What is a Good Faith Estimate?
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HUD requires lenders to use a Good Faith Estimate form or GFE. This is important because whether you buy a mansion or a cottage, you want to know how much your mortgage is going to cost — not just the interest rate but all the fees and charges you’ll have to pay to close the loan.
The standard form for all lenders assures that borrowers actually understand what’s being charged for their loans, why and by whom.
First, it’s a three-page document that every lender uses — meaning that offers from lenders will be the same and can readily be compared whether you are looking for a Conventional, FHA, VA or Jumbo Loan.
Second, the document is not just a list of fees and charges, it also explains in basic terms the purpose of each expense.
Third, mortgage brokers have to show their yield-spread premiums (YSPs), which a mortgage broker is paid or discounts the borrower.
Fourth, it goes together with the government’s HUD-1. This is the three-page form which all closing and settlement agents must use. It is easy to compare the GFE with the HUD-1, thus assuring borrowers are not overcharged at closing.
Fifth, the GFE ensures that no fees are paid for an application.
The first page is actually a summary of loan costs — the specifics are found on page two.
Item 1 tells you how long the quoted rate and terms last. Items 3 and 4 concern loan lock-ins — how long the rates and terms will last if you lock them in at the time the GFE is issued.
The loan summary tells you the amount of the loan, the initial loan rate and monthly payment. IMPORTANT: If you have an ARM the next few items will tell you:
How high the interest rate can go.
When the interest rate can first rise.
The maximum monthly payment you can expect.
If a prepayment penalty is allowed and, if yes, how much it will cost.
Whether there is a balloon payment at the end of the loan terms.
Next the form will tell you whether the lender will create an escrow or “trust” account to collect money each month for property taxes and insurance. Generally, if you buy with less than 20 percent down an escrow account is required by the lender.
Finally, the form adds your origination charges (the “A” items on page two) with other settlement costs (the “B” items on page two). Be aware that you can have additional costs at closing, depending on how the sale agreement is written.
The second page is divided into two parts, A and B. Part A looks at “origination” fees, the cost to buy your mortgage.
First, the form shows your origination fee in a dollar amount, including any yield spread premium (YSP). Under the old rules, the yield spread premium could be shown as either a dollar amount or as a percentage of the loan. Now, the entire cost of the loan, including any YSP, is shown as a single dollar amount.
Next, the form shows if your interest rate is being impacted by the origination fee. In other words, let’s say you can borrow $100,000 at 6 percent interest over 30 years with no points. This is called the par pricing for this loan. But, let’s say that you could also borrow $100,000 at 5.75 percent — if you were willing to pay 1 point at closing. A point is equal to 1 percent of the loan amount or $1,000 in this case. The form shows if you are paying for any reduction of the interest rate OR any increase in the rate by paying a smaller origination fee.
Next we go to part B. This part of the form shows the cash costs you can expect to pay at settlement (or escrow) when the loan closes. As the bottom of part B is a total which shows “Your Charges for All Other Settlement Services.”
The totals for parts A and B are then shown at the bottom of the page and on the bottom of page one as well.
HUD encountered considerable opposition from the lending industry, especially with regard to the question of how yield spread premiums should be disclosed. In an important decision which reviewed 14 years of effort to update the good faith form, a court found in 2009 that HUD had acted fairly and in the public interest with the form it produced.
The last page should really be the first page because it contains instructions for understanding the form.
The first section lists charges that the lender cannot increase, charges that can rise by as much as 10 percent, and charges that change prior to settlement. This is important information, it means that you should check the numbers on your good faith estimate with the final figures presented to you at closing.
Next, HUD gets into the issue of higher or lower settlement fees. In the same way that mortgage loans have par pricing, so does the settlement process. In other words, if you are willing to pay a somewhat higher interest rate you may be able to lower your cash costs at closing. Indeed, you may not have to bring any cash to closing.
In the third section HUD offers borrowers the opportunity to compare loan offers from different lenders. This is important because borrowers should look at different loan offers to find the rates and terms which best meet your needs.
Lastly, HUD notes that your loan may be sold in the future. If so, after settlement “any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.” Translation: A contract is a contract.
HUD estimates that the new form will save typical borrowers $700 each time they finance or refinance a home. That’s a lot of money, but more could be done to cut borrower costs — and it shouldn’t take 14 years to make additional changes.
IMPORTANT: Always keep your GFE in a safe place to assure that your loan terms are actually the same as disclosed. For questions regarding GFE issues, speak with your real estate broker and mortgage lender.
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