The Problem with Good Faith Estimates
Rhonda Porter on 05 27, 2007
The document that savvy shoppers use to determine which loan originator they will work with is called a Good [photopress:beef.jpg,thumb,alignright]Faith Estimate. It is supposed to be just that an Estimate of the rate and closing costs associated with the loan provided in Good Faith by the Mortgage Professional. (You are not a savvy shopper if your just get your quotes over the phone and do not obtain a GFE or if you depend solely on APR). Sounds pretty rosy, doesn’t it? The Mortgage Professional is promising you a nice rate with low closing cost and you’re going to select this person based on rate and cost alone. Relying on the Good Faith Estimate to get you the best deal on a mortgage could leave you the same feeling as the “where’s the beef” lady from the Wendy’s commercial.
Here’s why:
- The rate being quoted at the moment the borrower is shopping is not the rate they will be getting unless they are willing to lock in at that moment. If the shopper called one lender Thursday and another on Friday of this past week, the rates would be entirely different (even if they were calling the same Mortgage Professional). Rates change and the Good Faith Estimate is not a guarantee of rate.
- Unless the borrower is actually approved, meaning they have supplied all of the supporting loan documents required from underwriting, it is not 100% certain what program the borrower will be using for their mortgage. For example, if the buyer winds up not qualifying for a conventional program and the Mortgage Professional has to broker the loan, there may be more cost involved. The Good Faith Estimate alone is not a guarantee of cost.
- The Good Faith Estimate is easily manipulated by Loan Originators. Some LOs might use short term rate locks for their quotes (shorter term cost less than a longer term lock) or they go skinny on the prepaid items without having an estimated closing date from the borrower.
- Some LOs may hide a prepayment penalty on the Federal Truth in Lending (a prepayment penalty does not show the Good Faith Estimate).
- The LO does not know what the exact third party cost will be. Title and escrow are dictated on the purchase and sale agreement and the appraisal type will not be formally established until the property address and the transaction has been re-submitted to underwriting. All of these fees may vary.
- The Good Faith Estimate may be revised during the transaction. Once a purchase and sale is obtained, the rate is locked and the third party closing costs come in, the GFE is updated and reproduced for the borrower.
Back in my past life in the title and escrow industry, when a borrower would bring their GFE to closing and would catch a significant discrepancy between the estimate and the actual closing costs reflected on the HUD-1 Settlement Statement, I would recommend that the borrower contact their LO…more often than not, the LO would state “hey, it’s just an estimate!” Ouch. Stick ‘em to it.
What’s a borrower to do?
- Ask your Mortgage Professional to guarantee the Good Faith Estimate in writing. Some LOs will run in fear or balk at doing this. Currently this is not standard practice in our industry. I have no problem guaranteeing my GFE…if it is before a client is approved, then the guarantee would have to be subject to the loan approval. You’ll weed out many LO’s right off the bat just asking for this.
- Request to receive a copy of your estimated HUD-1 Settlement Statement prior to your signing appointment at the escrow company. This will give you time to compare your Good Faith Estimate to the HUD and to contact your Mortgage Professional should you have any questions or see any discrepancies. This is not the standard practice in our industry either. Sometimes it is difficult for me to get an estimated HUD from the escrow company to review before my clients see it (I like to make certain that the borrowers I’m working with are seeing a HUD that reflects my GFE).
- Bring your Good Faith Estimate with you to your signing appointment at the escrow company to compare. (It’s possible the escrow company may not have received loan documents in time to provide you with the estimated HUD as mentioned in step 2 above).
This is why a borrower should work with a Mortgage Professional they trust, or who has been referred to them from someone they respect, over the lowest rate and cost shown on a piece of paper without a guarantee. Plus, there is so much more that goes on with a transaction besides obtaining a Good Faith Estimate and making sure the cost match up to the HUD. That’s just the beginning and the end…like buns with no hamburger. What’s equally (if not more) important is all the steps in the middle and the planning that was used to develop a specific mortgage plan.
Is it the Memorial Day Weekend, or the fact that I started a serious diet two days ago that I have hamburgers on my brain? 
Don’t be left at the closing table wondering why the cost or rates are different than your Good Faith Estimate. Do “beef up” your good faith esitmate by getting a guarantee from your Mortgage Professional. Any LO can do this, they don’t need to belong to a club or have a special designation…most won’t. Avoid having to ask “Where’s the beef?” at the closing table.
A tip of the hat to Vern for requesting this topic. 
About the Author: Rhonda Porter
- Author's website: http://www.mortgageporter.com
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116 Responses to “The Problem with Good Faith Estimates”
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what will the guarantee ensure? If one goes to escrow and the the costs are more….does the LO pay the difference? I hadn’t heard of this as an option. The LO we used was very good and was always showing “the worst case estimate” so there was no surprises.
Very good advice to bring the GFE to the closing for a comparison.
Currently, if the cost are more when you go to closing, the buyer can try to force the LO to pay the difference. I always use “worse case” on my GFE’s too, along with common sense. I let the borrower know upfront that this is how I prepare my GFEs.
I recently had a transaction close where I quoted the wrong rate for a second mortgage. It was a rushed situation (worthy of it’s own post). My client never knew. I ate the cost (it was in the consumers favor)…doesn’t taste great…but I do stand by my word.
I always recommend my customers compare the 800 section of the GFE.
That takes out the errors (intentional or accidental) on the estimated costs.
Unfortunately most people just look at the monthly payment and APR.
The one area I see the most misinformation is in estimated taxes…
In our area the taxes will be calculated on the sale price- not current taxes. That alone can make $100s of dollars difference in a monthly payment.
Barry, you’re right. Plus, some LOs will not use enough months in reserves for taxes. If I don’t have the actual taxes, then I use 1.25% of the sales price for property taxes to esitmate the annual taxes.
Nice post, Rhonda.
The main problem with this is that it is not at all easy for someone to find and confirm a mortgage “person” that one can trust. I looked around and asked a number of people, and I only found one homeowner who had a good enough experience with a broker that she was willing to recommend her. I thought the broker was okay, I had reservations. I certainly didn’t trust her, beyond her obvious displayed competence.
Particularly for first homeowners, which happen to be the ones in all likelihood with the greatest need, it is very difficult to find someone who you can trust. Barring that, of course you should rate and fee shop.
Good advice on the guarantee, however. I didn’t know you could ask for that, and that would be an excellent weeding out question.
Now someone he has an opinion on the NWMLS hiding the days on the market stat can hit on Vern’s final request in another post!
Thanks, Biliruben. I’m going to work on an “official” guarantee because it is something that I will do on request… and it’s something that I all ready do without my clients even knowing it…so why not promote it?
Maybe if I have a guarantee, that may help with the trust issue for potential clients who do not know me.
Rhonda,
I’m with Barry regarding the 800 series. Is there a requirement that the lender fees ALL show in that 800 series, so people can easily segregate lender fees from other 3rd part fees?
