The Good Faith Estimate Explained
Lenders are held to a high standard of accountability with the use of the standard Good Faith Estimate. This means you really should know your payment and cash to close for your transaction. Your lender must meet strict rules on timing and the quality of their estimate to protect you-the buyer or consumer.
Let’s start the top half of Page 1 of the new Good Faith Estimate (GFE) form
Name, address, etc of both the lender and the customer. It also asks for a Property Address. The property address is important. There are different requirements if you don’t have an actual property address. Obviously refinance transaction will have an address right away. If you are buying a home, you may or may not have an actual property address at the time the estimate is done so be sure to get an updated estimate before and/or after you offer.
The “Important Dates” Section
Line 1: Lenders must list a date and time the estimate is valid. This is a stupid requirement, as lender will simply put the same date they are issuing the estimate unless the interest rate is locked at the same time. This is because interest rates change daily, and sometimes hourly. No one can guarantee what rates will be tomorrow.
Line 2: This tell you how long the estimate costs are valid for. The costs must be valid for at least 10 days.
Line 3: How long is the rate lock valid. If your contract runs long, be aware that a rate lock extension comes with a price.
Line 4: Because it takes time to collect documents, get appraisals, then Underwrite and prepare your final documents, the lender will require you to lock your interest rate a set number of days before the scheduled closing. We anticipate most lenders will put about 14 days on this line.
The summary of the loan is displayed on the 1st page with answers about the loan such as:
(1) Can your interest rate rise? (Indicates if it is an adjustable rate mortgage or fixed)
(2) Even if you make payments on time, can the loan balance rise? (Indicates if it is a negative amortization loan)
(3) Even if you make payments on time, can your monthly amount rise? (Indicates if the account is escrowed or not. Even if your rate is fixed, your payment can change due to escrow amounts for taxes and insurance/s.)
(4) Does the loan have a pre-payment penalty? (Can you pay it off at any time without paying a charge?)
(5) Does the loan have a balloon payment?
The Good Faith Estimate groups fees heavily. This section groups lending charges. These items include Loan Origination Fee, Processing Fees, Funding, Doc Prep Fees, Broker Fees, Underwriting Fees, etc.
Line 2 of “A” shows if you are paying discount points to lower your interest rate, or if you are paying a much higher interest rate to offset (or lower) your actual closing costs; this is often called rolling in closing costs to keep your cash out of pocket down.
Section “A” of the Good Faith Estimate must be the same at closing (on the HUD-1 Settlement Statement). There is Zero Tolerance for any differences.
This brings Lenders to more accountability towards the accuracy of their good faith estimates to their clients, and should eliminate two big problems: 1) quoting low in order to gain your business and 2) passing the blame game on faulty lending software. A good agent and lender keep you informed at every step of the way. I once say a $5k error because of a software glitch. We are always happy to review your GRE though not lenders, we are here to support you.
As you progress, you’ll have new information and changes and should get a new faith. The most common changes are: address, purchase price, money down, inspection charges and things not initially known on the original application.
There are other charges associated in purchasing the property. Appraisal, title services, inspections and more. These items are found as part of “B” on page 2.
Title charges like lending fees are heavily grouped in Section 3, 4, 5 and 6. These charges can deviate up to 10% on the HUD-1 statement – assuming that the borrowers services are initially identified by the Lender. The total of these charges of page 2 on the GFE constitutes the “B” total.
Along with the “A” total and “B” total, these costs add up to make the Total Estimated Settlement/ Closing Costs. However, this is NOT to be confused with Cash to Close. Items A and B DOES NOT account for Seller’s concessions (seller paid closing costs), property tax and Home Owner Association prorations, unless they are being directed to obtain them with the purchase contract. Also note that nowhere on this form does it actually provide you with those numbers. Your lender will provide that information on their own forms.
Page 3 of the Good Faith Estimate is also known as the “finishing touches” for the loan. It gives borrowers instructions on what cannot be increased at settlement, what may increase up to 10%, and what could potentially subject to change.
Finally, there is also a tradeoff table for borrowers to see the various choices as provided by the same lender. Same loan with lower closing costs, or the same same loan with a lower interest rate.
Last but not least, the Good Faith Estimate also provides a section to allow borrowers to compare various loan offers in the Shopping Chart section. CAUTION: This section can be very misleading and is truly done best in person with a top notch lender. Rates change everyday, sometimes hourly. Unless you get all your quotes on the same day within just a few hours, this section is meaningless.
Other good things to know about the GFE.
It must be given upfront. Usually within 3 days of loan application.
A loan application is deemed taken by a lender with the borrowers’ names, social security numbers, incomes, estimate purchase value, loan amount, other information deemed necessary by lender and property address. This form must only be utilized if there is a specific property address. While home buyers have used the GFE to shop for lenders, they really can no longer do that. Without a property address, the lenders will come up with “preliminary” estimate forms, and only issue real Good Faith Estimates when compliance requires.
Good for 10 days of issuance.
The Good Faith Estimate will be good for at least 10 days after the borrower receives it. The borrower MUST express an intent to proceed with the terms and conditions of the loan based on the GFE provided within 10 days business. After 10 business days, the lender is no longer bound by the issued estimate.
This standard form is a government effort in facilitating consumer comparison shopping of Lenders and consumer consciousness.
The Good Faith Estimate is commonly just a P& I (with PMI) estimate. Your actual payment will need to be adjusted for taxes and insurance, which are specific to the property you choose. This is why getting an updated GRE before offer is a very, very good idea. A top notch realtor and lender can estimate better and help you stay within your budget!