September 22, 2023

Wealth Matters: Rushing Into a Mortgage Can Prove Costly

But there are still many ways that buyers or investors can end up paying more than they should. And the extra costs are so embedded in the mortgage documents — and the mortgage rate itself — that consumers have to be vigilant to find them. That is especially true when buyers rush into a deal and do not take the time to make sure they are not paying thousands of dollars extra in closing costs and tens, if not hundreds, of thousands of dollars more over the life of a loan.

“People today are less concerned with pricing,” said Joe Parsons, a loan officer at PFS Funding in Dublin, Calif. “They’re more concerned about, ‘Can you get my deal done?’ There are so many more moving parts.”

Joseph Wilbur, for instance, signed a contract to buy a co-op apartment in Forest Hills, Queens, in March 2012 and made it clear that he wanted to close quickly because he and his fiancée were getting married in August. Mr. Wilbur said the mortgage broker told him that would not be a problem.

The couple finally had their closing on Dec. 13, after spending the first few months of their marriage living with his parents. A few days before closing, Mr. Wilbur said the broker gave him a good-faith estimate — the basic information about the terms of the mortgage and the estimated costs of the loan — that he should have had at the start. Shortly after that, he got the HUD-1 statement, which formalizes the closing costs.

“It became clear early on that the guy wasn’t all that knowledgeable about mortgages for co-ops,” he said. “He made a whole bunch of mistakes.”

But Mr. Wilbur pressed on because he wanted to close and did not want to lose the apartment. “As much as I was concerned that I hadn’t seen something that was telling me I was paying thousands more than I had expected, I just wanted to get through with this,” he said. “The fact that my wife and I were getting married shortly was more of an issue. I didn’t have time to start with a new bank and the whole application process.”

Mr. Wilbur’s story may be a worst-case situation. But what should buyers be aware of and how can they avoid feeling cheated?

Many buyers think the good-faith estimate is the cornerstone of the mortgage process. It estimates the costs, like inspections and title insurance, buyers pay to close on a mortgage. But Mr. Parsons said the document did more to hide fees than illuminate them.

“It’s essentially a useless document for the consumer,” he said. “It lumps a lot of costs into the figures that are carried onto the good-faith estimate rather than itemizing them.”

Rick Allen, chief operating officer of, a Web site that allows consumers to search for different mortgages, ran three sets of closing costs in the first week of January for the same mortgage in the New York area and got three different good-faith estimates.

The estimates for closing costs on a $300,000 house with a 30-year mortgage at a rate of 3.5 percent were between $6,911.78 and $9,742.97. The biggest differences were the origination fee the bank charged, the discount the bank gave — or did not give — for the particular interest rate and the cost of title insurance from a third party. The origination fee and the mortgage credit vary because they are one of the ways the lender makes money from the loan.

“The reality is the consumer needs to do lots of homework,” Mr. Allen said. “The government would say that you need to apply with multiple lenders and get multiple good-faith estimates. But providing an application is not always a painless process.”

He said offers a guarantee on the closing costs within $50. But borrowers would still have to compare various lenders to know that they were getting the best estimate.

Of course, most people don’t do that. Elizabeth Safran, who owns her own public relations company in New York, said she asked a friend in her apartment building whom he had used.

“My main criteria for refinancing was to bake the closing costs into the loan so there would be no cash out of pocket,” she said.

This article has been revised to reflect the following correction:

Correction: January 18, 2013

An earlier version of this article misstated the Queens neighborhood where Joseph Wilbur bought an apartment. It is Forest Hills, not Astoria.

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Mortgages: When Real Estate Agents Make Referrals

That may or may not be a good choice. Either way, you have a right to be informed of any business relationship between the real estate agent and the mortgage broker.

A federal law passed in 1974, and updated with new rules in January 2010, prohibits referral fees, sharing fees (known as “fee splitting”), or giving anything of value, in any mortgage that could end up being sold to Fannie Mae or Freddie Mac, or being underwritten or guaranteed by other federal agencies. Called the Real Estate Settlement Procedures Act, or Respa, the law also requires disclosures of affiliated or shared ownership businesses and a good-faith estimate on closing costs.

