Could you please just “show me the money?”

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“SHHOOOOOWWWWW MMMEEEEEEE THE CLOSING COSTS!!! . . . . . . . . . . I LOVE THE LOAN ORIGINATOR!!!”

By definition, a Good Faith Estimate (GFE) is a disclosure (required by the Real Estate Settlement Procedures Act (RESPA) to be given at the time of loan application, which lists the charges the buyer is likely to pay at settlement.

The good faith estimate is (in theory) designed to be an easy way for consumers to compare different offers from different mortgage companies. Unfortunately, there are a few problems in trying to compare good faith estimates . . . a few of which I will try to help decipher today.

problem # 1 — the prepaid expenses vary based on different factors — how the homeowner’s insurance is estimated, how the taxes are estimated, the per diem interest based on the day of closing (interest is paid from the day of closing through the end of the month) and how the escrow account is estimated. When comparing good faith estimates, you can ignore the prepaid expenses.

problem # 2 — different loan amounts means different closing costs. Some of the closing costs are a percentage of the loan amount (the origination fee, any discount points, the title insurance and, for consumer borrowing in Georgia, the Georgia intangible tax are all a percentage of the amount financed). When comparing good faith estimates, make sure the estimates are for the same loan amount.

problem # 3 — different closing dates will cause the interest rate to change. Once you have a contract on a house, you are able to ‘lock-in’ or protect your interest rate. The interest rate is dependent on the lock-in period (usually 15 days, 30 days, 45 days, 60 days, 90 days or 120 days) — the longer the lock-in period, the higher the interest rate. When comparing interest rates from different lenders, make sure that everyone is quoting the same ‘lock-in period.’ This is the reason why most of the lowest rates in the newspaper and on fakerate.com (fictitious website . . . although curiously similar in sound) will have the lowest interest rates.

problem # 4 — some loan originators (who must already know that their fees are too high) seem to hide fees in strange places on the good faith estimate. Every now and then I will have clients send me a competitors good faith estimate. This works out well — the client makes sure that we are comparing everything accurately (pineapples to pineapples), and I get to see how I measure-up to the competition, helping me make sure that I am always absolutely competitive (track back: “I can’t be beat . . .” ). Things to look for — an application fee not included in the ‘total closing costs’; the ‘total closing costs’ being only a total of lender fees (and not including settlement agent/attorney related fees); the appraisal and/or credit report fee listed as upfront fees or POC fees (paid outside of closing) and not included in total.

problem # 5 — Theoretically, you could compare the APR’s of different loan scenarios to find the ‘best deal.’ Unfortunately, the APR calculation is anything but standard and without going into all of the tedious details, just trust me, APR just isn’t an accurate tool to measure your options side-by-side.

problem # 6 — if you do not yet have a contract on a house, you can’t really lock-in on an interest rate or loan program. And because interest rates change daily (or even in the middle of the day depending on the market), estimates must be compared based on information from the same day. (As an aside, one competitor told a client of mine that it would take them a day or two to get them a good faith estimate?? . . . or that their manager had to approve the good faith estimate and that is why it took them two days to send it to them?? What!!?? These people are either too busy to help (which I would argue is probably more of an organizational problem), or they are part-time loan originators, or they are so new in the business that they can’t create a good faith estimate without proper supervision — if you encounter any of these situations . . . RUN FOR YOUR LIFE!! Ok. Maybe just, walk away . . . quickly.

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6 Responses to “Could you please just “show me the money?””

  1. HD Says:

    I have a question on your APR not being accurate. Why not just add up all the GFE, use a web calculater like the one in Bankrate.com, then you can compare all the loan quotes. Even if they hide it amoung the many lines, you can get a better overall APR. If they lower the taxes to 15 days, and another quotes for 30 days, make the mathmatical adjustment, then total the cost, use APR calculator. Am I thinking right? Thank you.

  2. hillsidelending Says:

    HD,

    Good question. Comparing ALL of the closing costs (in the columns and outside the columns) and the interest rate is exactly what you should be doing. I tried to find the calculator that you mentioned but only found the “personal loan adviser”, not to be confused with me, a “personable loan advi-sor” for sure. ha ha.

    For the per diem interest (which is part of the prepaids), just ignore them all together when comparing estimates.

    One of the reasons the APR is not accurate is because different lenders include different items into the APR calculation. For example a $400 “settlement fee” charged by the closing attorney does not have to be included in the APR calculation, but a $400 “attorney’s fee” does have to be included. There are more reasons why the APR isn’t helpful, but I think you are headed in the right direction comparing ALL closing costs and interest rate vs. ALL closing costs and interest rate.

    I hope this helps!

  3. Daizy Says:

    In my GFE it shows an amount for Settlement of Closing Fee. But no attorney fees. Can you tell me about this

  4. Daizy Says:

    On my GFE it shows a fee for settlement or closing fee and a fee for closing costs. Why am I being charged for this fee twice?

  5. Liz Says:

    Liz

    That is very interesting. I never thought about it that way.

  6. Dwight Says:

    Dwight

    I completely agree with that.

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