RESPA, or the Real Estate Settlement Procedures Act, oversees the costs involved in any real estate transaction. This includes purchases and refinances. While this Act covers many real estate transactions, there are certain types that they do not cover. The lenders offering loan types not covered should still practice good faith effort and disclose all fees appropriately, even though there is no agency governing it.
What is RESPA?
RESPA pertains to one-to-four unit residential properties in either a purchase or refinance. The Act, which began in 1974, protects consumers against fraudulent activity as well as helps them choose the right services. It helps prevent you from paying any type of kickback fee or a referral fee in return for mortgage services.
A large part of what the Act does is regulate when consumers receive documents pertaining to a loan they applied to receive. The documents must be received by you at specified times or the Act is violated. The documents you receive disclose the fees, practices, and agreements that you must abide by if you agree to take the loan. The first part of RESPA comes into play immediately after you apply for the loan. The lender must provide you with specific loan documents, including the Loan Estimate within 3 business days. The Loan Estimate shows you the fees for doing business with the lender as well as the cost over the entire term of the loan.
The main benefit of RESPA is the protection against prohibited fees you receive. For example, under no circumstances can you be charged a referral fee. You may only pay for actual services you receive, such as attorney, title, or lender services actually rendered. No money may exchange hands strictly because someone referred you to a specific company.
Just as referral fees are prohibited, so are kickback fees. These are similar to referral fees but sometimes come in the form of material goods, such as tickets or gift cards. You are not obligated or allowed to pay for anything that pertains to a kickback. Any type of compensation is strictly prohibited.
You can use a mortgage to purchase land; however, it is not covered by RESPA. The only exception to the rule is if you use the land to immediately construct a home on it. You must also use proceeds of the loan to perform such construction or intend to build on the land within the next 2 years. If the loan is strictly for the land, the Act does not apply.
There are two types of construction loans you can obtain – construction only and construction-to-permanent. If you choose the construction only loan, RESPA does not apply. If, however, you choose the loan, which converts from a construction loan to a permanent mortgage, it does. Basically, any type of temporary financing does not apply.
Occasionally you might hear about a loan assumption. They are not as common as they used to be, but FHA loans do carry the right to assume. The only time RESPA applies to the assumption is if the lender approves the borrower for the assumption. This is the common way of conducting an assumption today, but in the off chance there is an assumption where the lender does not get involved, the Act does not carry any weight. The most common loan with assumption abilities today is the FHA loan. In order for a buyer to assume it, the lender must approve the borrower. In this case, RESPA would apply, just like it would for any other purchase loan.
RESPA might seem confusing, but it is meant to help you. It keeps away unnecessary fees and costs. It also protects you against any type of referral fee or kickback. The documents you receive are meant to help you understand the loan process and how to make it one you understand and can comfortably afford.