Many buyers have seen last minute mortgage-settlement cost shocks and mystery junk-fee charges that pop up last minute or the "good-faith estimates" from lenders saying that closing costs would be about $2,000, but doubled to $4000 on the final settlement sheet.  Worse - the Buyer had to come up with the extra money to cover the surprise costs or the sale or refinance just isn't going to happen. 

But drastic changes are coming. On January 1, new federal rules adopted by the Department of Housing and Urban Development will implement pro-consumer real estate and mortgage transactions across the country.  The bottom line? Lenders who lowball fees - and/or "surprise" Buyers at the last minute with extra fees, will have to pay these fees - instead of the consumer.

Also, loan charges and settlement fees will be clearly stated on a revised, consumer-friendly version of the good-faith estimates (GFE).  Lenders must provide this GFE to the borrower within three days of their mortgage applications.

Charges must fall into three categories on the form:

• Fees that cannot increase from upfront estimates to final closing. These include lender's or broker's origination fee, processing and underwriting charges, (a huge source of junk fees),  lender's or broker's loan discount "points", and local transfer taxes.

• Fee estimates that can, may increase by as much as 10 percent from upfront estimates if they are on a lender approved list.  Common charges here include appraisals; lender's title insurance and settlement services where the borrower chooses a firm on a list approved by the lender; owner's title insurance when the borrower chooses a company on the lender's approved list; and recordation charges by local governments.  Keep in mind, these are combined fees of charges that cannot increase more by more than 10%. Total.

• Fees that can increase without limit, due to factors beyond the lender's control and come from non-lender approved lists.  These include lender-required services where the borrowers choose a title insurance, escrow or other settlement company that is not on the lender's list; the cost of homeowners' hazard insurance; daily interest charges on the loan; and the amount of the initial deposit by the borrower into an escrow account.

Other benefits to the new rules:

The new good-faith estimate encourages loan applicants to shop and compare lenders. The form includes space for comparing up to four competing lenders' GFEs on interest rates, rate locks, prepayment penalties or balloon payments, among other factors. The cost estimates you receive from each competitor are required to remain available for 10 business days. Interest rates can change unless locked by the lender and borrower.

The new GFE rules include  an updated standard closing-cost statement, also known as the "HUD-1."  The revised HUD-1 is programmed into the GFEs allowing consumers to directly compare, line by line, what they were told upfront by a lender to the actual close costs.

The new rules requires disclosure of fee splits between the insurance underwriter - the company actually insuring the title - and the title agent, who is often the settlement agent. Consumers may be stunned to learn that in some markets, 80 percent to 90 percent or more of the premium they pay at closing actually goes to the title agent - and not the insurance itself.

Source: Class on the new rules and HUD and Dept of Urban Development website.