First, let me do my best to briefly explain RESPA.  RESPA stands for Real Estate Settlement Procedures Act and was established in 1974 by the Department of Housing and Urban Development (HUD) as a consumer protection statute.  It has been revised numerous times, 1976, 1983, 1990, 1992 and 1996.  Attempted to be revised in 2002 but never passed. 

However, there was a major overhaul of RESPA in 2009 which went into full effect January 1, 2010.  The main goal was to help borrowers shop for a loan more efficiently by clarifying and simplifying the process.  RESPA estimated each individual borrower can save between $518 to $670 per transaction.  How, I am not sure.

As a consumer what can you expect to see differently when purchasing a home?  The major two changes are the Good Faith Estimate (GFE) and the HUD-1 settlement statement you receive at closing; with the GFE getting the major overhaul.

For anyone who has purchased or refinanced a home in, lets say the last ten years to throw out a number, you may recall receiving a GFE.  The GFE listed the costs associated with purchasing your home, your impounds or escrow items, the estimated house payment, down payment and total funds needed to complete the transaction.  It would also reflect any credits you would be receiving from the lender, Realtor or seller. 

The GFE of 2010 will no longer reflect all of this information.   

Now, don't think I am not all for change as I think the lending industry as a whole was in need of (1) more monitoring, (2) licensed and educated loan officers (originators) and (3) tighter guidelines.  However, I am not sure the new RESPA rules help the consumer understand what is going on or save you money.

The new GFE does provide more clearer details regarding your loan program and how your payment may or may not change in the near future.  It does provide you with an opportunity to compare costs with other lenders.  And it does provide some protection for your pocket book by limiting how much some of the fees can increase from what was originally disclosed to you by your loan originator.

However, the main guts of the GFE that lists everything are so confusing, HUD has needed 52 pages of Frequently Asked Questions to help Lenders and Originators complete the form.    Remember what I said in the beginning about RESPA's main goal in making these major changes was to help consumers.."shop for a loan more efficiently by clarifying and simplifying the process".    52 pages of explanations does not seem simple to me?

O.K. so what do you need to know?  First, the charges from your Lender cannot change one dime from the time they issue the GFE unless your loan amount changes or your rate is not locked at the time the GFE is issued.  All charges from the Lender or Broker are now lumped into one lump sum; i.e, origination charge, processing fee, underwriting fee, etc.   The GFE does not provide a place for the Lender/Broker to breakdown the fees.  If you are paying points to buy the rate down, it is clearly stated and added to the Lender/Broker fees.  If your Broker is receiving added money from the Lender for the rate charge, it is clearly listed and credited back to you to reduces your overall fees.  **NOTE** Very Important ** If you receive a GFE with a credit from the Broker for your fees and you opt NOT to lock in your rate, this credit may decrease if the market worsens.  Make sure you have constant communication with your loan officer to understand the daily changes of mortgage rates.

Moving on-The next few sections of your GFE is where it will get a little confusing. 

Your Lender will now list charges for services that you are required to obtain from their providers.  This will be items such as an appraisal or credit report.  You have to have these items completed and you don't get to choose who you use.  The fees listed in this section generally cannot increase more than 10% from what was originally quoted unless there is an event that was not expected; i.e, a 2nd appraisal was needed, items needed to be repaired on your credit report that resulted in additional fees.

Title charges and escrow charges are now listed as one lump sum even though they may be two separate entities/companies.  There is no place to break down how much you are paying for title insurance and how much the escrow company is charging you.

Owner's Title Policy - This is something that is typically paid by the Seller.  The Purchase & Sale Contract for Spokane County specifically states the Seller will pay this.  However, HUD wants the amount listed on the GFE for the buyer.  At closing, you will be charged this amount and then credited the same amount from the Seller to offset the charge.

Services that you can shop for, such as home or pest inspection, well tests, etc., will all be listed in one section with corresponding charges for each item.  The loan officer will need to provide you with a list of their preferred providers for these services.  If you elect to use someone on this list, then the quoted fees go into a buck of charges than cannot increase more than 10% of what was originally quoted.  Unless of course a changeable event occurs.