“If that real estate agent refers to me, it’s a violation of Respa for me to even take that real estate agent out to lunch,” said Irene Amato, the president of the A.S.A.P. Mortgage Corporation, a mortgage broker in Cortland Manor, N.Y.

When you receive a recommendation for mortgage bankers or brokers, you still need to do your homework, Ms. Amato said. Ask if the real estate and mortgage companies are affiliated. Meet the brokers or bankers in person, if possible, and ask about their professional background and credentials. Find out whether they handle mostly sales and mortgage originations or have broader experience and knowledge of underwriting and mortgage programs, Ms. Amato said. “What are they going to do for the borrower different than someone else?”

Consider, too, how much experience your real estate agent has. “If they don’t have much, what can you expect?” said Mark Yecies, a co-owner of SunQuest Funding in Cranford, N.J.

Although it is illegal to pay for referrals, that doesn’t stop them from being made — sometimes for old friends, experienced professionals or related companies.

It’s worthwhile to know why the referral is being made. Is it because the company is affiliated to the agency? Or because the mortgage professional has a great track record of closing deals? These are important questions, said Gene Tricozzi, the president of the Northern Funding Corporation in Clifton Park, N.Y., and a past president of the New York Association of Mortgage Brokers.

When he is referred to a potential customer, Mr. Tricozzi said, he sees it as a “pat on the back” and an endorsement of his expertise.

Sometimes, though, as Mr. Yecies pointed out, real estate companies that run in-house mortgage brokerages are trying for a second profit center on one purchase, and thereby keep independent mortgage brokers out of the running.

“The buyer is immediately shepherded into the financial-services side of the business,” and sometimes made to feel as if he or she must use that vendor, he said.

“Sometimes people are not getting a competitive rate,” he added. Other times, they may end up with a house above their price range. Ask yourself, he said, “whose best interests are really being protected?”

That said, there can be advantages to the “one-stop shopping” approach, said George S. Wonica, a real estate broker and a mortgage originator at Wonica Realtors Appraisers on Staten Island.

Because he knows the client already, he said, he feels the all-in-one business can create “seamless information” and an easier time of getting the mortgage. “A lot of our customers feel it’s very comfortable” to work with someone they already know, he added.

John J. Vento, a certified public accountant and financial planner who owns Comprehensive Wealth Management on Staten Island, suggests borrowers “make sure the mortgage broker is working as your broker and looking out for your best interest.”

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DealBook: Consumer Bureau Plans New Mortgage Form

The mountains of paperwork are one of the few certainties of home buying.

Now regulators are aiming to cut back on some mortgage documents, as the new federal consumer watchdog announced plans on Wednesday to revamp crucial forms that have long confused would-be home buyers.

During the mortgage bubble, many consumers signed up for loans they could not afford – a problem that nearly caused the collapse of the financial system. Consumer advocates have blamed lenders for doling out credit on a whim and regulators for creating mortgage disclosure documents that failed to alert consumers about risky lending.

“The current forms can be complicated and difficult for consumers to use,” Elizabeth Warren, the Obama administration official who is setting up the Consumer Financial Protection Bureau, said in a statement, adding that the forms are also “redundant and can be costly for lenders to fill out.”

The consumer agency unveiled on Wednesday two prototypes for a “single, simpler” form that will replace the Truth in Lending Act mortgage disclosure and the Real Estate Settlement Procedures Act’s Good Faith Estimate, Ms. Warren said.

The prototypes are seen as a mixed bag for the mortgage industry. Lenders have long complained that the existing forms are overly complicated and costly, although they also are weary of major changes to their business.

The Financial Services Roundtable, a major financial industry trade group, issued a statement on Wednesday praising the prototypes as a “positive step forward for both consumers and financial institutions.”

The new mortgage form would make several tweaks to the Truth in Lending Act document and the Good Faith Estimate, which are two pages and three pages, respectively.

