Legal for Life

[Editor’s Note: The writing of this blog will be taken over by Carly, assistant to Kellie Stokes. Please see “About This Blog” for more information.]

Situation: You are a first time home buyer. You are looking for the home of your dreams, complete with a white picket fence, porch swing, and over-achieving garden. Before you shop around, you decide to meet with a loan officer to go over your finances and to pre-qualify for said dream home. The Loan Officer gives you a Good Faith Estimate to review.

Question: …what the heck is this thing and what does this have to do with my white picket fence?

Dictionary Answer: A Good Faith Estimate (GFE) is an itemized list of fees and costs associated with your loan, which must be provided by a mortgage lender or broker to a customer within three days of applying for a loan, as required by the Real Estate Settlement Procedures Act (RESPA). (Feel free to click that link – Wikipedia does an awesome job on breaking down each and every fee that might go into the GFE.)

Say what? Basically, your lender will take what you can afford to pay a month (usually an average), your down payment, any discounts, the fees the lender and title company might charge, and ta da! An estimate of what your closing costs will be. Using that estimate, you can realistically shop for that dream house. [Side note: use this to your advantage and don’t live beyond your means.]

There are several advantages to the GFE:

1. It is included in the new HUD-1. The HUD-1, commonly referred to as the settlement statement, has all the final fees from the lender, title company, etc – that is the final bill for your loan. In fact, on page 3 of the HUD-1, there are three boxes to compare the estimates to the current fees and rates. The GFE and the HUD-1 should be very close in number. Sometimes other fees can be tacked on at the end (sometimes accidentally) and comparing the two may save you and your closer some peace of mind! This updated settlement statement is designed to catch those mistakes early. The new HUD-1 will go into effect on 1-1-2010.
2. You can shop lenders. Say you just walked into to the local bank down the street. You like the people (and you don’t know any better than to like their estimates), but when you bring the GFE to your REALTOR, she sends you to her guy. Her guy happens to be $1200 less in fees. Whoopee! That is more house for you to shop for, i.e. one with two swings! Or an extra bathroom!
3. Know EXACTLY what you are getting into. Just because your mother has been pushing you to own a home doesn’t mean you are ready for it. With the current credit crisis and shady subprime mortgage dealings, it may be better to live in mom’s house for another year and afford the dream house (instead of settling for the fixer-upper you don’t know how to fix).
4. It levels the playing field for consumers. Lenders will cater to YOU instead of the other way around. Now is the time to ask what all those fees are for and to make sure they apply to you. Sometimes people don’t understand what they are paying for and this will give you an idea BEFORE you pay for it.
5. You can save money! The Department of Housing and Urban Development estimates that consumers can save around $700 in closing costs by paying attention to the GFE. Sign me up! That is enough to buy and install my own picket fence!

I spoke with a local loan officer regarding these changes to get his opinion. Martin Quiroz, of Prime Lending in Dallas (say hi Martin!), said that this is very good for the consumers, but tougher on lenders. This change encourages clients to shop around for the best rates and lowest fees. However, Martin stresses that it forces the lender to explain all fees so the borrowers won’t be surprised come closing day (which has happened). Use a lender that feels comfortable explaining each fee.

So, all you home buyers out there! While home buying is a confusing and complicated process (and what isn’t these days), educating yourself and surrounding yourself with good lenders and realtors will not only save you money, but will give you piece of mind. Ask questions! Compare lenders! And don’t brush off that GFE – it may be the difference between a picket fence and a couple of sticks. What will you do with the knowledge you’ve gained? Let us know in the comments below. We’d love to hear from you.