Mortgage closing costs may look as if they've skyrocketed, but it would be more accurate to say that they've just gotten real.
On the surface, the headlines were rather arresting: An annual survey released in August by financial services website Bankrate.com showed that closing costs nationwide in the last year were a twitch-inducing 36.2% more expensive than a year earlier — and much higher in some states.
Although it might seem that the closing costs for such services as title insurance, credit checks and appraisals had gone through the roof practically overnight, it wasn't quite that way, according to Holden Lewis, who covers the mortgage business for Bankrate.com and who helped compile the study.
"When I interview the lenders, [the costs] haven't gone up 37% and 41% — they've gone up 2% or 5%," he said.
So how could this be?
The difference, Lewis said, is to be found in three letters: GFE. That would be the good-faith estimate, the document that lenders are required to provide early in the mortgage-application process so that borrowers better understand what they're getting into and, theoretically, shop around for the best price on a loan.
What's changed in the last year is that the federal government — after a prolonged and tense regulatory dance with the real estate industry — this year standardized the GFE and made the lenders stand by their estimates (with some categorical exceptions) or face fines.
"This year, the GFEs are just more accurate," Lewis said. "I wouldn't say that in past years they consciously and consistently underestimated the fees on purpose, but I do think they did tend to understate fees."
In other words, "good faith" is no longer quite the laughable misnomer it traditionally has been. For years, many consumers complained that the "estimate" was merely a low-ball enticement, the source of many a "yikes!" moment near the end of escrow when consumers were presented with actual costs that were more painful than expected.
This year, the requirements and specifics of the GFE changed. Now, within three days of applying for a mortgage, consumers should receive an estimate that clearly spells out likely costs.
Among other things, the amount, term of the loan, initial interest rate and monthly payment should be stated clearly; the form should tell whether your interest rates and your monthly payment could rise. Lender charges, including points paid to reduce the interest rate and the total of all other originators' charges, should be stated in simple terms.
Those things (and the costs of transfer taxes) shouldn't change between the issuance of the GFE and the closing. Some other things might change because they're beyond the control of the lender — if you obtain your own title insurance or homeowner's insurance, for example. But if you obtain these products through your lender, the GFE should list a ballpark price that by law can't vary more than 10% when the deal closes.
A GFE sample can be viewed at the website of the federal Department of Housing and Urban Development: hud.gov/offices/hsg/ramh/res/gfestimate.pdf
Some mortgage lenders have beefs with the new form. They complain, for instance, that some borrower costs that once were itemized are now bundled together, confusing consumers and causing them to question the charges.
Lewis said the industry seemed to have come generally into compliance with issuance of the new GFEs, with some interesting exceptions.
"Some lenders, instead of giving an applicant a GFE, they give 'worksheets' that aren't officially GFEs, and technically they're not in compliance," he said. "There are a couple of reasons they do that.
"One of them is, frankly, to be more flexible on the closing costs — they say, 'OK, here's a ballpark of what the GFE might say, and once we get further along, we'll give you a GFE,'" Lewis said. "But that's not the law."
In another instance, such as when a consumer doesn't have a specific house under contract but is looking to "prequalify" for a loan for a house that's worth a general amount in a specific neighborhood, a lender might draw up a worksheet that anticipates the GFE — an estimate of the estimate, he said.
In those cases, the lender probably isn't skirting the law, Lewis said — the GFE regulations stipulate that the GFE is required when certain purchase conditions have been met, and one of them is having a concrete address, he said.
For the record, California ranked 17th among the 50 states and Washington, D.C., with closing costs averaging $3,097. The most expensive place was New York, where costs this year averaged $5,623. The least expensive place was Arkansas, where costs were $3,007.
Umberger writes for the Chicago Tribune.