That’s where all of the fees associated with the mortgage (except for title, escrow and reserves) are suppose to be. And, this is the only true way to compare lenders as far as rate/fee are. Some lenders might go low on the title and escrow and the consumer should ignore that because the lender does not have control (with a purchase) of who the title or escrow will be and they do not control title or escrow rates.
Hi Ardell,
Here is a link to the HUD website. RESPA tells us which lines are used for specific charges.
http://www.hud.gov/offices/hsg/sfh/res/sc3secta.cfm
Line 801. What belongs here is the loan fee paid to the lender. Lender is defined as the entity funding the loan.
If a consumer is using a mortgage broker, the mortgage broker’s fee belongs on line 808. or below
The mortgage broker’s fee does not go into line 801.
Would there be some problem putting together a post that went through a GFE and HUD1 line by line, listing reasonable ranges and highlight spots for potential abuse, Jillayne or Rhonda?
I did compare my GFE to my HUD1, but it was at closing, and I recall being a bit confused trying to match things up. The bottom line was what I expected, so I didn’t ask as many questions as I probably could have.
I might even be able to dig up my old docs if you wanted to use mine as an anonymous example.
Biliruben, I would be happy to do the post. You can email or fax your GFE/HUD to me.
Here’s a site with a sample blank HUD 1.
A good exercise is to take the GFE and fill in a sample HUD 1 before closing, so you you know what you are expecting to see on the one you get from escrow, and in the format you will receive.
Makes the final comparison a lot easier if they are in the same format.
You fill out page two first and then carry that total over to page 1.
Cool, Rhonda.
It might be a few days before I find the time to dig my docs up0 and turn them into electronic form. I’m juggling an infant at the moment, and time is limited.
If you have a ready example, feel free to use it.
Jillayne,
Thanks for the explanation. Since 801 is generally the best place to pick up the expense when doing your taxes, I didn’t like when 801 was blank and the 1% origination fee charged by the broker was listed on 808. Since tax instructions call it an “origination fee”, seemed to me that the buyer could miss the tax deduction if it was down on 808, and I had escrow move it up.
Do you know for tax purposes, does it matter if the 1% is charged by the broker or the underlying lender with regard to its deductibility?
At least now I know why it was down on 808.
Jillayne, how do you define the “mortgage broker” fee on 808? Or, how do you define “mortgage broker” in that example. If I charging 1% (discount/origination) and I’m brokering the loan, I would still put it in line 801 or 802.
If the mortgage broker (meaning the company, not the originator) is charging a broker fee, then the fee would go on line 808.
I think real estate terms can be confusing for consumers. Many of the words have multiple meanings and can vary depending which person in the transaction you’re talking to.
Biliruben, be careful while you’re juggling infants!
I can dig up a HUD with a GFE. No problem.
Hi Ardell,
We would have to ask a tax person about broker fee v. loan origination fee. I think there’s a guy who works with Reba with a tax background. Michael Lindquist.
Hi Rhonda,
Your company is a hybrid: a correspondent lender, meaning, you’re licensed as a broker and can broker and also close with your correspondent lenders.
If you are brokering the loan, brokers and originators disclose their fee on line 808.
The only fee that belongs on line 801, when brokering a loan, is the fee the LENDER is charging. Lender is defined as the entity with the money to lend.
If you’re closing it under your broker’s warehouse line, refer to the contract your broker has signed with the bank. Your compliance person will know the answer to this.
Yes, many of the words have different meanings. In any of the federal and state laws we operate under, there is a “definitions” section just after the preamble to the law.
801 lender fee
802 discount
808 broker fee (company or originator)
These lines are not interchangeable.
Jillayne,
Are you saying that if I’m brokering a loan (not closing the loan in Mortgage Master’s credit line as a correspondent) that my origination or discount fee would go on line 808?
Yes.
I’m not the one saying it.
http://www.hud.gov/offices/hsg/sfh/res/sc3secta.cfm
Discount fee that a consumer pays to a lender to lower the interest rate of the loan goes on line 802.
I have a feeling we are missing a conversation off-blog.
Great post Rhonda, interesting point on the guarantee. I only have on lender in my pool that “verbally” says he’ll stick to his GFE. I’ve never pushed anyone for it in writing.
I do recommend that my clients ask for a “complete GFE” with all prepaids and YSP included. When the buyers ask for that the LO knows they’re serious and that they will be shopped. some will just drop out at that point. And that’s ok.
You could be right, Biliruben. I’m not sure why Jillayne brought up comment 9 and where the origination/discount fee goes. Bottom line, consumers need to add up the 800 section and use that to see how much the rate is costing them. Doesn’t matter where the fee is (mathmatically)…it’s the sum that’s important for the consumer.
I have often guranteed the GFE for my clients, but I have to review it first.
Hi Biliruben,
Sometimes Rhonda and I email each other off blog but not this time.
This particular Q&A is a very, very common question from all loan originators.
One of the reasons why there’s questions surrounding the use of lines 801, 802, and 808 is because our state and federal government do not enforce their laws all that well. Without enforcement, there is still SOME incentive to follow the law…..depending on many factors.
Like I have said over and over again in other posts, the system by which we originate loans is broken in many places.
HUD never has had nor will they ever have enough money to regulate every single loan. Our government was never designed for that. The industry does not self-regulate. I advocate MORE industry self-regulation, some people want to let the invisible hand of the market take care of regulation. Time will tell. There are many solutions.
It will be a very interesting fourth quarter of 2007 when the LOs are forced to take their competency exam, some kicking and screaming. I will report from the front lines for you
“It will be a very interesting fourth quarter of 2007 when the LOs are forced to take their competency exam”
Only LOs who work for Mortgage Brokers will have to take the compentency exam. LOs who work for the big bank mortgage companies or credit unions will not have to prove their competency via the state exam.
Keith, thanks!
I’m glad you appreciate this post.
Biliruben, I agree that some of the comments feel out of place on this post. I’m not involved in any “off record” conversation. I gues sometimes post do take on a life of their own.
That’s cool. Things got quiet, and I just assumed that two mortgage professionals wouldn’t want to air their disagrements on stage.
Na… my Dad went into the hospital this weekend…it’s been pretty tough. On top of that, I volunteered to “help” with at my son’s graduation. I’ve found myself working on a 108 screen powerpoint presentation of the students. I have NEVER done anything like this before (it’s actually pretty cool). Between Dad, volunteering and, oh yeah…I work (and I’m a Mom of 3 teens)…I’ve been busy.
Jillayne and I have known each other for a very long time. We use to work in the title industry together (at the same company, different counties). I don’t consider her as a “mortgage professional”, she does not originate mortgages (that I’m aware of). She teaches and is promoting certification thru her company; specializing in ethics. Licensing has been a huge benefit for her, I’m sure!
And, the lower a mortgage professional, or retail mortgage salesperson, seems, the more they need Jillayne and her company.
I’m sure Jillayne will correct me if I’m wrong.
I don’t have a problem with not seeing eye to eye if it promotes good, professional conversation that helps consumers.
