The main purpose is to give borrowers, at the beginning of the loan process, when they are figuring out their budget to purchase or refinance a home, a sense of their total cost. So a borrower could look at the GFE and evalutate the bank, title, and other fees, as an estimate, that are associated with their loan. You would think that this is–has been–a great document.

In the past, lenders had the ability to tell their clients that, for example, bank fees are going to be (say) $500, and then at the closing charge the borrowers $1500. At the closing table borrowers could either close and eat the additional fees, or they could decline to close and either try to sue the lender or find a loan with another lender.  Any scenario is painful. And rightfully so. This is the “inspiration” for the new GFE.

Now, as I will discuss in upcoming posts, the lender must write, in separate boxes, total bank charges, total bank credits (to the borrower), or total bank discount points. At the top of the second page the loan officer must clearly indicate:

1. the bank’s total orgination fees that usually include bank and/or origination fees.
2. if the bank is offering and interest rate with no other fees.
3. if the bank is offering any credit to the borrower.
4. if the bank is charging discount points to lower the interest rate.

Theoretically, then, borrowers can compare–the old apple to apple comparison–lenders cost to cost. It’s not a bad idea, and seems simple enough. But as the article that I have referenced explains, these numbers cannot change unless the borrower requests a change, and if the loan officer makes changes without the borrower asking for the changes, the lender will have to pay for the difference.  So in my initial example, a borrower showing up at closing with a settlement statement that is $1000 higher than the GFE will not have to eat the difference. The lender will be forced to pay the difference  Though this is a good thing for the borrower, to protect them for predatory lenders, it can be an unfair practice against many lenders. Now lenders are forced to wait until borrowers have a contract before issuing a GFE.  And so borrowers can only receive and estimate (an estimate for the Estimate?) of what their GFE will be.  Sound a little wacky?

Stay tuned for some more thoughts on the new document.

In the example that is presented, where we do not know the loan amount, the borrower is spelling out that the monthly tax and insurance payment has increased, which it would anyway, but the P & I payment would be lowered by $144 per month. Not bad. And the net closing costs were around $2,000.

Is it worth $2000 to refinance? A couple things. First, it is accurate that a borrower can pay the closing costs at closing or can role this amount into  the loan (add it to the current loan amount). This, then, means they are paying interest on the additional $2000.  Here, they are paying an additional $100 per year in interest on the $2000 amount added to the loan amount. Good thing or bad thing? A small thing, but something to think about. In five years that’s $500. My thinking, if you have the $2000, why not pay it at closing and save the money that would be paid on interest. The whole point of refinancing.

Also, this borrower brings up an important point to remember. When refinancing, you will have to re-establish a tax and insurance escrow account. Unfortunately we can’t roll the old account into the new one, so the borrower will have to bring money for the new account, and then the current lender will reimburse the borrower for the money that is being held in the old escrow account, usually within a few weeks of closing. In addition, the borrower will pay the accrued interest for the current loan to the current lender, and will then pay prepaid interest (paying the interest that will accrue, for the new loan, usually through the end of the new month, just as you would do in a purchase), and then you will skip a month for the new, first month’s payment.

But wait:  was it work paying $2000 in closing costs? Look at it this way, from a payment perspective, if you divide the monthly lower payment amount ($144) into the cost ($2000), it will take just under 14 months to break even, and then these borrowers are truly saving their $144 per month. Sound good to you?

Last, they are also paying more than the required minimum, as part of their goal is to pay down their loan faster to pay less interest for the life of the loan.  To me, neither bad nor good. It makes them comfortable and happy. That’s the important thing.  I like happy people.

So what does the Chicago City Counsil do? Increase the tax stamp, to the buyer, for buying a home!

What used to be $7.50 per $1,000 just increased to $10.50 per $1,000.

So a home that costs $300,000 currently carries a tax of $2,250, will have a cost of $3,150.  And this becomes effective for purchases, in the city of Chicago, after April 1.

