Understand the new Good Faith Estimate
Since January 2010, a new form of 'Good Faith Estimate' (GFE) has been mandated by the Department of Housing and Urban Development (HUD) for use during the mortgage application process. While this new form can be hard to understand, HUD estimates it will save the average borrower about $700 in closing costs and, used properly, it can certainly help you to make the right choices about your loan and to compare one lender offer to another.
What is a GFE?
When you get past an initial conversation with a lender and elect to make a formal application, your lender must provide you with a Good Faith Estimate. This three-page form is intended to help you understand:
- The interest rate on your loan
- Your monthly loan payments and any additional monthly payments for insurance, property tax, etc. that you must make through the lender (escrow payments)
- How your loan behaves - is it a fixed rate mortgage, an adjustable rate mortgage (ARM) with an initial fixed period and a varying rate thereafter, or something else. Can the loan balance rise in any circumstances, and is there a penalty if you pay off your loan early (prepayment penalty)
- What fees is your lender charging you for taking out the loan (origination charge)
- What charge or credit are you receiving because of the rate that is proposed (loan points or rebate)
- What other charges are you likely to have to pay in order to take out this loan (examples may include appraisal fees, title insurance, government fees and taxes and so on)
One of the reasons that a new GFE was introduced was that, in the past, it was not uncommon for lenders to quote values for some closing costs that changed dramatically when the loan was funded. This new form mandates that the lender fixes some of these charges (or provides a new GFE should new information emerge, such as a poor appraisal or credit report, that requires additional charges), and sets limits on how much other charges can change.
Charges that cannot change between the issuance of the GFE and closing are as follows:
- Origination Charge
- Credit or charge (points) for the interest rate chosen after the rate is locked
- Transfer taxes
Charges that may change up to 10% at closing (also referred to as settlement) are as follows:
- Required services selected by the lender (may include settlement fees and escrow services)
- Title services and lender's title insurance
- Owner's title insurance if you use a company recommended by the lender
- Required services you can shop for (if you use a company recommended by the lender)
Charges that can change at settlement/closing are as follows:
- Services selected by you, not the lender
- The initial deposit into the escrow account
- Daily interest charges
- Homeowner's Insurance
Understand Your Loan
The first page of the GFE is devoted to explaining the loan you are being offered:
- How much are you planning to borrow over what period of time, and at what interest rate? What will your monthly payment be, and can your payment rise in the future (if, for example, you are being offered an Adjustable Rate Mortgage).
- Are there any other features of the loan like a prepayment penalty (an extra charge if you pay off or refinance your loan within some period of time) or balloon payment (after a number of years you must refinance or pay off all the remaining debt in a single payment) that could trip you up?
- Do you have to make monthly payments into an escrow account (homeowners insurance and property tax are typical charges) managed by your lender who will pay them on your behalf? Escrows don't force you to pay more money over time, but do force a higher monthly payment.
- The GFE concludes with a summary of the charges you must pay to the lender (origination charges), and other charges and fees charged in connection with the loan.
The second page breaks out what the lender is going to charge you for the interest rate selected and for administrative fees.
If you choose a slightly higher rate, you may receive a credit at closing. Many people go this route and use the credit to cover their closing costs. Be aware, however, that while this may make sense in the short term, over the long run you may find yourself paying a lot more in interest than you saved at closing.
If you select a lower rate, you may have to pay an additional charge (called points) that buys you a lower interest rate. Points often make sense for borrowers who know they plan to be in their homes for the long term (typically at least five or more years), because while they pay more today, they save interest over time.
Page 2 of the Good Faith Estimate also digs deeply into all of the other charges associated with your mortgage refinancing or home purchase loan. These are discussed in some detail above. Ensure that you understand which fees are for services for which you have a choice of provider - you may want to use a service such as closing.com to see if the provider your bank recommends is overcharging.
Page 3 can be useful in helping you to make a choice of loan and lender. A tradeoff table (which not all lenders fill out) helps you to compare different credit/charge options and the impact that they have on your rate and payment, and a shopping chart provides a handy table for you to record quotes and GFEs from different lenders as you shop to find the right loan or rate for you.
If you are looking for a great mortgage refinancing or home purchase rate, you should consider looking for a quote from bills.com's network of reputable lenders.