HUD’s New Mortgage Rules

The US Department of Housing and Urban Development (HUD) issued a new regulation designed to empower borrowers in the mortgage process. HUD has dictated a change in the good-faith estimate (GFE) form and the settlement form (HUD-1). These forms are part of the Real Estate Settlement Procedures Act, a law enacted in 1974 to protect the consumer. However, as stated by HUD Secretary Steve Preston, “The mortgage crisis was fueled in part by people agreeing to mortgages that they ultimately could not afford.” It is HUD’s hope that the new changes will help to save Americans approximately $700.00 when closing on a new mortgage.

The GFE form requires lenders to disclose, in plain English, costs that the borrower can expect to incur at closing (loan settlement). This form was required in the past, however, often the estimates made on the form changed as the borrower sat down to the settlement table to finalize their mortgage terms and become homeowners. At that point borrowers feel they are trapped in a point of no return. They will either have to pay costs they cannot afford or risk being in default on a sales contract.

The new GFE must be given to the borrower within three days of applying for a loan. This allows the borrower to “shop around.” Americans can gather GFE forms from several lenders, compare prices, and choose the loan that best fits their needs and budget. The law requires that the GFE must answer such questions as; what is the term of the loan, is the interest rate fixed or can it be changed, if the interest rate can be changed at what point and by how much, if the borrower refinances is there a prepayment penalty, is there a balloon payment (a time when a lump sum is due), what are the total closing costs, and is there a Yield Spread Premium ( a lender payment to a mortgage broker) included in the fees? The law also dictates what lines of the GFE can and cannot change prior to closing and what lines may only change by a maximum of 10%.

In addition to the GFE the HUD-1form was changed by the new law. The HUD-1 is a document given to the borrower at the mortgage settlement. The HUD-1 will now highlight by line each cost listed on the GFE. This allows the borrower to compare the two documents with ease to ensure that the lender is honoring their agreement and there are no hidden costs at the mortgage settlement.

The new GFE and HUD-1 will be required as of January 1, 2010. As a side note, non-conforming mortgages like jumbo mortgages fall outside these guidelines since they’re not covered by HUD’s rules.