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Form and Function

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Posted On: 01/27/2010

QUESTION: A bunch of new real estate forms went into effect at the start of January. Why are they different, and why are they better or worse?

ANSWER: As of Jan. 1, lenders and settlements agents will be required to use new Good Faith Estimate and HUD-1 closing statements. HUD has been working on these forms for more than a decade and with good reason: The government estimates that consumers will save $700 per transaction with the new forms.

The GFE is the form you receive from a lender that gives you some sense of how much cash it will take to finance or refinance real estate. Unlike the old form, the new one explains what lender fees can be changed, not changed or changed by no more than 10 percent.

No less important, the new form shows the cost to originate the loan - a cost that must include any yield spread premium.

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Yield spread premiums can be good for borrowers when properly used. For instance, you might get a somewhat higher interest rate for a mortgage if the lender will pay some or all of your closing costs. That can be a good trade-off to save up-front cash.

The problem is that mortgage pricing is complex and some borrowers unknowingly pay higher rates but get no benefit. As an example, the Wall Street Journal says 61 percent of the subprime borrowers financed in 2006 actually qualified for better loans and lower rates. (See: "Subprime Debacle Traps Even Very Credit-Worthy," Dec. 3, 2007)

With the new GFEs borrowers will be able to easily see mortgage costs, and they will be able to compare loans from different lenders. No less important, the numbers from the GFE plug into the new HUD-1 tally sheet used at closing. Borrowers will be able to immediately compare the rates and terms promised with the rates and terms that have been delivered.

Copies of the new forms, as well as point-by-point explanations, are available at my Web site, OurBroker.com.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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