The most enjoyable part of homebuying is supposed to be the closing. But all too often, buyers have been met with settlement fees far higher than they'd anticipated. The disappointment and frustration of this closing-cost shock caused the Department of Housing and Urban Development to make changes to the rules surrounding closing costs in 2010. HUD strengthened closing-cost disclosure rules through revisions to the Real Estate Settlement and Procedures Act.
Most of the reforms made to closing-cost rules involve the "good faith estimate." Lenders must provide, and then stick by, their initial figures on the uniform three-page document. The estimate makes it easier for borrowers to comparison-shop and to hold lenders accountable for fee changes at closing. Lenders must provide borrowers with the estimate within 72 hours of taking a loan application. And they must stand by the fees for at least 10 days so that borrowers have enough time to shop for closing services as well as loan terms.
Final closing costs must be disclosed to the borrowers on a settlement statement, known as the HUD-1, at least one day before closing. Third-party fees, such as charges for appraisal, escrow, attorney and title insurance, may not exceed the initial estimated fee by more than 10 percent if the borrower uses the lender's service providers. The final cost may exceed the 10 percent "tolerance" if the borrower uses a different service provider not previously approved by the lender. If lender or third-party fees limited by closing cost rules increase by more than 10 percent, the lender must provide a new estimate. Lender-controlled costs, such as origination, administrative and processing fees, must match the fees initially disclosed.
Certain closing costs are exempt from the 10 percent tolerance rule, including the initial deposit required to establish an escrow impound account. An escrow account is usually required on a mortgage when the loan balance exceeds 80 percent of the house's value. It allows the lender to collect and allocate payment for taxes, mortgage insurance and homeowner insurance on the borrower's behalf. The lender typically requires several months' worth of these costs to be collected at closing for reserves. Prepaid mortgage interest through the end of the month can differ at closing; so can the homeowner insurance premium.
Closing cost rules help protect borrowers from bait-and-switch tactics and other predatory lending practices involving fee hikes. The good faith estimate format encourages borrowers to compare loan features and closing costs among lenders on Page 3 of the document, in the "shopping chart" section. The estimate is supposed to be used in conjunction with the HUD-1 at closing to determine any discrepancies. But this might be difficult because of their different formats, according to Bankrate.com. The estimate summarizes costs by category, whereas the HUD-1 itemizes each fee individually.
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