Besides knowing about the additional costs, borrowers should pay attention to a few things:

1. Does the Good Faith Estimate disclose the costs?
2. When a loan officer meets with a borrower and analyzes the borrower’s qualifications for a loan, does the loan officer take into consideration the new costs?
3. Think about asking the seller to help pay for the costs.

Whether we like it or not, the increase is here.

The room, as I call it, is the place where you, the borrower of a loan, and the loan officer, the person who is assisting you in getting the loan, meet. By place I should almost say space, but really, it is how you meet the loan officer. It could be via email, via phone, or in person. It is this place/space where the loan process begins, and this is the area that no one–none of the so-called experts–really can tell how things are going. Except for the loan officer and the borrower(s).

In continuing my series on our current foreclosure epidemic that started with my Introduction, I think this is probably the most important step in staying out of foreclosure.

Tony Gallegos has a recent post (quoted from another source) that explains how Abe Lincoln would know his opponent’s arguments and case so well that he himself would, in effect, take all the wind out of the opponent’s sails and win. Because he knew their case better than they knew their case. In an odd way, this is relevant to my point. As borrower’s ‘meeting’ with a loan officer, in many cases a stranger, you should think about the loan officer’s agenda. Yes, the loan officer has to make a living, yet the best loan officers never convey the sense that they are meeting you only to make a profit. Hopefully, though, when you walk into that strange space (internet, phone, or actual room), you will get a very strong sense that the loan officer wants to help you, make you feel comfortable, and assist you in making the best decisions. Though you are nervous and excited and probably feeling eight to ten other emotions, I think it is important to pay attention to the loan officer.  What is he saying? How is she saying it? Are there options? Why? Why not?

So here is my main point–and it is going to sound really crazy: don’t just think of yourself. By this I mean pay attention.

The road to foreclosure starts right now. We, the people who are trying to understand and explain and help others not go down this path, forget that we really don’t know what happens in these rooms. Does the loan officer explain an ARM and how it works and how it could hurt you? Does the loan officer give options? Does the loan officer review the Good Faith Estimate, and, if the borrower signs it, does the loan officer sign as well? Does the loan officer review the credit report, the essential documents for underwriting, and/or the different types of documentation (verify income and assets and employment…or not)?

Most important, when you walk in the room, do you feel like you are being treated as a human being or manipulated like a robot?  And this is what no expert can measure in explaining how the foreclosure mess started.

I am not Abe Lincoln (for sure), but I do like to understand my clients, and most good, reputable loan officers will do the same. Prepare yourself before you step into the room.

Here’s a great post about closing costs. Dan’s pie chart shows that, in general, lenders’ costs are only a small portion of the total costs (He does not include the 10% of the underwriting cost as part of the lenders’ overall percentage, which I would think should be part of the total lender percentage. Some brokers/bankers simply pass on end-lenders’ fees, and so this would be something to discuss with the loan officer.)

Dan is right on: many loan officers “forget” to add other costs, which, even though the numbers are estimates, do not project a fair and accurate cost analysis for the borrower to compare. Unfortunately, these extra costs will appear on the settlement statement at the closing.

During the pre-approval, when you are reviewing the Good Faith Estimate, make sure you understand all the numbers.

One slice is enough. Unexpected closing costs can certainly give you indigestion.

Sloppy pre-qualifications (not to be confused with a true, legitimate pre-approval) are another matter. This blog post has it right, and everyone should pay attention.

High loan-to-value loans, especially 100% financing, are very tough to come by.  If you are a buyer and you want to make an offer with no down payment and get seller credit to pay for closing costs, be prepared for the seller’s agent to wait for stronger offers. All things being equal, another offer with a 5% down payment may be accepted.

Sellers are going to want to see professionally written, legitimately and fully pre-approved letters.  Obviously, this means that buyers who have taken the time to meet with a loan officer and find out what programs are now available will find that they will be in a much stronger position in having their offer accepted first.

Sloppy seconds can cost you a house.