Some homebuyers are confused by new federal rules for 'closing'

A new law limits the amount homebuyers can be charged for the expenses involved in getting a loan, but some prospective borrowers don't know how the complicated guidelines work.

Q. We agreed to buy a house, and our lender provided a statement showing our loan's estimated closings costs. The estimate for the cost of a title search and title insurance policy from a company recommended by the lender totaled $1,127, but we decided to use a different company because we thought it would save us money. When the deal closed last week, the final settlement statement showed that the company we chose charged us $1,640 for its services - more than 40 percent over the bank's estimates! Isn't this illegal, because the new law that you wrote about a few months ago says that the actual closing costs cannot be higher than 10 percent of the lender's original estimates?A. I'm afraid that you misread that earlier column.Under a new federal law that took effect Jan. 1, all lenders are now required to provide prospective borrowers with a standardized, three-page "good faith estimate" of their closing costs. The law essentially divides these costs into three separate categories: Those that cannot change from the bank's estimates, those that can rise by as much as 10 percent, and those that can change without limit.Fees that cannot change from the good faith estimate, commonly called a GFE, include the lender's origination and underwriting charges, as well as the prepaid "points" the borrower might have to pay based on the agreed-upon loan amount and interest rate.Fees that can rise by up to 10 percent at settlement include services that are either required or recommended by the lender. Had you used the title company that the bank suggested, the cost of the title search and title policy could not have increased by more than 10 percent of the original $1,127 estimate. But since you instead decided to pick an "outside" vendor for the search and title policy, the 10 percent limit didn't apply.The fees charged by other service providers that are chosen by the borrower and not recommended by the lender are also subject to unlimited increases. They include charges for homeowners or flood insurance, fees for a pest inspection or needed pest-control work and the cost of daily interest charges that the bank may charge while the transaction is waiting to close.Q. There is a very nice home in our neighborhood that has been vacant for a few months. A large for-sale sign was recently placed in its yard that provides the name and number of a local bank, and a smaller sign right next to it that says "20 percent below BPO." What does this term mean?A. The term "BPO" is shorthand for "broker's price opinion," and is often used by lenders who are trying to market a foreclosed property.BPOs are typically prepared by local brokers or sales agents and are used by lenders to set an asking price for their foreclosures. Though a broker's opinion is no guarantee that a home is actually worth the quoted amount, the fact that the property you're asking about is being offered for 20 percent below its BPO suggests that the bank is anxious to sell - and thus may be unusually willing to negotiate the price and other terms of a deal.Q. I got into a jam with the Internal Revenue Service a few years ago and wound up owing it almost $16,000 in back taxes, which I have been paying off in monthly installments. I purchased my first home last year and now am entitled to a $10,000 refund for 2009, thanks to the first-time-buyer's credit and the other real estate tax breaks that you have written about before. Will the IRS send me the refund, or will it keep the money because I still owe more to the government than it owes to me?A. Virtually all agreements that the IRS signs with delinquent taxpayers contain a provision that allows the IRS to keep any refund that's due in a future year and apply the amount to the back taxes owed from previous years. So, the upcoming $10,000 refund you earned by purchasing a home in 2009 likely will be applied directly to the outstanding balance of your account.This means you won't get a refund check, but the amount you owe to the IRS will be sharply reduced and you will retire the debt much sooner. However, you must still continue making your monthly payments based on the original agreement: The credit that the government issues toward the outstanding balance of your old debt is not a substitute for the regular installments that you agreed to make when you signed the contract a few years ago.It's worth noting that the IRS also can keep or reduce a taxpayer's upcoming refund to settle other types of outstanding debts, including money owed for state income taxes, student loans or child support.bull; For a copy of the new booklet "Using Your House as Shelter from the IRS," explaining how homeowners and investors alike can maximize their real estate tax breaks under the new federal tax rules, send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.#169; 2010, Cowles Syndicate Inc.