Month: December 2008

In order to have continuity in the mortgage process and to protect the rights of borrowers, The Department of Housing and Urban Development (HUD) has developed regulations called RESPA (the Real Estate Settlement Procedures Act) and TIL (the Truth in Lending Act.)

These acts were designed to provide borrowers who are shopping for mortgages with certain information, in a standardized format, so that costs and other information can be compared from lender to lender.

A few of the documents that must be provided to the borrower, either within three days of application or at closing, are listed below:

Good Faith Estimate (GFE)

Regulations require that this document be given to the borrower within three days of application.  It discloses rates and fees, including escrow deposits the lender expects to charge and/or collect from the borrower.

Truth in Lending Disclosure (TIL)

This document shows the APR (Annual Percentage Rate).  APR is, in effect, the total cost of the loan, expressed as a rate, with the costs of the loan factored in.  This is useful for borrowers to understand because lenders who charge the same rate but with different fees will have different APRs. The lower the APR, the lower the total cost.

Escrow Account Disclosure

If the lender is requiring the borrower to have an escrow account from which taxes and/or insurance will be paid the lender is required to notify the borrower within three days of application.

HUD

Also known as a Settlement Statement, this HUD paper breaks down for the borrower, at closing, the fees that are being charged in the transaction, as well as payoffs, escrows, etc.  The figures here should closely match, and can be compared to, the Good Faith Estimate.

With so many choices available today for consumers who want to obtain home financing, it may be helpful to compare and contrast mortgage brokers and banks from a mortgage perspective.

There are three main differences:

1) How many lenders each works with
2) How the loans are funded
3) How each are compensated

Mortgage brokers connect lenders and borrowers. They can and usually do work with many lenders. This gives borrowers a range of choices because brokers can select the best product and terms for their clients.

Another difference is how the loan is funded, or how the money gets to the borrower. At closing, a broker will request funds from the lender, who will send them electronically, but the broker never holds the funds. A bank will deliver the loan directly out of its own funds, from what is called a warehouse line.

The broker gets paid by the lender in the form of what is called a Yield Spread Premium (YSP), or fee for finding and processing the borrower. Brokers by law must disclose the YSP to the borrower; banks, if they charge one, are exempt from having to disclose the YSP.

The higher the interest rate, the higher the Yield Spread paid to the broker. Brokers stay competitive by keeping the YSP and the rate low.

Brokers, if needed, are able to charge a slightly higher rate and then refund a portion of the YSP back to borrowers in the form of a broker credit toward closing costs. This assists borrowers who would otherwise be lacking in the funds to pay closing costs.