New federal rules cut upfront costs for buyers, home refinancers

A nationwide law that took effect July 30 prohibits lenders from charging huge upfront fees to applicants who are seeking to purchase a house or to refinance an existing mortgage.

Q. I want to apply for a loan to buy a house, so I visited the bank that I have done business with for almost 20 years. The bank's loan officer said that I would need to give the lender an upfront fee of nearly $1,500 to cover the cost of a credit report, appraisal and other services "to get the ball rolling," but the amount seems excessive. What do you think?

A. I agree that such setup fees are excessive - and now they are illegal.

A little-noticed federal law that took effect July 30 requires lenders to provide each potential borrower with an initial disclosure of their estimated mortgage costs within three business days after the application is filed. If you don't get the disclosure, you can cancel the loan deal.

Under the new federal rules, banks and brokers in all 50 states also are prohibited from levying any upfront fees except for a "reasonable charge" to order a credit report, which usually costs about $50 or $75. And unlike years past, a banker or broker can no longer insist that an applicant pay for an appraisal of the property that he or she wants to purchase before the truth-in-lending disclosure is issued - and banks must now provide the customer with a copy of the appraisal at least three business days before the loan closes, unless the borrower feels that a copy isn't needed.

It doesn't sound as if the bank appreciates the nearly 20 years of business that you have given it. Call at least three more local lenders and mortgage brokers to see if you can get a better deal.

Q. My wife and I are planning to refinance our mortgage. Earlier this year, we received a check for $5,200 as the final distribution of my late father-in-law's estate. Can we list the money as income on our loan application to improve the chances of gaining loan approval?

A. You can, but it probably won't do you much good.

When most lenders review an application, they usually sort the income listed by the borrower into one of two categories: "permanent" income, such as earnings from a job or an ongoing business investment, and "temporary" income, such as the one-time payment that you recently received from your late father-in-law's estate.

Banks tend to focus more on permanent income rather than temporary income when evaluating a prospective borrower's creditworthiness. That's because permanent income suggests that the customer likely will have the ability to make payments over the long term, while those who would rely more on temporary income to help pay their bills could run into trouble when the checks stop coming.

There are other types of temporary income that lenders often won't consider, or will at least "discount," when reviewing a loan application. They include short-term unemployment or disability benefits and tax refunds. Payments that the borrower plans to receive from a roommate who would share the home usually aren't counted either, unless the applicant can produce a signed rental contract and (sometimes) even canceled checks or deposit receipts that can prove the roomie has already started to pay rent.

Though the check that you and your spouse received from settlement of the estate earlier this year might not automatically boost your chances of getting the loan, it's worth noting that the loan representative could consider the money as a "compensating factor" that may indeed bolster your approval chances if your credit score is borderline - especially if you still have the money available or are willing to use it in order to lower the amount that must be borrowed. So, when in doubt, borrowers should always list every type of income they have, whether permanent or temporary.

Q. We have owned our condominium for nine years, and would now like to replace our worn-out carpet with a hardwood floor. However, a neighbor of mine who also sits on our homeowners association's board of directors says that hardwood floors are banned in our development. Is this prohibition legally enforceable? The association can't dictate which colors that owners choose for their rugs, so how can they stop us from installing hardwood floors?

A. It may seem unfair but the prohibition on hardwood flooring is probably legal, provided that it is clearly spelled out in the association's bylaws or set of covenants, codes and restrictions.

Carpets and rugs muffle noise, which is an especially important consideration in condo or townhouse developments where the units are built with relatively poor soundproofing or are stacked on top of each other. Wood floors transmit sound more easily, which is a key reason why many associations have banned them.

In addition, the installation of hardwood floors may require the construction of a subfloor or involve complicated engineering and design issues that some associations simply don't want to bother with - especially if the changes could conceivably affect the entire building's structural integrity or the job would create lots of noise and dust that might anger folks who live in neighboring units. So, while the association can't tell you what color your carpet should be or dictate the shade of your interior walls, it probably has the right to stop you from installing wood floors.

Read your association's bylaws and CC&Rs (covenants, conditions and restrictions), and then consult a local real estate attorney if you believe that you are being treated unfairly.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.

© 2009, Cowles Syndicate Inc.