The Pope’s recent visit to the United States has given us all an opportunity to reflect on important matters of faith, even in the world of personal finance. For home buyers, the word “faith” used to translate as, “avalanche of stupefying paperwork that works like a game of three-card Monte.” But since Saturday that’s changed for the better.
Before now, anyone taking out a mortgage got something called a Good Faith Estimate, an ironically named document that purported to explain what you’d pay for your loan and closing costs. But good faith had a rather elastic definition, and the numbers could vary wildly by the time you sat down to sign your way through the mountain of closing documents.
For example, I had one refinance deal where the actual closing costs were more than twice what the, ahem, Good Faith Estimate had projected. I don’t know where good faith turns into bad faith, but I’m pretty sure it’s way before double the cost.
No leaps of faith
That kind of confusion and chicanery gets a lot easier to spot now, thanks to new rules that boil down four forms produced under two different laws into two forms designed to help buyers know exactly what they’ll owe and what fees they’re paying. This comes courtesy of the Consumer Finance Protection Bureau and the Dodd-Frank financial reform legislation, two things Republicans are intent on trying to strangle so that lenders can go back to routinely ripping us off.
With the new paperwork, “It’s going to be easier to understand the loan that you’re getting,” says Holden Lewis, mortgage analyst at consumer finance site Bankrate.com. “It’s going to make it easier to compare different mortgage offers and it’s going to be easier, when you close, to look at the loan you’re getting and see if that was the loan you were promised.”
The Good Faith Estimate is replaced by a new form called the Loan Estimate, and final loan costs are contained in the Closing Disclosure, which replaces the confusing HUD-1 Settlement Statement. These are well-designed, clear forms that have been tested with focus groups and allow borrowers to make an apples-to-apples comparison between loan offers, and a side-by-side check to see if any costs have changed between the estimate and the final closing.
“I don’t know anyone who understood the HUD-1 statement,” Lewis says. “It was just impossible to decipher.”
Another improvement is a breakout in the Loan Estimate that compiles the total cost of all mortgage-related payments during the first five years of the loan — principal, interest, any mortgage insurance and loan costs — along with how much of the loan principal the homeowner pays down in those five years. That last number is a great new tool to focus on when shopping for a mortgage.
“Those numbers make it pretty clear what you’re getting in to,” Lewis says. “If you look at those two numbers side-by-side, it’s going to be fairly easy to decide which loan is the best one.”
Wait to buy that hot-tub
There is one aspect of the new mortgage rules that could trip up home buyers — unlike the old HUD-1, which sometimes was presented to you as you sat down at the closing table, the new Closing Disclosure must be delivered to the borrower three days before the closing. That gives you time to check all the numbers. But it also means any changes you or the lender make after that will generate a new disclosure and another three-day waiting period, which could wreck your moving plans.
One potential pitfall is that every lender pulls a final credit check on the borrower right before the closing, to make sure your debt load hasn’t changed. A lot of first-time home buyers get excited about furnishing their new homes and — as soon as their offer is accepted — whip out their credit cards for a shopping spree on furniture, appliances, lawn mowers and those giant inflatable Christmas balloons that will make their new neighbors cringe.
Doing that before the closing can create a hit that will lower the borrower’s credit score. And if that score already was just on the edge between good and not-so-good, the lender could decide to raise your interest rate, prompting a whole new round of disclosure statements and the accompanying waiting period for you.
“After you’ve applied and before you close, don’t touch your credit,” Lewis says. “Just hold still until you close.”
And leave yourself some leeway before you have the moving trucks pull in the driveway, in case you find a change in your closings costs or loan terms you want to challenge.
Overall, these new lending rules will put a lot more control in the hands of borrowers. Because, when it comes to your soul it’s fine to put your faith in a higher power, but with your finances, it’s best to put your faith in numbers.