Posts Tagged ‘GFE’

Coming Soon: Loan Estimate

September 8, 2015

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As discussed back in March, the new Loan Estimate disclosure is on its way! Originally, the new disclosure was scheduled to start August 1, but the CFPB move the implementation date to October 1. Use this link for a preview of the new Loan Estimate.

The Loan Estimate is a major step in the right direction compared to the current Good Faith Estimate (GFE). Why? While both documents are three pages, the current GFE is lacking key information. When I go through the GFE with clients, in addition to those three pages, I also must reference:

  • Page 2 of the loan application that shows the total monthly payment. The GFE only shows the loan and monthly PMI payment (if the loan requires PMI).
  • Page 4 of the loan application that shows the summary of the transaction. The GFE only shows the closing costs and prepaid totals. It doesn’t show the cash to close, any seller credits to closing costs, or any lender credits to the cash to close.
  • I also must have clients sign an intent to proceed with the loan disclosure because the GFE does not have a signature line on it

Some other great points about the Loan Estimate is that it will replace:

  • The Truth in Lending disclosure is now included in the Loan Estimate.
  • The Itemization of the Truth in Lending disclosures is also included in the Loan Estimate.
  • The Loan Estimate also has a section showing whether or not your lender plans to service the loan. Hopefully, this will eliminate the servicing disclosure as well.

When going through the numbers with a client, the Loan Estimate will reduce the number of pages I must reference from 10 to 3 pages. That should mean my loan packet will be reduced by those 7 pages. Anything to make the stack smaller!

Got questions about the new Loan Estimate? Contact me today to discuss. If you are financing a home in Georgia, we can also discuss how I can help you with the loan!

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2015 Closing Disclosure

April 1, 2015

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Along with a new Good Faith Estimate (see my recent post on the 2015 GFE), there is a new HUD-1 . The HUD-1 is more commonly known as the settlement statement, but will be referred to as the “Closing Disclosure” beginning in August of this year.

Just like the GFE, the Closing Disclosure is combining a couple of closing documents into one form. Even with the Closing Disclosure going from three to five pages, the total number of pages should stay roughly the same.

More on this in a moment. First, let’s talk about the one aspect of the new Closing Disclosure that will be very problematic. Beginning with these new disclosures, borrowers must be given a final Closing Disclosure at least three business days prior to closing.

This is not an April Fool’s joke, and the three day requirement will be the single toughest aspect for lenders, loan originators, closing attorneys, real estate agents, etc. to implement. Currently, if a closing is scheduled for Wednesday, and closing documents go out on Wednesday, we can close on Wednesday.

Not anymore. If closing documents go out late on Wednesday, a Closing Disclosure probably would not be approved until the following business day. Then the closing will have to be scheduled three business days after the final Closing Disclosure was approved. That means this example of a Wednesday closing just got moved into the following week.

The best way to approach this change is to add more days to the closing time frame until everyone (lenders, attorneys, agents, etc.) get accustomed to the three day requirement on the Closing Disclosure. Well, add time and be patient.

As for the components of the Closing Disclosure itself, they are pretty straight forward. Click the link to view the new Closing Disclosure.

The first page of the Closing Disclosure replaces the Truth in Lending document from closing. Pages 2 and 3 are essentially the first two pages of the current HUD-1. The fourth page provides a nice summary of the loan terms, explanations, and goes into more details about the escrow account. The fifth page is essentially the third page of the current HUD-1.

The Consumer Finance Protection Bureau attempted to simplify the loan details for consumers. For the most part, they succeeded with the implementation of the new GFE and Closing Disclosure later this year. Other than getting used to the new 3 day requirement for issuing the Final Closing Disclosure, these changes should make the loan details easier to understand for consumers.

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2015 Loan Estimate

March 26, 2015

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As mentioned in my previous post, there are changes coming this August to the way loan terms and details are disclosed to borrowers. This time, we’ll focus on the new Good Faith Estimate (also called GFE).

I am a fan of the new GFE approved by the Consumer Finance Protection Bureau (which is technically called the “Loan Estimate”). There are some great changes appearing in the new GFE. These include, but aren’t limited to:

  • the loan terms are listed out in a easy to read summary on the first page
  • there is a place to show any seller contribution to closing costs and/or lender credits
  • an estimated cash to close is listed on both pages 1 and 2
  • there is an itemization of both closing costs and prepaid items on page 2
  • the Truth in Lending disclosure is being combined into the new GFE on page 3
  • there is a signature line on the good faith estimate (imagine that!)

 

It is great that clients can now actually sign the good faith estimate, which will eliminate a fourth page that lenders had to add on for borrowers to sign stating they receiving a copy of the GFE. Combining the details of the GFE, Truth in Lending, and providing a signature line, the new GFE actually reduced the number of pages from six to three. Less paper!