Transfer tax is a hot topic right now.  What is transfer tax?  Each Lender is answering the question differently.  HUD requires the Lender to list the transfer tax charge on the GFE.  In Spokane and surrounding counties, Sellers will pay an excise tax for selling the property. This is a Seller cost; not a buyer's costs.  Is an excise tax the same as a transfer tax?  HUD doesn't address this specifically in their 52 page document.  So, some lenders are being very cautious and listing the excise tax amount on the GFE for the buyer.  Then once again, the buyer will receive a credit for this same amount for the Seller.  Some Lenders have clearly defined the excise tax is not a transfer tax are leaving it off all together.  Why does it matter?  Read on

The rest of the GFE will list the total deposit that will need to be made into your escrow account if your loan program has one.  It will also list your annual premium for homeowner's insurance and any interest you will pay on your new loan for the month in which you close your loan.

Then all the figures will be totaled and listed at the bottom.  No where can the loan officer indicate what items the seller or lender/broker will be paying on your behalf.  It also will not list your down payment. 

Now let's talk about how you will see the Seller's credits.  When you go to sign your final loan papers, the first document you will review will be the HUD-1 Settlement (HUD for short).  Page 2 of the HUD lists all the fees that were included on your GFE.  If the Seller is paying any of the fees on your behalf, you will be given a one-lump sum credit on page one.  Page one is where it will list your purchase price, add your costs and then deduct your loan amount and credits to come up with the total amount you need to purchase the home. 

Here is where it may get sticky.  Oftentimes, the Seller agrees to pay for a portion or all of the buyer's closing costs as a condition of the sale of the property.  The amount they will pay is listed in the Financing Addendum to the Purchase & Sale Agreement.  At closing, the escrow officer will not credit the buyer for any more than what is listed in the contract.  Unfortunately, the escrow officer will now be forced to add in the cost of the Owner's Title Policy as HUD now requires this cost to be shown as a buyers expense and a seller credit.  If your Realtor does not specify that the credit for the Owner's Title Policy is NOT to be included in what is paid by the Seller, you can be short changed at closing.  Here is an example:

Loan officer tells  buyer their down payment is $5,000 and their costs will be $4,000; they will need $9,000 to purchase home.  Seller agrees to pay $3,500 towards buyers costs now reducing the total amount needed from buyer to $5,500.  On the HUD, the escrow officer will indicate a credit of $3,500 for the buyer and total closing costs of $4,500.  The extra $500 in costs is for the Owners Title Policy which was never their cost to begin with but HUD requires it to be listed on the buyer's side.  Now the buyer needs $500 more than was told. 

How do you fix it?  Make sure your Real Estate Agent is specific on the Financing Addendum.  Clearly state that the Seller's credit will NOT include the Owner's Title Policy or the Excise Tax (remember some Lenders are requiring this to be listed on the buyer's side as well). 

Wrap up -

1. Be informed.  Make sure you are using a reputable, experienced and most importantly educated loan officer to finance your mortgage.  A good one will have a separate form that clearly lists the total costs, house payment, credits and total amount you will need.  If they don't; walk away.
2. See your loan officer BEFORE you decide to buy.  Do all your comparison shopping before you find the perfect house. 
3. USE a Realtor!  Again, use a good one.  Ask around and see who you know used or ask your loan officer for some good recommendations.  Now more than ever, you need to use someone who understands the complexities of our industries.
4. Ask Questions.  Make sure you understand the GFE to the best of your ability.  Know what can change and when it change. 
5. Lock your loan.  Waiting around for the rates to drop an extra 1/8th could cost you thousands in the long run.  Once you lock, get everything requested by your loan officer immediately.  Not closing on time could result in you needing more money at closing.
6. Expect to pay a little more.  Since there are so many areas in which fees cannot change or can change very little, we have seen an immediate increase in fees that both Lenders and service providers now charge. 

HUD had great intentions with the new RESPA rules but somewhere along the line, I feel they have made things a bit more confusing to both the consumer and the lenders.  The best we can do is work with what we have and move forward.  As I mentioned in the beginning, there are some very good improvements to the new GFE.  If nothing else, HUD is providing you with the to become more informed and educated regarding the lending industry.  Just make sure the right person is teaching you.

If you have any questions at all regarding this information, please get in touch with me.  I can be reached at 509-232-7725.  Denelle