Borrowers, prepare to shop.
And, potentially, to save hundreds of dollars on your next home loan, thanks to a new federal government plan that would revamp how lenders disclose home-loan terms and costs.
The plan, proposed by the U.S. Department of Housing and Urban Development, includes:
- A new standardized Good Faith Estimate (GFE) form that will explain the terms and estimated costs of your loan.
- Limits on how much your lender can increase some of your settlement costs, so you won’t be surprised by inflated costs at closing.
- Scripts that will be read to you at closing to help ensure that you understand the terms and costs of your loan before you sign off on all your paperwork.
- An improved settlement statement that will help you compare your final costs to your good-faith estimate.
A good-faith estimate already is required when you apply for a loan, but the forms that are used today aren’t standardized and can be difficult for borrowers to understand. Different lenders may not list the same costs in the same way and the form may not fully disclose all of the important terms of your loan.
The proposed standardized GFE will clearly detail the terms of your loan, including your interest rate and monthly payment, whether your rate and principal balance can increase, and if so, by how much, and whether your loan has a prepayment penalty or balloon payment. It also will consolidate your costs into categories and display a total of the estimated charges on the first page.
The plan is HUD’s response to a study that found many homeowners didn’t understand key terms of their own mortgage. The study concluded that clearer disclosures could help borrowers recognize loan costs, which would help them understand their loan and make better-informed decisions.
HUD’s consumer testing found that consumers were able to select the lowest cost loan more than 90 percent of the time when the proposed new form was used--a huge improvement over the typical situation. Consumers also said they liked the enhanced disclosures and scripts.
The new form won’t be official until after a comment period, and even then, it could be changed or abandoned. But if you think it might help you shop for a mortgage, you may want to print it out the new GFE form from HUD’s Web site and ask your lender to walk you through it.