Click the link to view the 2015 GFE.

One aspect that is new is the replacing of the terms “closing costs” and “prepaids.” Historically, closing costs were the costs associated with the home purchase. These include lender fees, attorney fees, appraisal fee, title insurance, etc. These fees can differ from lender to lender.

Prepaids typically referred to setting up an escrow account, paying a full year of home insurance, and paying interest on the loan from the date of closing until the end of the month. These fees were the same regardless of the lender used for the transaction. Now the sum of all fees is referred to as closing costs, and there are two new categories:

  1. Loan Costs: this is the total of lender fees, third party fees (appraisal, credit report, etc.), and attorney fees.
  2. Other Costs: this includes insurance, escrow set up, taxes paid to city/state/county for purchasing a home, recording fees, HOA fees (if applicable), prepaid interest, etc.

That said, the 2015 GFE seems easier to read, understand, and contains all the needed information in one document. This is much better than referring to the GFE for terms of the loan, the Truth in Lending for the APR, the Fee Itemization worksheet (2 pages) for an itemized breakdown of closing costs along with the cash to close. Here is one part of the change that most are excited about coming to fruition. Next time we’ll focus on a change no one wants to see implemented.

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More changes on the way

March 24, 2015
blog-author-clayjeffreys3

There is more than just pollen in the air… change is in the air too!

Starting in August 2015, the Consumer Finance Protection Bureau (CFPB) will reshape the way loan terms and details are disclosed to borrowers. This is the second change being made to the Good Faith Estimate and the HUD-1 (settlement statement). The original change turned the Good Faith Estimate from a one page document into a three page document. The HUD-1 only increased from two to three pages.

This time the Good Faith Estimate will stay at three pages. The HUD-1 will increase from three to five pages!

I’ll spend a couple posts discussing the new Good Faith Estimate and the HUD-1. Today, we’ll focus on when to get started with the Good Faith Estimate.

Currently, the main time period Lenders must be aware of is the 3 day disclosure requirement from the time a loan officer receives 6 crucial pieces of information. Once these 6 things are provided, we now have an official loan application.

  1. Borrower(s) Name
  2. Borrower(s) Income
  3. Borrower(s) Social Security Number
  4. Property Address
  5. Estimated value of the property being purchase (or refinanced)
  6. Mortgage Loan Amount.

Once there is an official loan application, a borrower should be given a Good Faith Estimate within 3 business days. There are still requirements for re-disclosing terms of a loan should the rate change or APR increase more than a certain amount during the loan process.

These aspects of the loan process are not changing, but change is coming. Next time, we’ll move into the ins-and-outs of the new Good Faith Estimate.

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Origination Fee vs Origination Charge

May 15, 2012

Some new vocabulary came along the new good faith estimate that was introduced in 2010. For anyone who has never been through the loan process before, the terminology change didn’t really matter too much to them. On the other hand, those who got a mortgage prior to the change (and are buying/refinancing now) find the new terms a bit confusing.

These new terms have been around for a couple of years now, but I’m hearing this question more often these days… “‘Origination Fee’ and ‘Origination Charge’… they mean the same thing, don’t they?”

They are similar, but not exactly the same. Let me explain.

  • the origination fee is the traditional one point fee that is paid to the mortgage broker/bank for originating the loan.
  • the origination charge includes all lender fees. This would include any underwriting fee, processing fee, and the origination fee.

Almost all of my clients who are refinancing now are choosing to not pay an “origination fee,” yet they are still seeing an “origination charge.” How does a consumer know they are not paying an origination fee as part of the origination charge?

Look at the good faith estimate. If they origination charge (Box A) is around $1,000, it is highly unlikely it contains an origination fee. Let me give an example.

Suppose you have a loan amount of $200,000, and your loan officer says there is not an origination fee on this loan. There is an origination charge of $1,000 listed in Box A on the good faith estimate. Since the underwriting fee is around $750, and there may be an office processing fee of $250, those two add up to $1,000. That would be your origination charge. There isn’t any room in that figure for the origination fee.

In short – you can have an origination charge without an origination fee, but you can still get loans without the traditional 1 point origination fee.

If you have questions, make sure your loan officer takes time to explain the differences to you. If your loan officer won’t take the time, and the property you are trying to purchase/refinance is in Georgia, I’ll be happy to take the time to explain the differences. To get started, here’s how to find me.