Hi Biliruben and Rhonda,
Yes, I agree! Differences in opinions often result in people testing their own assumptions, being reflective, and finding soures to back up their beliefs. This usually results in positive consequences.
If we all agreed on everything, we’d have a pretty boring blog.
Oh crap, I just broke my own rule because I AGREED with you!
AAAAhhh! Quick! Must find something to disagree with….!
Yeah, Rhonda is correct, I am not a loan originator. However, I have worked in real estate and mortgage lending for over 20 years in many capacities. Today, among other things, I research, write, teach, and consult on mortgage lending compliance issues.
So that means one of the ways I spend my time is teaching loan originators how to stay in compliance with the state and federal laws that govern their business practices.
Currently I’m teaching an exam prep course for loan originators who are studying to take their competency exam, which they must pass sometime between now and the end of the year.
Hi Rhonda,
I hope your dad makes a speedy recovery. I will keep you in my thoughts.
For my daughter’s 8th grade graduation (must everything be ritualized?) they also put together a slide show, but guess who put it together? The 7th and 8th graders as part of an in-class powerpoint assignment for an elective class called “media.” Gee, when I was in 7th and 8th grade, we had to take woodshop and home-economics.
Thanks Jillayne. When you read a post, are you looking for something to disagree to bring out a point you feel may be interesting?
Jillayne,
I’ve researched and confirmed that lines 801 and 802 are for origination/discount points. Period. 808 on the GFE/HUD is not. Even the HUD link you refer to above confirms that. It is a vague broker fee.
I’m sorry to beat up this point you’ve brought up. I don’t want wrong information on a post I’ve prepared for consumers.
Bottom line, consumers need to add up all fees in section 800 to know what mortgage costs are associated with the rate.
OK Guys,
Here is the messier part.
If Jillayne is correct, then many are doing it wrong, possibly to the BENEFIT of the consumer. Points are often deductible, while loan servicing costs often are not.
Clearly the 1% origination fee belongs on line 801 from the tax benefit standpoint, which is why I had escrow move it up there when it showed on 808. I’d rather show it where the buyer can use if for income tax purposes, especially given I’m absolutely positive many show it there as Rhonda suggests.
When you have a gray area…lean on the side of the client’s advantage or get a very strong legal opinion if you are wanting to lean on the side of the client’s disadvantage.
I am not an LO or an accountant or a lawyer. Just someone who always sees the 1% origination fee on line 801, regardless of the meaning of “lender”. Match it against the IRS code (504 I think) and you will see why.
The short of it…I’m on Rhonda’s side of the table where ALL 1% origination fees show on 801 where it is clearer that the borrower can deduct it on his income taxes. Not sure my vote counts though, Rhonda
Hi Rhonda,
“Thanks Jillayne. When you read a post, are you looking for something to disagree to bring out a point you feel may be interesting?”
Not at all. If I see mis-information that I know for sure I am 100% correct on, I feel that I have a duty to correct mis-information, and will provide references for further discussion.
RCG Readers,
The law governing the use of the Good Faith Estimate and HUD I Settlement Statement are not vague at all. The laws are very direct and easy to understand.
For tax advice, consult your favorite CPA or tax attorney.
Here is the WA state administrative code:
http://apps.leg.wa.gov/wac/default.aspx?Cite=208-660&full=true
do an edit/find on the term “808″ and it will pop up for you.
It falls under:
208-660-430
Disclosure requirements
(4)
(4) How do I disclose my mortgage broker fees on the good faith
estimate and settlement statement? You must disclose or direct the
disclosure of your fees on lines 808 through 811 of the good faith
estimate and HUD-1/1A settlement statement or similar document.
On the GFE and the HUD I, loan origination fee (line 801) is defined
as the fee that the lender collects, not the broker. Lender is defined
as the entity with the money to lend. A mtg broker can call his/her
fee an origination fee, but they would need to call it a broker
origination fee or broker fee and show it on line 808 (or 808-811) and separate it out from whatever shows on line 801. Consumer then can see the fee that they pay to the lender and the fee they pay to the broker.
This is from the HUD website.
http://www.hud.gov/offices/hsg/sfh/res/sc3secta.cfm
801. Loan Origination: This fee is usually known as a loan origination
fee but sometimes is called a “point” or “points.” It covers the
lender’s administrative costs in processing the loan. Often expressed
as a percentage of the loan, the fee will vary among lenders.
Generally, the buyer pays the fee, unless otherwise negotiated.
808. Mortgage Broker Fee: Fees paid to mortgage brokers would be listed here.
A loan originator could not choose to place fees on lines just to provide a consumer with more lucrative tax benefits, or direct an escrow closer to do this. HUD and the state did not write that into the law. If a mortgage broker wants to do this, I seriously advise seeking legal counsel and having a written statement from your attorney on file.
Leaning towards the benefit of the consumer here might result in negative tax consequences for that consumer down the road. So again I restate: For tax advice, consult your favorite CPA or tax attorney.
Approx 85% of my business is not brokered, it’s in our credit line as I am a Correspondent Lender. However, I have never used line 808 for orig./discount fees. 808-811 has been used for mortgage broker fees such as funding or admin and goes directly to the broker. Not to my company. I’m going the check this out more, Jillayne.
Also, if HUD has not madated this: “A loan originator could not choose to place fees on lines just to provide a consumer with more lucrative tax benefits, or direct an escrow closer to do this. HUD and the state did not write that into the law”. Where are you getting this information?
Why are you all arguing this? It is completely off topic.
The focus of the post is to educate a consumer about settlement charges and how to insure that the settlement charges disclosed on a good-faith-estimate are consistent with the final HUD-1 settlement statement.
What the heck is the hidden agenda here?
I am checking actual HUD 1s. Lines 808 through 811 are used for the servicing fees of both the underlying lender and the broker, that are generally not tax deductible. Tax Service fees, Underwriting fees, Doc Prep fees, Flood Cert, etc…
801 and 802 are used for the points charged by both the underlying lender and the broker which generally are tax deductible.
Each clearly identifies the name of the company charging the fees and clearly the two areas have both companies there. The origination fee on line 801 is a broker charge. The discount fee on 802 is the underlying lender on the one I’m looking at right now.
So far what I am seeing matches what Rhonda is saying, all points regardless of who charges them are on lines 801 and 802. The consumer can clearly identify who is charging the fee each time. Who is charging it does not seem to influence which line it appears on, it’s about whether or not it is a “point” or a servicing fee.
Jillyane, it is hard to tell in comment 37 where you are talking vs. where you are quoting. I think as long as the HUD 1 clearly identifies the name of the entity charging the fee, points should go on 801 and 802.
Brian, do you show your origination fee in 801? Seems 808 and below are flat processing fees, and not a % of loan amount.
Hi Brian,
This is a great dialogue because it shows raincityguide readers the wide variety of ways people in the real estate and mortgage industries view and interpret the federal and state laws governing mortgage lending.
