Regulation Z, the federal truth in lending law, requires that mortgage lenders provide borrowers with a good faith estimate (GFE) of closings costs. Many clients come to me for advice on how to make sense of this document and with good reason. How can you compare two GFEs among two lenders competing for a borrowers business? Are we really making apples to apples comparisons?
When it comes to origination charges, those charges paid directly to the lender, we can make the apples to apples comparisons. These charges once disclosed cannot increase unless the lender re-discloses at least three days prior to closing. Most of the time there is a valid reason that the origination charge increases. For instance if the borrower decides to “buy down” their interest rate and pay points, the lender must re-disclose. If these numbers change significantly without a change initiated by the borrower, the lender has some explaining to do. One more good reason you want hire your own lawyer to represent your interests through the home buying process.
The more difficult questions are those charges that are required by the lender, but are paid to a third party or vender. These are appraisals, tax service fees, flood certification fee and title related charges just to name a few. Unlike origination charges, these fees have a ten percent tolerance and can increase by ten percent without re-disclosure. Once again, this can happen for very a valid reason, for instance, the underwriter may require a second appraisal. However, I will give a simple example of why you need to compare the GFEs from various lenders with the assistance of your attorney.
The example I come across quite frequently is owner’s title insurance. First, there is some variation among title insurers in premium rates. This number is usually insignificant. The real issue arises because there are two separate types of owner’s title insurance, standard and extended. For a good explanation of owner’s title insurance check out this nice pamphlet. At O’Connell & Rudolph, we always recommend borrowers make the investment in an extended owner’s title insurance policy. For what is usually around ten percent more in premium, the home owner gains significant coverages such as mechanics liens and inflation protection. So herein lies the rub, that difference in premium between a standard policy and an extended policy will show up differently on a GFE and could convince an unwary borrower to make a decision based on an apples to oranges comparison. For example, on a $250,000.00 purchase with 20% down payment. The standard premium will be roughly an additional $588.00 over the amount of the lender policy. The same scenario with an extended policy is $675.00.
This amount can make once GFE look more attractive. When in reality the lender disclosing the higher premium may be closer to what the borrower would see at closing. Among the many important functions your attorney performs, comparing lenders and GFEs is essential.
