Posted September 11, 2014Tweet
As a mortgage applicant, your lender is required by law to tell you how much your loan will cost at a given mortgage interest rate. These loan costs are reported on a form called the Good Faith Estimate (GFE).
Mortgage lenders are required to a Good Faith Estimate to all mortgage applicants within 3 business days of application unless the loan has been denied.
Understanding your Good Faith Estimate can help you to make better mortgage rate comparisons among lenders, and to reach a better understanding of your loan and APR.
Good Faith Estimates plainly explain the terms of a mortgage. The best part, though, is that mortgage applicants can trust the numbers on a Good Faith Estimate because lenders by law to honor a GFE's key terms -- even if they've been made in error.
Let's look at the three pages of a Good Faith Estimate and explain what's included.
The first page of the Good Faith Estimate is a summary of your mortgage terms. It lists your name and property address; one available mortgage rate-and-fee combination; and your bottom-line settlement charges among other items.
The upper-most part of your Good Faith Estimate lists your name, the address of the subject property, and the date on which the GFE was prepared. The date is a key element because mortgage rates change daily, and a GFE from today won't be the same as a GFE from tomorrow.
The header box also lists the name and contact information for the GFE-preparing lender.
The Good Faith Estimate includes a section with key dates, which explains the duration for which the GFE is valid. This section is provided to protect mortgage lenders from "out-dated" GFEs. You can't lock a mortgage rate from 6 weeks ago, and the GFE attempts to prevent this type of misunderstanding. An explicit GFE expiration date is provided.
For loans with specific locks periods, the GFE will indicate the number of days for which the rate lock is valid. For loans with "floating" mortgage rates, the GFE indicates how many days prior to closing a mortgage rate must be locked.
Many people review the "loan summary" section first on a Good Faith Estimate. The summary area includes the key terms of your loan, and describes whether the GFE is for a fixed-rate mortgage or an adjustable-rate one.
The items included in the summary section include your loan size, your loan term (in years), your loan's initial interest rate, and your monthly principal + interest obligation at the start of the loan. .
The section also answers the questions "Can your interest rate rise?" and "Does your loan have a prepayment penalty?" If the answers to either of these questions is "yes", the rules of your loan's adjustment and/or its prepayment penalty are required to be shown.
Lastly, the section indicates whether the mortgage carries negative-amortization or balloon mortgage features.
This GFE section lists whether an escrow account was included in the pricing of your mortgage, and whether you're required to escrow in order to get access to the mortgage rate provided. Note that some mortgage types -- including FHA loans and conventional loans over 80% loan-to-value -- require escrow accounts for all approved mortgages.
This section lists your "bottom-line" figure due at closing. It presents, on the first page, the sum of two figures taken from the GFE's second page. Note that the amount listed in your summary is not necessarily the amount of cash you are required to bring to closing.
Your bottom-line figure is -- loosely -- your closing costs minus your closing cost credits plus whatever monies are required for your escrow.
The second page of the Good Faith Estimate is a summary of your closing costs and funds required for your escrow impound. Together, these fees are labeled "settlement costs" on the GFE.
The GFE's Adjusted Origination Charge section is split into two parts -- the fees charged by your lender for the loan, and the number of discount points required to get the lender's offered mortgage rate.
The first part, labeled "Our origination charge", is a sum of all lender-charged fees. It comprises processing fees, underwriting fees, wire service fees, along with every other lender-related charged. There is no itemization of fees provided which is why the GFE explicitly reads "This is our charge for getting this loan for you."
If the lender charges it, it's included in the origination charge.
The second part of the section lists your loan's accompanying discount points. There are three available checkboxes. Lenders will use only one of them.
If the first checkbox is checked, it tells that your loan's discount points were included in the "Our origination charge" section. If the second checkbox is checked, it indicates that a closing cost credit is being provided at the GFE's listed interest rate, a setup sometimes known as "Reverse Discount Points".