I originally started this thread after reading comments #3 and #7. The 800 series on the HUD I is not the only place for consumers to scrutinize. It’s important for consumers to compare the entire GFE with an estimated final HUD I prior to entering the signing room.
Hi Ardell,
Here is a re-post, with “quotation marks” around state and federal law.
RCG Readers,
The law governing the use of the Good Faith Estimate and HUD I Settlement Statement are not vague at all. The laws are very direct and easy to understand.
For tax advice, consult your favorite CPA or tax attorney.
Here is the WA state administrative code:
http://apps.leg.wa.gov/wac/default.aspx?Cite=208-660&full=true
do an edit/find on the term “808″ and it will pop up for you.
It falls under:
208-660-430
Disclosure requirements
(4)
“(4) How do I disclose my mortgage broker fees on the good faith
estimate and settlement statement? You must disclose or direct the
disclosure of your fees on lines 808 through 811 of the good faith
estimate and HUD-1/1A settlement statement or similar document.”
Jillayne says: On the GFE and the HUD I, loan origination fee (line 801) is defined as the fee that the lender collects, not the broker. Lender is defined as the entity with the money to lend. A mtg broker can call his/her fee an origination fee, but they would need to call it a broker origination fee or broker fee and show it on line 808 (or 808-811) and separate it out from whatever shows on line 801. Consumer then can see the fee that they pay to the lender and the fee they pay to the broker.
This is from the HUD website.
http://www.hud.gov/offices/hsg/sfh/res/sc3secta.cfm
“801. Loan Origination: This fee is usually known as a loan origination
fee but sometimes is called a “point” or “points.” It covers the
lender’s administrative costs in processing the loan. Often expressed
as a percentage of the loan, the fee will vary among lenders.
Generally, the buyer pays the fee, unless otherwise negotiated.
808. Mortgage Broker Fee: Fees paid to mortgage brokers would be listed here.”
Jillayne says: A loan originator could not choose to place fees on lines just to provide a consumer with more lucrative tax benefits, or direct an escrow closer to do this. HUD and the state did not write that into the law. If a mortgage broker wants to do this, I seriously advise seeking legal counsel and having a written statement from your attorney on file.
Jillayne says: Leaning towards the benefit of the consumer here might result in negative tax consequences for that consumer down the road. So again I restate: For tax advice, consult your favorite CPA or tax attorney.
I don’t see where comments 3 and 7 say anything about line 808 spefically. If anything, comments 3 and 7 support what the intent of this post is all about and the message that I’m trying to not get lost all of these comments… consumers need to focus on the TOTAL costs of section 800 to see what the rate cost. Whether or not it’s on 801, 802 or 808, 810 or 811…it does not change what the total cost for the rate is.
Hi Rhonda,
How is your dad doing? I hope he is doing well.
We actually agree about the use of 801 when the broker is closing as a correspondent lender.
Regarding comment #38, correspondent lenders, when closing the loan under the name of their sponsoring lender, get to show their fee on line 801. This is one of the reasons why many brokers aim to become a correspondent lender. Now they can better compete against banks when consumers are shopping for a loan and comparing fees.
When a correspondent lender brokers out to a different lender, the fee that benefits the broker/LO is shown on line 808 and the entity funding the loan, the lender, their fee is on line 801.
Rhonda says: “Also, if HUD has not madated this: “A loan originator could not choose to place fees on lines just to provide a consumer with more lucrative tax benefits, or direct an escrow closer to do this. HUD and the state did not write that into the law”. Where are you getting this information? ”
Jillayne’s answer: There is nothing in RESPA that allows loan originators to arbitrarily move fees from line to line for the tax benefits of the borrower. If that were the case, then why not show any or all fees on line 801 so everything could be deducted?
As compliance consultants, our firm does not recommend this as a standard business practice. An originator/broker that would like to do this, is best served by seeking legal counsel and keeping a written legal opinion on file in the event of an audit by your state regulator.
Seems to me that if moving it to 808 makes it less likely to be taken as a deduction, that is not a small factor for the consumer. It could cost them thousands of dollars. Isn’t that more important than whether a $16 fee ends up as $20.
I’ve had this discussion with accountants in the past, and while the consumer could conceivably argue with the accountant or tax preparer that the 808 number is “in this case” deductible, how many consumers would know to argue the point?
It’s like relying on the consumer to know enough to argue with the tax preparer, when the points are paid by the seller, and deductible by the buyer. Another discussion I’ve had with accountants who are surprised when I am correct. Are consumers really expected to know enough to argue with accountants? Isn’t it easier to put the deductible item on the line the accountant will more likely look on?
Rhonda,
Is this correct? 802 “discount points” are always a charge by the underlying lender. Is that correct? So it is only the 801 origination fee we are talkng about.
For those reading this, the tax treatment of 802 is different for a refi vs. a home purchase. Not usually 801, but I’ll have to double check that.
I think it is valuable to the consumer to see that everything is not as cut and dry as one would like. Makes it even more important to have a professional you trust, when gray areas can affect a buyer to the tune of thousands of dollars. A “point” on an $800,000 purchase is an $8,000 tax deduction. Not something to sneeze at.
“Brian, do you show your origination fee in 801?”
Great question, Ardell. My answer will sound flippant and that is not my intention.
The answer is that I do what ever the client’s CPA and the lender’s compliance officer tell me to do. My expertise, using a mortgage to create real after-tax wealth, relies on guidance from those two individuals.
Rhonda’s post was basically this: “If your GFE says your being charged X, and the HUD-1 is actually x+15%, you’re getting ripped off. Here are six stupid mortgage broker tricks to avoid so that x+15% doesn’t happen to you.”
That’s good advice!
Rhonda, Jillayne,
How do LO’s advise clients on whether to pay closing costs or not? The rates are now inching upwards and are at 6+% for 0 points on a non jumbo loan. If the client said they had a plan to stay put in the home for say 5 to 7 years, and given where interest rates are today, would you say avoid paying closing costs, and just wait a bit (say 6 months) to re-fi? This is the advice I am getting. Paying closing costs would mean waiting atleast 2+ yrs to break even.
Hi Sandy,
It depends on several different factors, which you’ve touched on.
1. How long you plan to stay in the home?
2. How long it will take to break even?
3. Are closing costs being paid by the seller?
Just to name a few. A Mortgage Professional can help you determine what your best plan is after reviewing what your financial goals are.
Sorry for the short answer. I’m taking off to go see my Dad in the hospital who’s not doing well. I’ll be away from the blog and work for a while today.
Yikes, Sandy. I just read post again before shutting down. Why on earth would your refi in 6 months? There is no guarantee of what the rate will be. With my mortgage practice, unless you have a financial event coming up or you’re subprime, 9 times out of 10, I would advise that you select a mortgage that you do not have to refi out of. 6 months seems nutty to me…but I don’t know your scenario. If the LO says they are refinancing you at no-cost, the cost is build into your rate. You are paying for the refi either in rate or equity. I’ll be back later. Good luck!
Another question, I seem to be hitting post too soon!
