Understanding the Good Faith Estimate

Understanding the Good Faith Estimate

When you apply for a loan, your lender or mortgage broker will supply you with the Good Faith Estimate or GFE. The GFE is an important document for three reasons:

  • It’s required by law.
  • It gives you an estimate of your loan terms.
  • It lists your estimated settlement charges or loan closing costs.

It’s required by law

Each time you apply for a loan, you will receive a GFE, as required by the Real Estate Settlement Procedures Act (RESPA), within three days of your loan application. These days, most brokers and lenders will email or fax the GFE to you – but they also have the option of mailing it to you as long as it’s postmarked by the third day.

Because it’s such an important document, you want to keep the GFE in a safe place in order to bring it with you at loan closing (more on this below). You also want to read your GFE carefully. Although not complicated, you do want to pay attention to specific areas, including loan terms and settlement costs.

It gives you an estimate of your loan terms

When applying for a loan, your lender or broker will typically quote loan terms – or the percentage rate you’ll pay for the life of the loan. The estimated terms you’re verbally quoted should match the estimated terms on the GFE.

The GFE will also list how long the quoted rate is available. In order to ensure you get the quoted rate at closing, you must lock in your rate.

A rate lock is a guarantee from the lender that you will receive the quoted rate for the quoted price for the quoted time period. Rate locks protect you from rising interest rates and are good for 30, 45 and 60 days – this information will be listed on the GFE.

Following the section outlining the terms of the loan on the GFE, you’ll find a box detailing the loan summary. This box shows the initial loan amount, the term, initial interest rate and whether or not the loan includes a prepay penalty or balloon payment.

It lists your loan settlement charges

When you close on your loan, you pay a number of settlement fees. These fees, a few of which we list here, include:

  • Loan origination charge – The cost to the lender to get you the loan.
  • Points – The fee charged for the interest rate.
  • Title services – The cost to research title to ensure it’s free and clear of liens or other problems.
  • Owners title insurance – An optional cost, we highly recommend you purchase Title insurance as it protects your investment in the property as long as you own it from claims of any prior owners or fraud.
  • Government recording charges – Covers state and local fees.
  • Escrow deposit – The amount of money you’ll need for your initial escrow deposit for property taxes and PMI.
  • Homeowners insurance – Insurance that protects you against loss due to fire or other disasters.

The settlement charges listed on the GFE are estimates and can change by the time you close the loan. At your settlement, you’ll receive the HUD-1, a form that lists your actual costs.

Now is the time to compare the terms and settlement charges on the GFE with those on the HUD-1. Some charges can change, others cannot.

Charges that cannot change:

These charges must match on the GFE and HUD-1:

  • Origination charge
  • Points
  • Adjusted origination charge (once you lock in your rate)
  • Transfer taxes

The total of these charges can increase by up to 10% at settlement:

  • Any services required by the lender
  • Title services
  • Owners title insurance
  • Government recording charges

These charges can change at settlement:

  • Initial escrow deposit
  • Daily interest charges
  • Homeowners insurance

You have the right to say “No”

If anything seems amiss, or the lender cannot explain why costs have changed from the GFE to the HUD-1, then leave the table. You are not required to continue the closing process or sign on the loan. Don’t let anyone pressure you to do so if you have any questions about the loan, terms, or costs.

As you can see, the GFE is an important part of the mortgage application and loan closing process. Keep any and all GFEs in a safe place, use them to compare rates and costs, and bring your GFE to closing.

An informed consumer is a smart consumer!