Dec 16, 2008

New HUD-1 Helps Homeowners

Many homebuyers are overwhelmed by a sea of paperwork when they sit down at the closing table. Buried in the paperwork is the HUD-1: the settlement statement that summarizes the buyer's (mostly mortgage-related) closing fees.

Buyers should see the HUD-1 before closing, in draft form. But things can and do change before getting to the closing table, and many buyers find new or increased fees tacked on at the last minute. Those anxious to close may not bicker with the higher fees, or even notice them as they deal with everything else. But the Department of Housing and Urban Development (HUD) has noticed the trend. After much debate, HUD has created some new mortgage rules to deal with it, hoping to save homebuyers an average of nearly $700 at the closing table.

The most important change is that now, lenders and brokers are required to provide buyers with a standard Good Faith Estimate (GFE) within three days of receiving a mortgage application. (The GFE was commonly used in the past, but no standard format existed.) On the GFE, brokers must now disclose how they're paid, through the "origination charge."

This is the cost to the borrower for getting the loan, expressed as a percentage of the overall loan amount. The charge may be paid in "discount points" (points the borrower pays upfront in exchange for a lower interest rate) or as part of the interest rate itself.

In addition, lenders and brokers can't increase some costs between the GFE and the HUD-1, and other costs can only go up by up to 10%. For example:

  • Origination charge: cannot increase.
  • Transfer taxes: cannot increase.
  • Appraisal fees: can only increase up to 10%.
  • Government recording fees: can only increase up to 10%.
  • Title insurance: can only increase up to 10% if borrower uses the title insurer selected by the lender.

The HUD-1 is also revamped to make it easier for borrowers to compare to the GFE. Lenders and brokers aren't required to start using these forms until January 1, 2010 -- but they're allowed to use them immediately. If you don't receive a GFE when you apply for a loan, ask for one -- or better yet, ask the lender to use the new forms together and to agree to be bound by the fee increases on those forms.