For a new construction when does the appriasal typically happen? I realize the appriasal has to be submitted to the banks and that takes time. But what stage can the home be before an appraisal is done? Note that I dont want a half baked appraisal and then pay to have it done again..
Hi Brian,
Regarding comment #47, what is your standard practice when the lender’s instructions and the CPA’s advice are different?
What is your standard practice when the CPA’s advice runs contrary to state and federal law?
If a lender is advising you to complete the GFE and HUD different from your state and federal law, I encourage you to keep a written and signed statement from the lender on file, to that effect. If the lender will not put this in writing, this is a salient.
This might sound flippant, however, a mortgage broker taking advice from a CPA on how to use or mis-use forms that govern the practice of mortgage lending is risky. As Sponge Bob would say, “Well, good luck with that.”
Hi Sandy,
First, let’s take the question about your appraisal. Are you purchasing a home in a subdivision from a builder with lots of other similar homes being finished around the same time?
Second, there is no such thing as a loan without closing costs as Rhonda’s answered in comment #50. Costs are built in to your interest rate. The one exception is the new Bank of America promo. They are eating the loan costs in order to bring you in as a bank customer so they can sell other bank products to you at a later time.
The real answer here is that there ARE closing costs. You’re paying for them in the form of a higher interest rate.
In terms of tax planning strategies and the deductability of costs associated with your loan, please consult with a tax attorney and a CPA.
It sounds like Rhonda will be back later with more insight for you.
Rhonda I will keep you in my thoughts.
Rhonda: I hope your Dad feels better, my thoughts and prayers for his recovery
Jillayne:
The home is in a large community being built now. This home though may be among the first few to get done and close.
Jillayne:
Sure I understand no closing costs implies higher rate. But here is what I am debating I guess:
Last yr towards the end of the yr the rates went down by almost 0.5 %. In peak summer it was 6.25% and end of the yr it was 5.75%. If that happens this year too, would I be better of re-fin end of yr and paying closing costs then, and accepting a slightly higher rate now? Thoughts?
Jillayne,
I listen to the lender first and advise the CPA that the lender won’t allow it. I trust lenders’ compliance departments to comply with federal and California law and consider their lender’s instructions as written record. I suppose the “belt and suspenders approach can’t hurt” you offer can’t hurt. Your advice on legal compliance is second to none. You clearly know lending regulations.
Why are you offering a consumer advice about how to structure a specific loan transaction on Rhonda’s post ?
“The one exception is the new Bank of America promo. They are eating the loan costs in order to bring you in as a bank customer so they can sell other bank products to you at a later time”
Bank of America has stated that this loan program has slightly higher rates (hence some costs are built in). Great marketing for BOA.
Hi Brian,
I regularly teach classes for consumers on how to understand their good faith estimate, how to compare it with their estimated final HUD I, and how to understand differences between products, services, rates, and fees offered by different types of lending institutions.
“Why are you offering a consumer advice about how to structure a specific loan transaction on Rhonda’s post ?”
Because the consumer directed her question to both Rhonda and I. Now, It’s my turn to jet out of here for an appointment in Seattle. It looks like Rhonda is back and I know she is highly capable of helping Sandy answer her questions.
Question again for Jillayne or Rhonda:
If the buyer agent offers a discount (% of their commision) at closing to the buyer towards upgrade and closing costs, can this be used towards the pre-paid items like real estate taxes and hazard insurance? If there is still a balance left at closing, can this be used to pay additional months of pre-paid items?
Sandy, what does your Mortgage Professional say about paying additional months of pre-paid items?
Rhonda: My Mortage professional says no it cant be done.
I want to stay on the right side of the line here, but all the same I dont want to lose the credit.
Sandy, then you should not have the closing costs priced into the rate. Use the credit to buy the rate down.
Here’s a post I wrote about a LO using the extra closing cost credit to pad their pockets instead of benefiting the buyer or http://www.raincityguide.com/2007/04/17/are-you-leaving-too-much-on-the-table/returning it to the seller:
If you want to make sure that the credit is used, depending on how much credit there is, make sure it used to buy down the rate (hey…then you won’t have to refi in 6 months) and pay closing costs instead of building it into the rate.
As a disinterested party who obviously doesn’t know even half of what’s going on, it sounds from this discussion like you might want to talk directly with a different mortgage “professional” or two, if only for a second opinion.
The one you are using sounds like he might be considering his own interests a little more strongly than your interests.
I agree, Biliruben. It’s difficult to give Sandy (or anyone) advice when you’re getting “bits” of information. It could be that her mortgage person is providing a brilliant strategy, or maybe she needs to work with someone else. This morning when I was responding to Sandy, I was wondering…what if I’m dealing with two different Sandy’s?
If she’s one in the same and the LO is suggesting a no-closing cost mortgage (higher rate) so she can refi in 6 months because the LO thinks rates will be better (a nutty proposition) and is not using all of the buyer closing cost credit to buyer down her rate (huh?)…this doesn’t add up to me.
The LO will be paid on both the purchase and the no closing costs refi. And, if Sandy can use the cost to buy down the rate, then she won’t need to refi in 6 months. BTW, Sandy, 1% in fee (points–discount or orig.) roughly, not always, equals 0.25% in rate, depending on current pricing.
http://www.raincityguide.com/2007/03/03/whats-the-point/
Sandy,
Excess credits are becoming more and more of an issue. The buyer being given too much money by third parties to the transaction, has never before been such a broad scale “problem” in the industry.
The resolution is best negotiated with the builder. Say the excess credit amount is $500 and the cost of the appliance package (new construction) is $2,400. One resolution would be for the excess credit to go to the seller, which is normally permitted, and for the appliance package cost to be reduced from $2,400 to $1,900.
You shouldn’t have to “lose” the credit, but whether you apply it against sale price, or the cost of the upgrade, will likely require the seller’s cooperation and signature. If you are planning to hire an inspector down the road when the home is completed, that is another place you might be able to apply the credit, by showing the amount paid to the home inspector “on the sheet” as a POC item (Paid Outside of Closing), expanding your closing costs. You can do the same with an appraisal cost if you paid it up front.
How much excess are you trying to absorb? Artificially expanding the true costs by inflating the pre-paid items is not really an option. I think the LO is correct there. That’s the same as handing you the excess in cash to pay future obligations that are not part of the transaction. Not an appropriate finance cost. Remember, the agent’s fee is financed by you and the lender, so their dictating what can and can’t be financed is the underlying concern of the lender.
If the excess is a nominal amount, the agent could reduce the credit and buy you a house warming gift, like a gift certificate to Home Depot or to apply toward window treatments. Many answers depending on how much you are trying to absorb.
Easiest answer is to reduce the credit, reduce the fee paid by the seller and reduce the sale price accordingly.
In regard to #64, I agree with the idea of talking with more than one mortgage professional. I suggest making a Short List of three, including one bank and two local mortgage brokers. Since each mortgage broker will shop a list of wholesale lenders, you are actually “shopping dozens of lenders” with this Short List method.
