New Mortgage Rules Help Home Buyers Shop for Loans

New federal rules that go into effect today may ease the stress of finding a home mortgage for many prospective buyers.

Changes to the Real Estate Settlement Procedures Act require mortgage lenders and brokers to provide consumers with a standardized Good Faith Estimate that discloses a loan's key terms and settlement costs. The new regulations, first announced by the Department of Housing and Urban Development in 2008, seek to help consumers compare offerings from different loan originators before choosing to go forward with the process.

"For a lot of people, purchasing property is one of the biggest financial commitments you're going to make in your life," said Lucas Miller, compliance director for the Neighborhood Assistance Corporation of America, a nonprofit homeownership organization. "It's a stressful process."

To comply with the new regulations, loan originators must complete a three-page Good Faith Estimate form, providing estimated settlement charges based on the loan's term, initial interest rate and monthly amount owed.

According to HUD's Settlement Cost Booklet, the GFE form is "designed to encourage you to shop for a mortgage loan and settlement services so you can determine which mortgage is best for you."

Though Good Faith Estimates have been used for years, the new estimate regulates which charges can and cannot change at the time of a loan settlement, thereby preventing loan originators from adjusting certain costs after providing an estimate.

"In the past, it was a common thing for a buyer to walk into a closing and find fees they had no idea about," Miller said. "It could be a substantial change when it comes down to the consumer's pocket."

While origination charges cannot change from the estimate, fees for certain services, like government recording, can increase up to 10 percent in total at the settlement. There are no such regulations for certain charges, such as homeowner's insurance and services provided by third parties selected by the borrower.

While the new Good Faith Estimate form is "substantially different" from the previous estimate form, Miller said the new regulations will have a "positive effect" on the industry and produce more accurate estimates.

However, some critics say the RESPA reforms will further complicate the home buying process, rather than simplifying it.

"We've gone from a one-page estimate that completely itemizes all costs associated with home transactions to a three-page, confusing, complex disclosure that does not give the consumer a transparent depiction of the closing costs in their transaction," Marc Savitt, president of The Mortgage Center, based in Martinsburg, W.Va.

It is "hard to say" if the number provided by the Good Faith Estimate is enough to help consumers find the best loan option, noting that the estimate is hard to break down and does not disclose how much money a consumer should bring to the settlement, he said.

"With the new Good Faith Estimate, you will get one number to shop," said Savitt, who is also the president of the National Association of Independent Housing Professionals. "Consumers, by nature, are suspicious; we want to know what's involved in that number."

Loan closing agents must also complete a new HUD-1 form when closing home purchases. The new form provides a summary of the borrower and seller's transactions, as well as a comparison of the loan's estimated and final costs.

Choosing a loan originator will directly affect monthly mortgage payments. It is worthwhile for buyers to do their research before making loan decisions, Miller said.

"In the last couple of years, I've seen brokers trying to pressure borrowers into a loan," Miller said. "It's just important for buyers to know that they do have options."

Talking to friends and relatives who have used mortgage originators and gone through the loan process is the best way to shop around for a home loan, Savitt said.

"We encourage consumers to shop at at least three different places to make sure they are getting the best deal," he said.

HUD's Settlement Cost Booklet also suggests consulting local listings of lenders and brokers and researching loan originators' advertised rates online.

Mortgage rates ended the year at 5.14 percent, according to a report by mortgage lender Freddie Mac. Mortgage rates hit a record low of 4.71 percent in the beginning of December. The Federal Reserve has pledged to keep mortgage rates low with plans to buy $1.25 trillion in mortgage-backed securities by next spring.

The Associated Press contributed to this report.