Here's a really excellent synopsis of the new Good Faith Estimate that's required, effective January 1st. Loreena Yeo's done a great job of spelling things out and making it understandable, even for Realtors.
For the longest time, there was no standardization in good faith estimates presented by Lenders when a loan application is made by a borrower. No standarization here means some lenders disclose a variety of information on the previous GFE while others do not disclose at all. In efforts to facilitate a better shopping experience for the consumers, HUD requires all lenders use the new standardized format for Good Faith Estimates effective January 1 2010.
At first glance, the standardized format of the Good Faith Estimate is easy to read, understand and digest by the average borrower.
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)
(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)
(4) Does the loan have a pre-payment penalty?
(5) Does the loan have a balloon payment?
Lenders are held to a higher standard of accountability with the use of the standardized Good Faith Estimate. "Good faith" in the past will now be more of certainty, especially when it comes to the Lender charges. HUD requires that Lenders be sure to know how much they intend to charge their borrowers based on the information the borrowers provided.
The new Good Faith Estimate also utilize the Lump & Dump concept whereby HUD feels that the borrowers have been provided too much information in the previous good faith estimates. Items "A" on Page 2 of the GFE includes all origination charges. They are no longer broken down into Loan Origination Fee, Processing Fees, Tax Service Fee, Funding, Lender Feeds, Doc Prep Fees, Broker Yield Spread Premium, etc. Only information that could affect the loan is broken down into 2nd part of "A". According to HUD, the "bottom line" numbers is what the consumers care about.
This section of the Good Faith Estimate must be the same (ie. Zero Tolerance for differences) and borrowers can expect them to be the same on the HUD-1 settlement statement - if the terms and conditions of the loan are the same. Should there be a difference, HUD considers this Breached Tolerance and this breach will be cured with a credit at the closing table or writing a check to the borrower within 30 days of closing.
This brings Lenders to more accountability towards the accuracy of their good faith estimates to their clients. It is a good thing.
Other considerations could be expected should there be changed circumstances on these No Tolerance items above (ie. Lender charges). A changed circumstance may include acts of God, war, disaster, new information not known by the Lender, other information found not to be inaccurate.
There are other charges associated in purchasing the property. These items are found as part of "B" on page 2 of the GFE.
The similar lump & dump concept for Title charges in Section 3, 4, 5 and 6. These charges can deviate up to 10% on the HUD-1 statement - assuming that the borrowers services 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 Needed for Settlement. Items A and B DOES NOT account for Seller's concessions, property tax and HOA prorations, etc.
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.
There is also a tradeoff table for borrowers to see the various choices as provided by the same lender. Same loan with lower settlement charges or same loan with lower interest rates.
Last but not least, the GFE also provides a section to allow borrowers to compare various loan offers in the Shopping Chart section.
The use of the form is MANDATORY. In the past, lenders have created their own formats and some not providing one at all. The new rules as directed by RESPA must be furnished to borrowers:
- 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 could no longer do that. Without a property address, the industry believes that lenders will come up with "preliminary" GFEs without the actual property address.
- Without 10 days of GFE issuance.
The GFE will be good for 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 GFE.
This is HUD's effort in facilitating consumer comparison shopping of Lenders. It is not the most perfect version out there but it is a much simpler method for an average consumer to understand. What this new GFE does not address is it does not specify the loan product (FHA, Conventional, VA, etc.) and it also does not inform the borrower the actual monthly payments in Principal, Interest, Property Taxes and Home Insurance (PITI). It only addresses the Principal, Interest and Mortgage Insurance (if applicable). The lender may furnish these information on other documents.
Download the new GFE here.
- How to Compare Lenders and Good Faith Estimates
- Mortgage Interest Rates Spiked Higher Than Normal
- 100% Home Loans
- Time Value of Money in Closing Costs
- Myths about Tax Assessments vs. Property Values
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Realtor®/ Broker of 3:16 team REALTY
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Copyright © 2009 by Loreena Yeo (3:16 team REALTY)
Originally posted on New Standardized Good Faith Estimate Effective January 1 2010.