To start, you need to ask only one question: “Will you send me a Good Faith Estimate and Truth-in-Lending?”
That way, you can look at the whole picture of the loan and select the best one.
One of these three on your Short List could be a referral. But you must not rely on a referral only without doing any comparison. Why? Because it is a well-known fact in the mortgage community that clients who come in by referral don’t shop you, trust you more, and are easier to make a bigger commission from.
I know that sounds outrageous, but so-called mortgage gurus have been teaching this doctrine for quite awhile now. And this is just the tip of the iceberg. While researching and writing Mortgage Rip-Offs and Money Savers, I uncovered a train load of dirty little secrets.
Home buyers and home owners refinancing have to look out for their own best interests. That is their responsibility and their right. This is not to say there aren’t any good, honest, ethical loan officers out there, because there certainly are. They are the Stars of the mortgage business.
“Because it is a well-known fact in the mortgage community that clients who come in by referral don’t shop you, trust you more, and are easier to make a bigger commission from.”
Maybe I’m attending the right and avoiding the wrong seminars…I’ve never had a mortgage guru promote this. I prefer working with clients who are referred or who are not shopping me. It’s less work for me…you can wind up providing dozens of GFEs for someone who may or may not work with you over a rate that they may or may not get (depending on when they’re locking).
I do not make more on a referral. I highly value referrals. It would kill my business to do that.
Rhonda, I do not know you, so I would not and could not judge you. From what you’ve said, you are one of the good, honest loan officers who work hard for your clients, which means you rightly earn their referrals.
Unfortunately, there are many smooth-talking loan sharks who don’t work this way. For example, one woman said to me, “I could never ask for referrals. My clients will all hate me once they figure out what kind of loan I’ve given them.”
Another said this to me when I was asking him about the high-priced loans he sold his clients: “If they’re stupid enough to take it, it’s their fault.”
I conducted a “Loan Mystery Shopping Experiment” and posed as a home buyer and applied with ten companies. The Good Faith Estimates I received are printed in my book. As an honorable mortgage professional, I’m sure you’ll be horrified to see what some of your “competitors” are doing.
I would be happy to send you a free copy of my book, if you’d like to provide a mailing address. I appreciate it that you let me post on your blog and didn’t delete my post, just because it shed light on a different experience than your own.
By the way, I worked in both retail and wholesale lending for over ten years myself, and I am a strong advocate of the local mortgage broker.
Hi Carolyn, I would love a copy of your book. And I am happy to post a review of it on my blog. RCG is not “my blog” so it’s not up to me whether or not you can post here. With Mortgage Porter, I currently do not have guest authors posting. I might do this down the road.
I have done book reviews for clients and I actually promote books on Mortgage Porter that I think would be of interest to consumers.
If you’re satisfied with me reviewing the book (perhaps I can interview you for the post), my address is Rhonda Porter c/o Mortgage Master, 24909 104th Ave SE, Suite 100, Kent, WA 98030.
Thank you for offering to review my book, Mortgage Rip-Offs and Money Savers; I would appreciate that. I am taking it to the post office today, so you should receive it shortly.
By the way, it was listed under “Local Offerings” in the Sunday Seattle Times/Post Intelligencer last weekend.
Carolyn,
That’s fantastic. I’ll check that out too! I didn’t realize that you’re local. I’m looking forward to receiving and reading your book.
To clear up the matter of deductibility of loan fees on the HUD statement, on the original purchase of a principal residence, the loan origination fee (”points”) shown on Line 801 are deductible in full. They can be amortized over the term of the loan if the purchaser make that election. If it is a purchase of real property that is not the principal residence, the points are amortized over the term of the loan. Points paid to refinance a mortgage are amortized over the term of the loan, unless the funds are used to substantially improve the principal residence. Points are deductible if paid to borrow money and also include loan discounts or discount points, as well as points paid by the seller. They are typically a percentage of the amount being borrowed.
Thanks, Randy. It’s nice to have a CPA commenting at RCG!
What if the “points” show on 802 or 808 on the HUD. Does it impact if a borrower can deduct them in the same way as if they’re on 801.
Thanks Randy,
Rhonda is correct. Out dilemma invovles an origination fee of 1% that is not charged by the underlying lender, but is a broker service fee on line 808. Does that change the borrower’s ability to deduct it?
I still think it stands a better chance of being missed by an accountant, if it is on 808 vs. 801.
I dred going through this whole scenario again…however, if Randy can clear this up from a CPA’s perspective, that would be great.
If I understood scenario before…Jillayne was stating that if I brokered a loan, the origination fee would need to go on line 808 instead of 801 or 802.
Randy, Would line 808 still be deductible as a point the same way as in 801 or 802?
BTW: I believe what DFI is stating is that you cannot take broker fees and tally them up charge them as points in 801/802. For ex., if you had $2000 in closing cost, not including points, and instead of breaking out the cost, you add $2000 to the points so clients can write it off.
Hi Rhonda and Ardell -
The points shown on Line 802 (”Loan Discount”) would be deductible by the purchaser. Those shown on Line 808 as a broker service fee would not be deductible by the purchaser, as that fee was not paid by the purchaser. The key element here is that the purchaser has to pay the charge, and that’s not the case with a broker service fee reflected on Line 808. The exception to the requirement that the purchaser has to have paid the charge is with seller paid points. In that case, the buyer is treated as having paid the points and the seller reduces the amount realized on the sale of the home.
Hi Randy,
HUD line 808 is reserved for the mortgage broker’s fee. The fee can show up elsewhere below line 808: sometimes it shows up on 809 or 810, but HUD says the broker must disclose his/her fee on or below line 808.
The home buyer or refinancing homeowner pays this fee. It is much like a third party fee like title, escrow, appraisal. The broker acts as a third party and places the loan with a lender, and for that service he/she earns a fee.
The lender (the source of the money; the bank) fee goes on line 801.
The question is: What lines from the HUD are deductible? Sounds like the IRS is pointing us to lines 801 and 802.
Thanks for your help on the matter of IRS and tax rules.
Jillayne,
Now you see why I had escrow move it to 801 when I saw it on 808. I still think it always belongs on 801.
If the fee is paid from the borrower’s funds (Column 1) it is deductible. If it is a parenthetical notation that it was paid outside of closing (POC) and is called a Yield Spread Premium or similar terminology and is not paid from the borrower’s funds (Column 1), then it is not deductible. You could make an argument that that amount is an “interest type” fee in that it is ultimately reflected in a higher interest rate charged by the lender, but it isn’t paid by the borrower at that time and, at best, should be amortizable. But the IRS isn’t going along with that. The IRS is pointing you to Lines 801 and 802. You can also make an argument that other “fees” paid to the lender (e.g. Administration Fee, Brokerage Fee, Processing Fee) that are shown on Lines 808-811are disguised points and should be deducted. There are some CPA’s who do include those “fees” with the points charged; some don’t. The IRS would probably say “No”, but I don’t know if there has been any precedent on this one way or the other.