The prototypes combine the existing forms into a two-page document that, according to Ms. Warren, makes the costs and risks of the loan clear. The documents, for instance, highlight “key loan terms,” like the projected monthly loan payment, and underscore “cautions” about risky aspects of the loan, including prepayment penalties and balloon payments.

“This is about empowering consumers,” Ms. Warren said on a conference call with reporters. “With a clear, simple form, consumers will be in a better position to answer two basic questions: Can I afford this mortgage, and can I get a better deal somewhere else?”

Still, it could be more than a year before consumers will be able use the new form. The consumer bureau said it would first subject the two prototypes to “testing” over the next several months. The testing will include one-on-one interviews with consumers, lenders, and brokers in six cities, including Chicago and Los Angeles.

The bureau will then put the finishing touches on a single document, which may become a hybrid of the two prototypes.

Under the Dodd-Frank financial overhaul law, the consumer bureau must formally propose the new form by July 2012, although bureau officials said the process might continue into the fall of that year.

“We’re going to keep testing this thing,” Ms. Warren said.

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Mortages: Problems With New Good Faith Estimate Forms

But industry experts say the three-page, line-by-line disclosure — which lenders must provide within three days of receiving a loan application — still falls short of telling borrowers exactly what they will be paying. Some in the mortgage industry complain that it can even distort or obscure the true cost.

The new Good Faith Estimate form “is better than it used to be, but it’s not up to snuff,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a consumer advocacy group. “There are things that need to be unbundled and made clearer,” she said.

The disclosure form, designed by the Department of Housing and Urban Development, became mandatory on Jan. 1, 2010, under the Real Estate Settlement Procedures Act that emerged from the mortgage crisis.

With the exception of certain fees, for services like title services and appraisals, lenders are bound to the costs they quote, notably those for origination and interest-rate locks.

The form also lists the services a borrower can shop around for, versus those selected by the lender. Charges for required services that the lender selects or that the borrower shops around for, using companies selected by the lender, can rise no more than 10 percent at closing. (An exception is fees for escrowed amounts and property taxes, costs that are beyond the control of the lender.)

The revised form, according to a consumer compliance alert issued last year by the Philadelphia branch of the Federal Reserve, is intended “to make the mortgage loan process more transparent to consumers, with fewer surprises at closing” in the form of higher fees.

But there are notable gaps.

The form, for example, does not break out seller-paid costs, such as transfer taxes, which are levied when a property changes hands, instead lumping those costs into the “total estimated settlement charges” figure at the bottom. (Transfer taxes, based on the sales price, vary by state; the combined New York State and city rate is 3.025 percent.)

As a result, borrowers are sometimes unknowingly looking at a larger final figure than they will actually have to pay. Nor does the new form account for down payments in the “total estimated settlement charges” column. Borrowers might then be looking at a smaller final number than they will need to pay.

This lack of clarity, according to Melissa Key, a spokeswoman for the Mortgage Bankers Association, can lead to delayed closings or even the loss of a locked interest rate.

Amid the uncertainty, a growing number of lenders have been furnishing consumers with their own custom “work sheets” as a supplement to — or in a few cases, in lieu of — the required disclosures, according to Brian Sullivan, a spokesman for the federal housing department. They were being used “to weed out window shoppers and borrowers who haven’t provided enough information for the lender to be required to furnish a G.F.E.,” he said.

But these work sheets may differ from the Good Faith form, further adding to the confusion.

Because Good Faith Estimates are binding on the lender, Mr. Sullivan said, some lenders appeared to be violating the new lending regulations by refraining from issuing the estimates, to avoid being locked into costs. He said that HUD would “intercede on the consumer’s behalf” if asked by the borrower, but only after lenders had been given a chance to correct any violations.

Still, the form may get yet another overhaul, by the new Consumer Financial Protection Bureau, itself part of the regulatory overhaul signed by President Obama last July. The bureau has said that it is considering revising the revised G.F.E. form to make all costs clearer to the consumer.

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