Buyers: More great news in 2010; Important new changes to the Real Estate Settlement Procedures Act (commonly referred to as “RESPA”)

Extension and expansion of the home buyer tax credit is not the only boon for buyers beginning January 1^st. Important changes take effect that will benefit ALL buyers, not just those who may be eligible for a tax credit.

HUD has published a new settlement cost booklet to help buyers shop for home loans. Lenders and mortgage brokers are required under RESPA to provide you with a copy of the new booklet within 3 days of applying for your new mortgage loan. Click here to take a look now as it contains a wealth of very useful and cost saving information for buyers. http://portal.hud.gov/portal/page/portal/HUD/documents/Settlement%20Booklet%20December%2015%20REVISED.pdf

The first several pages of the booklet provides an overview of the residential real estate buying process for prospective buyers, and it touches on the importance of selecting an agent to represent your interests, an exclusive buyer agent or buyer broker. Typically you are not required to pay for the services of your buyer broker unless you specifically contract to do so. When a MLS listed property is purchased by you with the assistance of your own broker/agent, your buyer agent should be compensated by the listing brokerage - a portion of the total commission that the seller pays at closing. Even though the seller is the one who ultimately pays the commission of your agent, you should have a signed brokerage agreement with the broker/agent who represents you, for your own protection.

BEST ADVICE #1: As an agent it is my opinion that agent selection first is important and has everything to do with the lender that you select as well. When you work with a mortgage broker or lender who is known to your agent, it has been my experience that you will experience better service, very competitive rates and closing costs, better communication, and few (if any) surprises. Most buyers probably believe that I am encouraging this because we get a "kick back" from the lender - as a matter of fact, that is illegal. What we, as agents, DO receive when you work with a lender that we recommend, is the satisfaction of knowing that our buyer is working with a lender who actually knows what they are doing, is not going to lie to us (they want our future buyer referrals), is going to do everything possible to make the buyer happy, i.e., rate, lower costs, better service, etc. Again, it all boils down to making an investment. . .the lender knows that if they make you the buyer happy, then the agent will be happy and send more buyers!

Just as an aside about mortgage brokers and lenders. . .it is not "all" about rate and costs for you as a buyer. There are too many people out there trying to broker mortgage loans. I have learned the hard way that some of them will tell the buyer and agents ANYTHING just to keep everyone hanging on while the mortgage broker tries to place a bad loan SOMEWHERE. Not everyone does a good job on the front end in prequalifying buyers. Many mistakes are made, i.e., not enough questions asked, no documents reviewed. It is not uncommon to have a buyer told that they are "preapproved, no problem", even in writing, only to have the buyer pay for the inspection and appraisal, make arrangements for their move, etc., and then find out 4 weeks into escrow, after all of the buyer's "safety net" contingencies have expired, that it's not going to close.

I'm not going to spend a lot more time on this because it's not the intended purpose of this post. However, there are an alarming number of unethical mortgage brokers out there who don't know what they are doing and don't mind keeping agents, the buyer and seller waiting around for weeks, while they try to peddle a bad loan to some investor. Brokers have to place the loans that they originate so that it can be funded and serviced. If they make a mistake and the buyer is not well qualified, chances are they won't find an investor willing to "buy" the risk. The moral of the story is this: if you are working with someone who doesn't have long term "skin" in the game, i.e., they want future business from one of the agents, then you are just one deal, one buyer, and if you get ticked off because you were jerked around for 6 weeks only to find out that you cannot buy a house, what have they (the mortgage broker) really lost? Basically, just 1 deal and he's probably treating 20 other buyers the same way so he will get lucky and manage to get a few of these buyers closed.

Before you apply for a loan you should receive Good Faith Estimates (a "GFE") from multiple mortgage brokers or lenders so that you can compare types of financing, rates and costs. The HUD booklet does a great job of explaining to buyers the various types of loans and other terms common to the process. (pages 6-10).

The GFE has undergone major changes that take effect January 1, 2010. Beginning on page 10 of the booklet, the HUD booklet begins to go through the form, line by line item, explaining what exactly you should expect from the lender.

On page 17 of the HUD booklet, it begins to explain page 3 of the GFE - understanding which charges can change at settlement. Many times buyers say that they were given a GFE by the lender, but that final settlement has changes that they were unaware of, or they are called by the lender just prior to closing and told to bring more cash. Needless to say, that's a pretty unsettling place to be just prior to making the single largest investment in your life! HUD is trying to keep this from happening to buyers so that all buyers understand the exact terms of their loan obligation and all costs involved. This booklet provides illustrations and detailed explanations that should make it easier for buyers to select the best lender and loan for their situation.

There are three different categories of charges that you will pay at closing: charges that cannot increase at settlement; charges that cannot increase in total more than 10%; and charges that can increase at settlement. The new HUD booklet explains this in great detail.

Have you heard about the "no closing costs" mortgage loans that are frequently advertised? Page 18 of the booklet provides a "trade off table" that will explain to you how this option is accomplished, and then you can decide whether or not "no closing costs" is REALLY the best option for you. Basically, it's about the rate that you pay - higher rate, less or no costs. Lower or lowest rate, you pay the costs!

Page 18 of the booklet even provides buyers with a "shopping chart" - a handy "apples to apples" line item chart so that you can be sure you are making accurate comparisons when you interview multiple lenders. If you would like to have some idea of your buying power before you actually speak to a lender, go to page 36 of this booklet where there is a "determining what you can afford" worksheet. That way, if you are aware of some credit issues that need to be resolved prior to beginning the home buying process, you can at least determine a payment amount for your new mortgage that will be more in your "comfort zone" - which, by the way, is a great way to establish price range - tell the lender that although you may qualify to purchase a home at $200,000, your budget works better with a payment (including taxes and insurance escrows) at X. Can't tell you the times that I have had buyers tell me they "think" they want to look around $200,000 until they get prequalified and once they find out what the payment will actually be, the price range for house hunting changes!

BEST ADVICE #2: a mortgage/new home purchase is not something that you should "back into." There is a process that works best for many reasons; follow it.

The booklet even goes into some detail about other settlement services, i.e., title insurance, survey, homeowners or hazard insurance, etc.

Page 22 of the new HUD booklet begins a detailed explanation of the new HUD-1 standard form settlement statement that you will see at the closing table, including page 3 of the HUD-1 form which has been revised to include a comparison chart for the GFE vs. the HUD-1 final settlement statement. Details about your loan terms are also contained on the form beginning this year.

During the real estate bubble many buyers were caught up in the home buying process and never really understood the type of loan they were signing for at the closing table. Many have stated during the foreclosure crisis that they thought they were getting a fixed rate loan and recently learned they had an adjustable rate. HUD is trying to make it easier for buyers to have one handy resource to help them navigate the process. Even though you may have your own buyer agent, it is comforting to know that you have a booklet that does a great job of encompassing the entire process in written form.

I encourage you to share a copy of your good faith estimate with your agent and never hesitate to ask questions during the entire process. Agents walk a fine line sometimes - it is difficult to know the level of sophistication that a particular buyer may have and we wouldn't want to bore you with details that you already completely understand. I've worked with buyers making their 3^rd home purchase at around $500K who really didn't understand quite a bit about the process. There is no shame in asking to get what you are paying for, and trying to act like you know it all, may backfire on you! Agents are not just walking lockbox keys - we show property, we educate, we negotiate, we guide and do a lot of hand-holding. Work with your agent so that when you go to the closing table it is with a smile on your face, not a nervous grimace! Best of luck with your purchase in 2010.