[...] How to help yourself Test out their service ahead of time: Get the phone number of the processing center and call them in the presence of your loan officer, especially if the bank is running a national promotion. Do the same thing with their loan servicing department. Find out how long the loan officer has been with the bank and the number of loans he or she has originated. Why let a loan officer practice on you? If your transaction is falling apart, go directly to the manager. Ask the loan officer to sign the Good Faith Estimate and guarantee the quoted fees. Do not let the loan officer quote anything less than 15 days interim interest unless he or she is willing to guarantee, in writing, that your loan will close during the last 15 days of the month. Finally, ask your loan officer the following questions: “How are you paid?” and “Can you point to the lines on the Good Faith Estimate and tell me which fees go into your pocket and which fees go to another person?” “Are your fees negotiable based on the level of care and service I receive from you?” [...]
Worthwhile Real Estate Blogs To Read…
Sacramento Real Estate Voice posts often about foreclosure and financing issues. Here is one post on What is a Short Sale.Lu…
I love the idea of asking the loan officer to guarantee the good faith estimate in writing. The GFE really doesn’t mean anything without it.
Kermit, you’re right. Especially when you’re shopping. The best advice I can offer is:
1) Get the GFE guaranteed in writing
2) Get the estimated HUD1 from escrow 1-2 days before your signing appointment to review with your GFE.
3) Contact you LO to let them know when your appt. is (they may not know) and ask for a number you can reach them at in case you have questions during the signing.
4) Bring your GFE, written guarantee, est. HUD to your signing appointment.
5) Don’t be shy about calling your LO or agent if you have questions during your escrow appt./signing.
Rhonda,
What is the disclaimer one would use if people switch Title or Escrow Companies from the one used for the GFE, or start buying down the rate to throw the GFE out of whack?
Also, is the guarantee based on total, so that if one cost is $100 more but another $100 less, it balances out? Or is it for each item separately?
I used to guarantee the total number of my “cash to close” estimate wouldn’t be higher, but not the detail within that number. People seemed happy with that method.
Excellent question, Ardell. A LO can really only guarantee closing costs shown in the 800 section of the GFE/HUD. There’s no way for a LO to know which title and escrow company will be used in a purchase sceanrio.
I’ve only been asked twice in seven years to provide a written guarantee. In my practice, I check my GFE to the HUD before the buyer or agents see it (if I have a cooperative Escrow Officer).
“Balance out” works better for me as a LO because I may switch lenders during the process depending on when we lock and each lender I work with has slightly different costs.
The GFE guarantee would have to be subject to loan approval as well. If I present a GFE to someone who tells me they’re A Paper and we need to go FHA or what ever, then the GFE guarantee would need to be amended. It should be updated at the time of approval.
If you call a bank for information on interest, etc and then they see if you want to be locked in at say 6%, you have to pay a good faith estimate of $495.00 to lock it in. But two days later, you find a better deal, does the bank have to refund your $495.00? Penn West Home Equity Services Corp. says that they do not have to reimburese us that amount. All they did was send us the application, we have not signed anything yet.
Patty, you don’t “pay a good faith estimate” to lock in. The good faith estimate discloses the costs associated with the rate that’s being quoted to you. I’m assuming you may have paid an application or lock fee?
If you’ve told a lender that you’re locking with them, you are making a commitment to that rate and the lender is commiting to their resources for the funds at that rate on your behalf. When you “break a lock” you are damaging the lender and the relationship they have with their lending source.
I don’t know your lender or what type of lender they are. Different types of lenders abide by different laws.
Thanks, Rhonda, for your quick response. Yes, it was to lock in. We found this place on the internet. Being that the person did not explain all of this, is it still possible to get our money back, plus I asked her if they are an actual bank and not a mortgage broker, and she told me they were a bank. I (as an afterthought), checked their record online through the Better Business Burea and they are mortgage brokers, plus they have 50 complaints against them in the past 12 months. So, we any of this make a difference?
Thanks again
Patty, that sounds really tough. Do you know what state they’re located in?
Patty, I posted your question at Trulia to see what other industry experts would say. They seem to agree with me: if you commit to a lender and pay for a lock fee and they lock the loan, they have done what you paid them for. The lender cannot help that you broke your commitment with them. Since they’re an internet lender, they have less reason to cooperate with you or to care about their BBB reputation. This is why I recommend getting referrals to lenders from people you trust and respect instead of blindly shopping on the internet and chasing the lowest rate.
You can follow the responses by visiting this link: http://www.trulia.com/voices/Financing/If_I_pay_a_lock_fee_and_lock_in_a_loan_then_chang-7346–
Hi Patty,
When you lock a loan, the lender is required to provide you with a form called a “lock in agreement” which would explain all your options, your obligations and the lender’s obligations, and the conditions upon which the lock in fee is refundable. Take a look at that form….what does it say?
Your experience shows us how important it is to check out your lender with its regulator beforehand.
Thanks again, Rhonda, this is exactally why I told my husband not to deal with the internet!! This is also why I’am not talking to him right now!!!!
Thanks again for your prompt response.
Patty
Hi Patty, Did you sign a lock agreement with this lender? You may have rights to the refund if you did not sign an agreement. However, if this internet lender has tons of complaints against them, it may be difficult (at best) to see any refund your money.
Hi, Rhonda,
No, we did not sign a locked agreement. After talking to a supervisor, she has agreed to refund the money. Thanks again for all your help!!!!!!!
Patty
Rhonda,
I just got a GFE for a refi. What do I look for to tell if the rates (I understand that they could change) are legit as well as the fees? Is there somewhere I can research to find standard fees?
Jeremy, that’s part of the problem.
Are you in WA state? Fees may vary from state to state (title, escrow, etc.). Are you shopping or just wanting to know if this GFE is legit?
I am in WA state and just trying to figure out if my GFE is legit but also somewhat shopping.
I offer a Money Saver Service for this exact purpose., Jeremy. Hillary Clinton said there should be an unbiased source where people could go to find out if their loan offer was a good deal or a rip-off. I agree. Since I don’t do loans anymore, my only objective is to save people money. The details are on my website, which is visible when you click on my name. Or you can check out page 101 in Mortgage Rip-Offs and Money Savers.
Carolyn, are you unbiased if you’re selling books by your comment? I like your book but this comment seems far from “unbiased” when you’re promoting yourself.
Jeremy, I’m happy to review your GFE and if let you know if it’s a good offer or not at no cost or obligation. I can do a post of what I normally charge for a refi here at RCG, but what needs to be considered is how your loan is priced and the rate will factor into that (you can read “what’s the point”).
I often review GFEs and I will tell consumers whether or not it’s a “good deal”. Just email or fax it to me. If what the lender is offering you is fair, I’ll tell you so.
To explain, my comment itself is not unbiased–obviously I am in favor of my opinion, just as you are biased toward your own opinions. We all are, and that’s OK.
