Dear Alpha Consumer,
I recently purchased a home. I obtained a mortgage broker through LendingTree. Its ads state, "No surprises at closing." But I was met with several major surprises, including extra closing costs, a higher interest rate, and a spike in the private mortgage insurance of about 100 percent from the original quote. Is this legal and/or typical?
Unfortunately, first-time home buyers are often surprised by fees, insurance, taxes, and other costs. But it doesn't have to be that way.
"We try to help people get better prepared for the closing," says Allison Vail, spokeswoman for LendingTree, which does have ads that promise no surprises. But she says that with a tightening credit market, lending is rapidly changing. "It's important for people to know that we're in a different world now," she says. People without excellent credit scores may find rates going up and certain loan products no longer available, she notes.
To get ready for unpleasant surprises at the closing table—and, in some cases, avoid them altogether—follow these tips:
Be skeptical of advertising. Advertisements don't necessarily include all the fees, says David Siegel, a bankruptcy attorney in Wheeling, Ill. He adds that there would be too many to list in a quick radio or television spot. He recommends doing some research on local taxes, insurance requirements, and other fees before taking the plunge to homeownership.
Shop around. Some lenders absorb fees in an effort to attract customers. Bank of America, for example, offers what it calls its "No Fee Mortgage PLUS" loan. The bank pays for the application, appraisal, and title fees, as well as a variety of other costs. Aditya Bhasin, head of marketing for consumer real estate at Bank of America, says the bank established the program after its research showed that many home buyers were confused about what they had to pay.
"Customers told us again and again, 'I'm really confused by the process.... What are all the fees that I get hit with?' " Bhasin says. He adds that aggressive advertising of low interest rates and teaser rates contributes to the confusion.
Know what you're paying for. Before anything is final, home buyers receive a "good faith estimate" of closing costs as well as something known as a HUD-1 statement. Both those documents will cover in detail all of the costs involved, including insurance and other fees, says Vail. She recommends reading them carefully. If any of the prices change, you should receive new documents.
If you don't and are surprised at the closing table, then you can try to rework the terms on the spot. If you can't reach an agreement with the seller, you can walk away. Vail warns, though, that walking away can mean losing money that you, the buyer, have already contracted to pay. The whole situation can be avoided, she says, by making sure you know what to expect before the closing.
Negotiate. Some of the costs, including the appraisal fee, administrative fee, and title insurance, are negotiable, says Vail. "If you don't mind doing the legwork, sometimes you can find some good savings there," she says.
Be prepared for unavoidable costs. Many first-time home buyers have never heard of hazard insurance, for example, but it's one of the many required expenses that go along with a home purchase, says Bhasin. "A lender won't quote that upfront, but that is a legitimate insurance fee you have to pay," he says. And the city, state, and local taxes are usually unavoidable, too, he adds.
Educate yourself. Several organizations, including the Federal Reserve, give consumer-friendly guidance on what to watch out for when buying a home. The Fed explains home buyers' rights and provides work sheets to help you calculate an affordable monthly payment. LendingTree offers an array of calculators to help you decide whether to rent or buy and to compare loans. The site also explains confusing mortgage terms.
Then there's the old-fashioned approach. Says Bhasin, "It's always good to talk to people who have been through it."