To help homebuyers understand the costs of buying a home, the Consumer Financial Protection Bureau (consumerfinance.gov) rolled out the Know Before You Owe initiative in 2015. The project actually has deeper roots in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank created the CFPB and mandated that the Bureau “shall publish a single, integrated disclosure for mortgage loan transactions” in a “readily understandable language” so borrowers can understand the financial aspects of their loan.
Prior to Know Before You Owe, the home buyer would receive a Good Faith Estimate from the lender and a proposed settlement statement (which was on the HUD-1 form) from the title company. The pre-HUD, gave a fairly close estimate of the amount they needed at closing but could change depending on final lender charges. If the amount was a little short, the buyer would write a check to cover the difference. Sometimes the buyer would get money back at closing because the amount they needed was less than the amount the title company actually collected. Regulations dictated when the buyer received a lender’s Good Faith Estimate and settlement costs.
But in the aftermath of the financial and foreclosure crises, there was concern that homebuyers did not get accurate and fair closing costs disclosure. Know Before You Owe changed the process of disclosing closing cost estimates to provide more accurate closing cost figures. A new Closing Disclosure (CD) was devised to be consumer friendly. The process of closing cost disclosure changed such that the lender is now responsible for providing the buyer the CD (in lieu of title company’s HUD-1). However, the role of the title company (or closing agent) is still to conduct the settlement.
Unfortunately, title insurance and other title related fees (such as water escrows and the property survey) are still often misunderstood and disputed. Although the CD does a good job breaking down closing costs to help you understand what you are getting, it falls short in explaining title fees and options. For example, in Maryland, the cost for title insurance that is disclosed on the CD is the more expensive enhanced policy. And it is not just happenstance, Maryland Realtor purchase contracts require that the lender disclose an enhanced title insurance policy on the CD so you know how much the most expensive title insurance will cost. But unless you know to ask, you may by default be purchasing the more expensive enhanced policy. The survey is another title charge that may be charged by default. Although many feel it is not worth the expense, it may be relevant to your title policy.
Fortunately, your loan officer will review and help you understand your lender fees. On the other hand, the title company will be communicating with you throughout the home buying process. Make sure you read and understand all emails, as they will likely describe your title charges and options.
Life is hectic and it seems as if time is at a premium. Although buying a home can be exciting, it can significantly add to your daily stressors. But if you want to avoid surprises down the line, take the time to understand the process. Ask as many questions as it takes to know what to expect at closing. Have your real estate agent explain to you your purchase contract and, do not wait until settlement to communicate with the title company, or ask about your CD.
Dan Krell is a Realtor® with RE/MAX Platinum Realty in Bethesda, MD. You can access more information at www.DanKrell.com.