Federal rules that take effect Friday, Jan. 1, mandate a standard, three-page Good Faith Estimate that urges consumers to shop around for the best loan and helps them compare lenders’ offerings. The rules are an update of the Real Estate Settlement Procedures Act, a 1974 law known as RESPAAlthough Good Faith Estimates have been in use for many years, there never has been a standard form required of all lenders.
Under the new rules, lenders and mortgage brokers are required to give consumers the standard estimate forms within three days of receiving a loan application.The Good Faith Estimate form requires lenders to combine all of the bank’s fees into one “origination charge,” enabling consumers to compare one lender’s fees with another’s. Lenders are prohibited from increasing the origination fee from the estimate. Some additional charges, including title services and recording charges, can increase by as much as a combined 10 percent. Estimates for other charges, such as homeowner’s insurance and other services provided by third parties selected by the borrower, aren’t subject to such limits.
A finance professor emeritus at the University of Pennsylvania’s Wharton School recommends that borrowers focus on two items as they shop: the interest rate and the “adjusted origination charge,” which includes any points paid to lower the rate.
Another change includes the HUD-1 form used by settlement firms in closings. The new HUD-1 includes a comparison of the estimated and final costs, as well as a summary of the loan terms.
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