Using APR to find a “great deal”

May 8, 2012

Last year I blogged about whether or not APR really showed the “truth in lending.” You can see that post from my blog here. Recently I ran across a post by Dan Green from @mortgagereports. Dan is a loan officer in Ohio, and had some great points about APR. Here are some of the highlights of his detailed post (for the entire post, go here). Take it away Dan…

It’s a myth that you can shop for a mortgages using Annual Percentage Rate (APR) calculations. No matter what your loan type — FHA, conventional loans, VA, USDA or jumbo — APR is among the most easily manipulated numbers in the mortgage business and some lenders count on you not knowing that.

APR is a government-created math formula. It’s meant to measure the “true cost” of a loan, from the date of closing to the date of payoff. APR is roughly measured by taking the original loan size, accounting for closing costs and prepaid items, then estimating how much will have to be paid over 30 years to pay off the loan in full. APR answers the question, “If I borrow this much money, and it costs me this much to pay off my loan, what would my theoretical mortgage rate have been?

By showing APR along with every rate quote, it’s believed that customers will be better informed and can make better loan choices. In some cases, this is true. In many cases, it is not. APR is not the apples-to-apples comparison tool it’s advertised to be. This is because the loan with the lowest APR isn’t always the loan that’s best for you.

Banks and lenders love to promote their “low APR loans” — especially online. Unfortunately, getting a low APR doesn’t translate to getting a “great deal”. This is because the APR formula is flawed.

Calculating for APR requires a lender to makes serious assumptions about the future and, as we all know, predicting the future is impossible. For example:

  1. The APR formula assumes that you will hold your loan for 30 years
  2. The APR formula assumes that you will never make extra principal payments of even $1
  3. The APR formula assumes that you will not refinance or sell your home
  4. The APR formula uses third-party loan costs (appraisal, attorney fee, title search, etc) which are sometimes unknown. These fees are estimated, which means the APR is estimated and can appear artificially low.
  5. The APR formula struggles with adjustable-rate mortgages because it makes assumptions about how the loan will adjust during its complete, 30-year term. Will mortgage rates rise over 30 years? Will they fall? By how much will they rise or fall? Two lenders using two different set of assumptions will publish two different APRs — even if the loans are identical in every other way.

If any of these statements are “untrue”, or have the chance of being untrue, APR fails as an apples-to-apples comparison tool. This is a huge deal when comparing loans with discount points to loans without discount points.

For example, as compared to a loan with no discount points, a loan with discount points will have higher closing costs but lower principal + interest payments each month. Over the life of the loan, the lower payments will render the loan with discount points “cheaper” and so it will have a lower APR than the low-fee mortgage choice. If you chose your loan strictly by APR, you would end up choosing the loan with the highest closing costs and the best long-term payoff.

Don’t get me wrong, this is fine if you plan to stay in your home for 30 years and never make extra payments on your loan. However, if you plan to sell in fewer than 30 years or make extra payments, the APR comparison weakens. In this case, buying by APR isn’t the best way to shop — you’ll front-load your mortgage with fees.

The important thing to remember is that APR is not the metric for comparing mortgages — it’s merely a metric. The better way to compare two mortgage rate offers is to look at the mortgage rates as compared to the fees…

Thank you for the great insight Dan. I couldn’t have said it better myself!

If you’ve been shopping by APR, and would like to have a fresh look comparing rate and closing costs, feel free to contact me to get started. If you are buying in the state of Georgia, I can help!

Does the APR really show the “truth” in lending?

July 19, 2011

The federal government requires the mortgage industry to use the Annual Percentage Rate (known as APR) for consumers to compare offers from mortgage companies. The idea behind its mandate is to provide a tool for consumers to use as an “apples to apples” way to compare loan offers. The lower the APR, the better the deal. Right?!?

Does the APR really do this? Well… I’ll defer to Tom and Jack from their “discussion” in A Few Good Men answer that question.

Well, the truth is the APR has great intentions, but it isn’t necessarily the best tool to use when evaluating loan offers. Here is why:

  1. The APR is based on fees for services to get the loan closed. If the fees are estimated low early in the process and then increase, the APR would increase. With new laws in place, lenders have to disclose if the APR increases more than 0.125% from the original documents you sign. Still, if you’ve started with a lender, you are less likely to change course later on in the process if there is a slight increase in the fees. This is one way some choose to “lower” their APR on the initial offer to make it more competitive.
  2. The APR assumes you will keep the loan for the life of the loan. For example, on a 30 year fixed mortgage, the APR shows its value over 30 years. If you payoff the loan early, sell the home, refinance, etc., the APR would then change. Since the APR could be impacted by how long you keep the mortgage, it stands to reason the APR may not be the best tool to use when trying to decide on a mortgage program.
  3. The APR is somewhat useless on particular loan programs. Since the APR is based on the life of the loan in an “fixed/ideal” situation, any attempt to hone in on an accurate APR for an adjustable rate mortgage over the life of the loan is laughable. Since ARMs can adjust (typically) up to as much as 5% higher than the initial rate over the life of the loan, how can one possibly figure an accurate APR?!? Also, many consumers choose to refinance their ARM loans prior to them adjusting, and that takes us back to the problem discussed in point #2.

