to enable clear comparisons of loan fees. Updates to the federal law have tried many times since those early days to improve regulations for the benefit of homebuyers. Indeed, in reaction to the recent mortgage crisis, new rules took effect on January 1, 2010, intended, once again, as protections for consumers. Unfortunately the rules have had exactly the opposite effect. Let me explain.
Before the latest rule change, a consumer shopping for a home loan could collect a GFE from each loan officer he approached. At the end of the day, he could easily compare rates and costs directly before ever locking a rate or plunking down earnest money on a new home. Once Mr. Consumer decided on a lender and made a formal application, whether a day or a year later, a new GFE could be created which reflected the actual numbers based on the current rate for the transaction. Borrowers used the GFE exactly as it was intended, as the basic tool for comparing the true costs of loan products.
Those days are gone. As of last January, loan officers are prohibited from issuing multiple GFEs during a transaction. Once a GFE is issued, the loan officer may not change any of the line items referring to lender closing costs. This is called “zero tolerance.” Other lines on the GFE referring to title, escrow and recording fees may change only by 10%. Lines referring to estimated prepaid expenses such as interest, insurance and taxes have the most tolerance for change.
While the new rule prevents loan officers from changing fees once they are quoted, it also prevents a true comparison of loan products offered by competing brokers. Since they can no longer issue GFEs during the period when the borrower is shopping for his loan, mortgage brokers now issue Fee Worksheets, Initial Fee Worksheets, Closing Cost Worksheets or no worksheets at all. The problem is that these worksheets, unlike the GFEs of old, are not regulated! With no standard format, these sometimes make-shift forms are much more confusing for the average borrower.
Here’s an example:
Recently I had a client call me looking to refinance his home. He came armed with a closing cost worksheet from another lender and asked me if I could beat their price. Aside from the origination fee, the competitor’s worksheet delineated an underwriting fee and a processing fee. My worksheet listed only the origination fee and processing fee with no separate line for underwriting. Had my client compared only the processing fees between the two companies, he would have assumed the other company made him a better deal when, in fact, my total fees were lower by $100.
The bad news: without the GFE early in the shopping process, buyers must be more diligent about comparing quotes for home loans. The best approach is to be sure you are properly comparing rates and terms, and ask your prospective loan officers to itemize all closing costs in writing.
The good news: with lending more competitive, gone are the days of wildly fluctuating price quotes.
If you have questions, ask. Don’t be afraid to go over the numbers with a trusted third party. Check references, pay attention to your intuition and go with a referred lender you trust. Oh yes…and don’t expect a GFE until you’re ready to choose your lender and sign a loan application.