When home buyers are looking to buy that perfect home that they’ve chosen for their family, they usually need to speak to a lender about arranging for a mortgage. As of January 1st of this year, however, the government has changed the rules on what kind of information that home buyers are getting when they’re given their Good Faith Estimates (or GFE).
The Good Faith Estimates must be given to the homebuyer within three days after a loan application is made and incorporates an estimate of loan fees, title charges, reserves, and other charges so that the home buyer can shop around and make an informed choice. At least, that’s what the GFE is supposed to do, in theory.
In actuality, the previous system of GFEs had no way to hold lenders accountable for how accurate their “estimates” turned out to be. It seems that some less-than-scrupulous lenders weren’t aware of the mathematical concept of estimation and instead used the GFEs to low-ball other lenders to attract more customers. Unfortunately, due to the fact that these “estimations” weren’t rough calculations of what the actual closing costs would be but instead deliberate misrepresentations of the actual costs, many home buyers were left with hundreds or thousands extra in closing costs. Lenders have—until now—not been held accountable for the accuracy of their GFEs.
Starting on January 1st of this year however, lenders are now required to use a standardized form designed by the Department of Housing and Urban Development which requires them to provide accurate estimates of costs. The lender-related fees must be completely accurate from GFE to closing; while the other fees that the lender has no control of must be within an additional 10% of the estimated costs or the lender has to absorb the difference. The idea is that lenders have to be upfront about their fees and must accurately disclose the other closing costs.
While this all sounds like very good news, some lenders are less than impressed with the new system and claim that because only a few unscrupulous lenders were low-balling clients into buying their services with inaccurate estimates, many other lenders are being unfairly penalized. They claim that the new standardized forms take much longer to fill out and that additional cost will have to be incorporated into clients’ billing. Lenders also say that the new forms might make it easier for home buyers to compare prices from one lender to the next but don’t in themselves offer the customer any additional transparency about the costs. These new regulations may also put too much onus on the lender whereas some of the costs of closing hinge on other aspects that they have far less control over.
This is likely an issue that is going to take some ironing out on more than one front as the industry and the government try to make the home buying process easier for buyers. Neither the home buyers nor the economy is well-served by a dysfunctional system of lending afterall.
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