But my opinion as to whether a particular loan offer is over-priced or not is 100 percent unbiased. If a loan offer is bad, I don’t say, “I can get you a better rate and cheaper fees,” because I don’t do loans anymore. I’m not looking to increase my loan business.
Also, unlike most so-called helpful website services, I’m not harvesting leads and selling them to loan officers.
I am unbiased in that my only objective is to save people money. And sometimes, the happy result is that I say, “You have an excellent loan. Proceed with confidence.”
Carolyn, Without having the current pricing on the front and back end, I would think it would be hard to advise whether or not someone is receiving a “good deal” by looking at their GFE. I am happy to tell someone that they have a good deal based on their GFE.
I also make other recommendations such as getting the closing costs on section 800 guaranteed in writing from the LO.
“because I don’t do loans anymore. I’m not looking to increase my loan business”. This is my point, you are an author; you are looking to sell/promote your book.
Actually, I do still have access to wholesale rate sheets and what the Yield Spread Premiums are for specific pricing.
I’m not trying to compete with you. Feel free to look at Good Faith Estimates and if they’re bad, offer your loan services instead.
In fact, if I, as an unbiased source, saw a really bad GFE, I wouldn’t mind referring them to you for a better offer.
Cheers.
Hi Carolyn,
Interestingly, there’s a start up company that offers this same service for free, or $25 for an upgraded report.
http://www.offerangel.com/index.php?
I’ve talked with the owners of the company and I like what they’re trying to do, even though it makes me sad that consumers would have to look to a third party to tell them if they’re being ripped off.
I looked into this business model 5 years ago and determined that in order to take it on, I would either open a law firm or have an attorney on staff. Both of these would add to the cost of the file review.
The buz model simply won’t scale unless you can keep the price low and sell mass quantities, while keeping labor costs low.
I would much rather see us raise the professional status of all originators (no matter where they work) to that of fiduciary, which would perhaps put us on the road to restoring consumer confidence in the industry.
Some people, like Rhonda for example, already act as if they had fiduciary duties.
Thanks, Jillayne and Carolyn. By your estimate, what percentage of LOs do you think are ethical and competent? I have my opinion from when I was in title/escrow; however, we certainly didn’t work with everyone!
There are wonderful, hard-working loan officers who look out for the borrower’s best interests–to the point of sometimes working for free. Just this morning, I spoke with an LO who has a borrower wanting to buy a mobile home in E. Washington that no lenders here will touch. She spent hours find them a loan, which she’ll make zero money on, because it’s not through her company. It’s not anything Fannie Mae or Freddie Mac will touch due to some structural problems reported by the appraiser, which the buyers don’t care about.
That’s one extreme of fiduciary responsibility and going out of your way for people. Working for free.
I’m all for fiduciary responsibility, as are all the good LOs. The problem is, how do you regulate morality?
Some LOs consider a loan beneficial if it provides cash out–regardless of the terms, etc. “Cash out” is a benefit in itself; therefore, charge 5% or whatever, as long as you’re on this size of Regulation Z Section 32.
So it’s impossible to legally enforce fiduciary responsibility. Everyone has their own opinion on what that means.
All of us who have been in the loan business have a story where a borrower came requesting a refinance that was not in their best interests. We advised them not to take it. But then they got angry at us for offering this wise counsel and did it anyway.
I tried to warn a W-2 wage earner who was living paycheck-to-paycheck against taking a temporary teaser rate Option ARM that would be neg. am. and go up higher than his current mortgage.
He refused my advice. He said that 1.5% rate was taking advantage of the bank. So he went ahead with the loan (with another company, not me).
Whatever. You try to help some people, but they refuse the help.
What I’m saying is that it’s a two-way street. Loan Officers have to do business with their clients’ best financial interests at the forefront. But borrowers have to educate themselves enough to make a smart decision, too.
It’s not fair to blame Loan Officers exclusively. I’m sure that’s something we all agree on.
Hi Carolyn,
Government has been regulating professionals for a long time now. An example would be real estate agency laws, or the Bar Association, created by government to regulate the conduct of attorneys.
Rhonda,
I believe the vast majority of LOs want to conduct their business in an ethical manner, they have just not received any guidance as to what that means, and no enforcement of ethical codes of conduct.
Very, very few LOs are out to commit fraud/violate the law.
Very, very few LOs are ethically gifted and always know what to do when faced with any ethical dilemma.
The majority are in the middle; looking for a beacon. Within any profession, the government doesn’t regulate ethical conduct, our government regulates laws. It is up to industry trade groups such as, in the above example, the Nat’l Assoc of Realtors and state Bar Associations to regulate the ethical conduct of its members. Regulating ETHICAL conduct has never been the job of government.
[...] I already have the Opinionated Mortgage Broker on my blog roll but, here is another good mortgage blog hosted on the Rain City Guide. When you purchase a home and get a mortgage your lender is required to give you a good faith estimate. Here is a thoughtful post on why they are sometimes less that great. [...]
[...] The Problem with Good Faith Estimates by Rhonda [...]
[...] at the same time on the same day. By the way, if a mortgage originator refuses to provide you a Good Faith Estimate when you’re asking for a rate quote: run. There’s no excuse for not providing a [...]
I already signed a purchase agreement for a new build and gave my 1000 earnest money. But when I recd my Good Faith Estimate I was not pleased and the lender is refusing to make any changes to it. He sent me a 50 page contract including the Truth in Lending Disclosure after having a lawyer look at it I am scared to sign it. What should I do? Walk away?
Are you stuck with this lender? Is it the bulider’s lender? What is it that you don’t like about the Good Faith Estimate? Did you get a good faith estimate from this lender prior to making your offer and writing that earnest money check?
Miche, you are not obligated to take this loan you are not happy with it. I believe what you have received are disclosures and not the final loan documents, the actual contract. Even if you have signed the Good Faith Estimate, you have just acknowledged receiving it and are not obligated to those terms.
I am the author of the best-selling book, Mortgage Rip-Offs and Money Savers, and the newly published book, Homebuyers Beware. If you’d like, I would be happy to take a look at your Good Faith Estimate for you (no charge). Go to my website to contact me. My website is AskCarolynWarren.com.
(Google my name, if needed.)
Carolyn Warren
Homebuyer’s Advocate
Carolyn, thanks for stopping by to promote your book.
Yes Rhonda, its the builder’s lender. They are already in the process of building the house and they have my earnest money already. I found another property for a better value and I like the broker’s terms better so what about the other house? Can I get out of the sales agreement?
Miche, it’s difficult to give you advice–depending on what stage of the contract you’re in and what you signed, you may or may not lose your earnest money. The lawyer who reviewed your information can direct you on whether or not you can “get out” of the sales agreement.
Working with the builders lender can be dicey. I never recommend this because the lender is really working for the builder (since they are fed business) and therefore, the builders lender rarely has your best interest at heart. I don’t think it’s right for builders to be able to demand or control that buyers go through “their lender”.
Do you have a real estate agent or did you “walk in” to the site (working with a site agent)?