Dont place blind faith in the good faith estimate

Within three days after you apply for a loan, your lender must provide a completed form called Good Faith Estimate. This estimate supposedly itemizes the fees and costs you will pay to close your mortgage loan.

Place no faith in these figures. Only place faith in the verified integrity of your loan rep. Generally, loan reps who prepare bad faith estimates face little risk of penalty. Technically, bad faith estimates violate sections 3 and 4 of the Real Estate Settlement and Procedures Act (RESPA), but only recently has HUD been patrolling for abuses. And even when found, HUD's complaint must allege intent to deceive. No law or regulation prohibits "honest mistakes."

On Your Own

Thoroughly review the Good Faith Estimate to immediately question garbage fees, charges, and markups. Check it precisely against the final accounting of charges billed at closing. You should find it no surprise that in the flurry of paperwork at closing, some lenders slip in costs and charges that they previously omitted or understated.

Ideally, lenders should quote a guaranteed lump sum for closing costs and origination fees.1 You then could easily shop among lenders to compare the total package of (fixed) closing costs, interest rates, origination fees, and discount points. However, lenders know that most borrowers mostly inquire about interest rates and discount points. They less frequently mention other costs that—as you have seen—can run into thousands of

1 HUD is pushing reform in this direction. To do so, HUD must revoke its rules under RESPA that mandate the itemized, good faith approach.

dollars. Thus, until consumers wise up, lenders can still have their way with them.

Closing Costs Aren't Captured by Truth in Lending (APR Disclosures)

Newspaper and magazine articles frequently tell borrowers to compare loans according to their annual percentage rate (APR). Truth in lending mandates this calculation and disclosure. But as revealed in Secret #39, the APR errs because it incorrectly assumes that you will hold the loan to the end of its term—a quite unrealistic assumption.

APR also errs because it omits many closing costs that do not count as a cost of credit. The APR you see in the mortgage ads does not, for example, include private mortgage insurance, most garbage fees, cost of title or title insurance, or appraisal fees. Yet, as Table 8.1 shows, the amounts of these and other costs vary widely among lenders.

Naturally, this practice (as authorized by law) loads up profit-maximizing lenders with the ammunition they need to bamboozle you. They focus your attention on their low government-sanctioned APR disclosures and remain silent about their higher fees and costs. Remember, the lender need not give you a Good Faith Estimate until three days after you have applied for your loan and perhaps paid a nonrefundable application fee.

Don't fall for this trick. Ask the loan rep to accurately and comprehensively disclose all costs that you will pay. If the loan rep says he doesn't know for sure, ask for a high-low range. Ask precisely what factors create the uncertainty and when you can expect resolution.

Note: Mortgage Secrets advises you not to pay a nonrefundable mortgage application fee unless: (1) You're 99 percent certain that you know all loan terms and closing costs (within tolerable limits); (2) you trust the loan rep without question; (3) your loan closing does not depend on any contingencies other than the title search and property appraisal; and (4) the amount of the application fee does not exceed the customary charge in your area.

In fact, as a general rule, I urge you to negotiate out of paying any application fee. Primarily, lenders use this fee to deter you from changing lenders during the loan processing. No loan rep (or underwriter) wants to spend hours on your file only to see you jump ship before reaching port and thus eliminate the expected payday (for the rep).

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