One of the main goals of the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosure (TRID) rule was to help home buyers better understand closing costs.
During the initial trial stage of the rules, before they officially took effect in October 2015, the CFPB conducted its “E-Closing Pilot,” during which it conducted exit polls among home buyers who had completed purchases using the new disclosure forms. Those surveys indicated that, on average, the forms had increased home buyer awareness and understanding of closing costs by about 7%, which, at the time, didn’t seem all that high – especially when considering that lenders had to invest a lot of time, money and resources in order to adopt the new forms and adjust their process to the new rules.
(Note: This does not mean that only 7% of borrowers understood the closing costs and fees, it means it boosted the understanding of the closing costs and fees among all test subjects by about 7%.)
At that time, some people in the industry said they expected the forms to produce better results once they were in wider use.
Although in general it appears that TRID has helped consumers better understand their loans, a national survey recently conducted by ClosingCorp, a provider of closing cost data for the mortgage and real estate industries, shows that, on average, only about 50% of home buyers have a good understanding of closing costs and other fees impacting their home buying transaction.
The survey of 1,000 first-time and repeat home buyers, conducted by Wilson Perkins Allen Opinion Research, on behalf of ClosingCorp, in early January shows that 17% of home buyers who bought homes between Jan. 1, 2016 and Jan. 1, 2017, were surprised that costs/fees were even required and another 35% of were surprised that their costs/fees were higher than expected.
This, despite lenders’ required use of the new disclosure forms for all home buyers.
However, 31% of home buyers were not surprised at all about their closing costs because their loan estimates and closing fees matched. Hey, at least that’s better than a mere 7% increase in home buyer understanding, right?
As per the survey, the top five closing costs that most surprised home buyers included the following:
1) Mortgage insurance (24%);
2) Bank fee/points (23%);
3) Taxes (22%);
4) Title insurance (21%); and
5) Appraisal fees (20%) and fees paid by the buyer vs. seller (20%).
About 58% of those surveyed said that their initial loan estimated had changed or been revised prior to closing. Most of the buyers (67%) who received a revised estimate were located in the Northeast; and 63% had home values between $500,000 and $1,000,000.
When asked which fee estimates were changed, the top three answers included the following:
1) Closing costs (12%);
2) Insurance costs (6%); and
3) Taxes (5%).
According to the home buyers, the most common reasons for the changes in the closing costs included the following:
1) A change to the loan based on what they qualified for (31%)
2) The lender estimate was not accurate (27%); and
3) There was a change to the loan based on their request (23%).
About 72% of homeowners said their loan estimates and closing disclosures were delivered electronically. Interestingly, the vast majority of these homeowners (72%) fell into the millennial age range of 18-34 years old.
Half of all home buyers (50%) selected their title company. Of those who did not select their own title company, 35% said their realtor selected it for them, suggesting that realtors have more influence since they are the homebuyers’ first touch point.
“As more and more millennials become first-time home buyers, TRID, or Know Before You Owe, has made it easier for them to understand the costs and fees they’ll face at closing,” says Bob Jennings, CEO of ClosingCorp, in a statement. “Yet there are still surprises during the closing process. “Lenders and realtors need to keep educating borrowers on the costs and fees associated with closing to alleviate surprises.
“In addition, our survey shows that 52 percent of lenders were ‘off’ on their initial loan estimates, so there’s significant room for improvement,” Jennings adds. “Using automated fee technology can help prevent lenders from under- or over-estimating closing costs and mitigate the risk of costly variance issues post-closing.”