Lastly, if the third checkbox is selected, it indicates that your lender-offered interest rate requires discount points, and the charge for your discount points will be listed in dollars and cents.
Your Good Faith Estimate will also provide a listing of non-bank-related charges you should expect to pay in conjunction with your mortgage. Spilt over 9 separate categories, these fees and charges are estimates but lenders are required by law to be "within range" of the final settlement fees to promote fair comparison.
Some of the services listed in the "Other Settlement Services" section are shopped by the lender and assigned to you. These include appraisal fees and flood certification fees for homeowners in flood plains. Other fees are charged by state and local governments. These fees include recording charges for your mortgage, and transfer stamps in locales which assign them.
Lastly, your GFE will show the amount of prepaid mortgage interest due at closing, as well as whatever real estate tax and homeowners insurance premiums are due. Collectively, these charges are known as Prepaid Items. They are not mortgage closing costs despite their inclusion in your settlement charges.
It's important to note that Sections 3-11 on your GFE's second page should be nearly identical from lender-to-lender. These are charges and costs outside of your lender's control.
The third page of the Good Faith Estimate explains what Page 1 and Page 2 say, and provides instruction for comparing loans between multiple mortgage lenders. It also includes a listing of mortgage-related fees, sorted by whether they're allowed to change, and by how much.
Your Good Faith Estimate commits a mortgage lender to a given mortgage rate-and-discount point combination. GFE items which cannot change increase at settlement include your lender's origination charge and, once your mortgage rate is locked, the number of discount points charged for your loan.
Note that your lender can decrease these costs after your mortgage rate is locked -- it is only prohibited from raising them.
The Good Estimate Estimate is an estimate based on available information at the time of application. Sometimes, service costs change. For this reason, the Good Faith Estimate may vary from your settlement statement by as much as 10% per item.
Only certain fees are included in this allowance, however. They include government recording charges, and title services fees and other required service for which you are allowed to shop and for which you chose a lender-approved service provider.
Mortgage applicants waive their right to the ten percent cap if they shop with non-lender-approved service provider. Note that lender is not responsible by law for mis-estimating the fees of a service provider with which is has no working relationship.
In this section, the GFE re-iterates that the lender is not responsible for fees related to service providers which you select which are not lender-approved. It also lists that homeowners insurance premiums may change; that real estate tax bills may change; and that daily mortgage interest charges may change. These are items which are not in the lender's control.
For help with "discount point" comparisons, every Good Faith Estimate comes with a Trade-Off Table; a columnar comparison of up to three different mortgage rate-and-discount point combinations as offered by the same lender.
The first column is a summary of the loan terms as listed by the GFE. The second column shows the effect of reverse discount points; receiving a closing cost credit to offset settlement fees. And, the third column shows the effect of paying additional discount points to get access to lower rates.
If you'd like to see these columns completed in full, be sure to ask your GFE-providing lender.
To assist mortgage applicants who are shopping for a mortgage, the Good Faith Estimate template provides space to compare offers from up to 4 mortgage lenders. The key details of your loan are listed by column, including loan size, mortgage rate, principal + interest payments, and other key details from your summary page. After you have collected your GFEs from your short list of lenders, you can hand-write your notes into the chart.
Note that mortgage rates change all the time. Your Good Faith Estimates should all have the same "Date of GFE" from the tool's first page.
Lastly, the Good Faith Estimate explicitly states that your mortgage may be transferred among lenders after your settlement has occurred. If your loan is transferred, the new mortgage lender may not change the terms of your loan.
Mortgage rates vary between lenders, and so do the fees that they charge at settlement. It's always wise to "shop around" -- a better deal may be available to you. Maybe it's lower rates, maybe it's lower fees, maybe it's both.
See today's rates and get a Good Faith Estimate for your loan. Rates are available online. They're fast, they're free, and there's no obligation to proceed whatsoever.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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