The ARP is a tool for consumers to use, but it is not and should not be the deciding factor on what loan program/lender to choose. When comparing offers, always evaluate the interest rate, closing fees associated with the lender, and closing fees associated with the attorney. Those items are identified in lump sum totals on the good faith estimate.

Understanding the New Good Faith Estimate.

February 11, 2010

On January 1, 2010, the new standardized (nationalized) Good Faith Estimate went in to mandatory use.  The intent of the form was to create a standard disclosure for all mortgage providers — better allowing consumers to shop for a mortgage, make comparison of loan options, closing costs, etc.  In the first sense (to create a single standardized form), the new Good Faith Estimate has succeeded.  In a few other areas, the new form is a giant headache.  So, to help you understand the new 2010 Good Faith Estimate, here is the good, the bad and, well, what you need to know to avoid getting the previously mentioned headache (the ugly).

First, the good:

  • the new form gives a very good summary of loan terms (I honestly think that it should be renamed “A Summary of Loan Terms and a Guarantee of Closing Costs” because that is actually what it is . . . there are only a few items on the form that are actual estimates — other costs must match the costs at closing exactly.  Other details on the GFE answer whether or not the loan has an adjustable rate feature, the possibility of negative amortization, a pre-payment penalty, a balloon payment, and if the lender requires you to have an escrow account.
  • the costs on the estimate are categorized and then added together and placed in easy to find boxes.  For example, block A discloses all lender fees as one number = Adjusted Origination Charges 
  • the “lender fees” quoted on the Good Faith Estimate (block A) must match at closing.  There are some conditions where the fees can change, but a change in conditions and in fees requires re-disclosure of a new good faith estimate and a three day waiting period before closing can occur.  Thankfully, the low-life business of mortgage bait-and-switch is dead (mostly).
  • the interest rate (locking-in the rate) are clear and in writing — basically putting a time-line on how long the current offer is available.  Good idea, but a bit of a headache (read on to find out why)
  • fees from required service providers (credit report, flood certification) are clearly outlined
  • fees that consumers are able to shop for (title services and closing fees) are put in to a different line

Now, on to the bad:

  • customers want to know “What are my total closing costs?”  On most previous Good Faith Estimates, the estimate broke out “closing costs” and “pre-paid expenses”, the new form doesn’t use those two categories.  IF THEY HAD, then consumers could see that the “pre-paid expenses” are going to be the same regardless of who does your mortgage financing (prepaid interest is based on the day you close, tax and insurance escrow are based on your actual tax and insurance amounts).  INSTEAD, the new form has a “Total Estimated Settlement Charges” which totals the “Adjusted Origination Charges” and the pre-paid interest, first year’s insurance and escrow funds.  So, in order to use this figure for any meaningful comparison, consumers need to make sure that each lender they are speaking with is using the same tax and insurance $$ amount. 
  • the second thing customers want to know, “How much money will I need at closing?”  Well . . . it’s not on this form.

And the now the ugly:

  • the new Good Faith Estimate was created in the hopes of helping consumers shop for a mortgage, but because the form guarantees the interest rate (for a certain time period) and guarantees the closing costs (they must be guaranteed for at least 10 days), and because the closing costs are a product of the interest rate (it’s a whole separate blog post as to why this is really NOT hard to understand), a Good Faith Estimate shouldn’t be given to a consumer until they have completed a loan application . . . so, in order to get 3 or 4 competing quotes, do you need to fill out 3 or 4 loan applications (and provide financial documentation, etc)?
  • mortgage professionals are required to issue a Good Faith Estimate within three days after loan application and this should be documented by . . . oops, there’s no signature blank on the new form . . . documented by another form such as a “Good Faith Estimate confirmation of receipt” and then a form to confirm that you got that one, and a form to confirm you got that one (ad nauseum).

So, back to some more good news.  We have created a great tool for walking our clients through the process of getting preliminary figures, through loan application, and through the new Good Faith Estimate and to closing — in a way that keeps the intent of the new form = quote closing costs honestly (don’t hide fees or underquote fees), and quote a real interest rate (not like they do in the newspaper and some places online to get the phone to ring), and then, quite simply . . . keep your word.  Simple, honest, professional is still the key, despite a new, confusing to consumers, 3-page Good Faith Estimate (plus one more page for the itemization of costs, plus the page to confirm receipt of the Good Faith).