New “Good Faith Estimate” Mortgage Forms Mandatory for the New Year

On Jan. 1, 2010, new rules from the Department of Housing and Urban Development (HUD) went into effect that would help simplify and clarify what mortgage lenders would charge for a loan. The new rules, which bring with them the new “Good Faith Estimate” form, are supposed to help applicants more easily compare the true costs of loans from different lenders.

Why HUD Created New Rules

According to HUD, the reason for the new rules and new form were that applicants were not able to determine where their loan fit in the whole scope of loans. In other words, they didn’t know whether they were being given higher or lower interest rates and other fees than others lenders because comparison tools were apples to oranges vs. apples to apples.

For example, some lenders may have placed their focus on interest rates, while others focused on monthly payments to draw in borrowers. However, fees also play a large role. Without a strong basis of comparison, it could be difficult for borrowers to know what lender is offering a better deal.

How the New “Good Faith Estimate” Form Works

Now, the new “Good Faith Estimate” form will allow consumers the tools they need to compare mortgage options apples to apples. All lenders will be required to use this form to disclose fees and will be required to write the same details in the same spots on the form.

A couple of focal points on the form include the following fees:

• Origination charges: This is what the lender receives for providing you with a loan.
• Settlement fees: These fees account usually for title insurance or an appraisal.

How the Form Helps You

The point is to have these fees and other costs in plain view with any lender you encounter so you can easily determine what your total costs will be for your mortgage. If you as the borrower accepts the offers as outlined in plain view on the form, the lender must issue your loan under the costs listed. This leaves little room for surprise.

However, if there is an adjustment outside of the lenders’ control (like an appraisal comes in lower than expected) the mortgage rate could be affected. In this circumstance, the lender would be required to quickly inform the borrower of the change.

All in all, the form covers the following:

• Settlement fees (including origination fee and points charged up-front to reduce interest rate)
• Initial loan amount
• Term length in years
• Monthly payment
• Initial interest rate
• The possibility of an interest rate increase
• Prepayment penalties
• Balloon payments

There is also a shopping cart listed on the third page that allows lenders to set up four different pricing scenarios with side-by-side comparisons to easily determine which costs are best suited for the borrower.

HUD hopes that this new form will help make life easier for borrowers trying to get the best deal on their mortgage. However, only time will tell if it will really make a difference.

Do you think the “Good Faith Estimate” form could help borrowers better compare their mortgage loans?