Effective 1 January, lenders across the nation are required to provide information on the cost of a loan on the new Good Faith Estimate (GFE) format developed by the Department of Housing and Urgan Development (HUD). This has many lenders and title companies scrambling to meet the new requirements. The goal was to make it easier to compare loan information across lenders. Buyers are encouraged to "shop" for the best loan that meets their needs. When lenders follow the new regulation, comparing the loans will be easier for the buyer. Additionally, the expensive loan application fees charged by lenders is gone, they can only charge up to $45 for the credit check. That's a good thing, again making it affordable to shop.
Ruth points out some of the issues with the new GFE format in the blog below.
Nancy Murray of Murray Knoll Partners
With Keller Williams Clients’ Choice
Colorado Springs, CO
New Good Faith Estimate of Closing Costs
Sometimes the hardest part about having new forms is that, well, it's NEW! It's DIFFERENT! We have to create new scripts to EXPLAIN it so that our clients can UNDERSTAND it. But first... WE have to understand it.
So here are just a few points regarding the new Good Faith Estimate that I hope will help with that.
First, we have to recognize the old Good Faith Estimate was really an estimate focused on how much the BUYER needed to bring to closing and how much they would have to pay monthly.
Now, we have an estimate of closing costs related to the mortgage REGARDLESS of who pays! No credits offsetting, just a disclosure of the expenses. Let's do a simple down and dirty comparison of then vs now to help get my point across.
For the purpose of ease, we'll pretend we have an FHA loan with a sales price of $100,000.00. Here are the other details for my example:
- The buyer is putting minimum down of 3.5%, or $3,500.
- Buyer has put $1,000 earnest money down.
- We'll pretend the total closing costs and prepaids are about $4,000 and the seller is going to pay them.
- And of course, on an FHA loan we have upfront mortgage insurance of 1.75% off the base loan amount, or about $1,700, which is rolled into the loan.
The old Good Faith Estimate, which was created just for the buyer's information, the amount required for closing would show:
- Closing costs and prepaids being paid by seller, which would show the credit for the buyer.
- Mortgage insurance of $1,700 would be added to the mortgage, which would also be credited.
- Leaving basically the down payment of $3,500, less the earnest money deposit, or $2,500.00
With the new Good Faith Estimate, there are no credits reflected. It is merely a reflection of ALL costs associated with the transaction regardless of who is paying them. Bottom line is going to look like this:
- Closing costs of up to $4,000
- Mortgage insurance of $1,700
- Down payment of $3,500
- NO CREDITS, so bottom line will be a total of the above, or $9,200.00.
The buyer isn't paying any more or any less. It's simply an explanation of all costs that need to be taken into consideration on that transaction.
Will this leave the buyer confused? Yes, UNLESS we redirect our attention to the residential loan application, known as the 1003! That form does, in fact, give a total monthly payment AND breaks down what amount the buyer will need for closing. Let me show you specifically where to look.
Page 4, Section VII:
Notice the credits given for seller paid fees
and MIP financed
Leaving what the Buyer needs for closing
And while we're looking at the 1003, we can also see the estimated TOTAL monthly payment on Page 2 of the application, Section V:
So, just change your scripts!
- The GOOD FAITH ESTIMATE is a reflection of ALL costs regardless of who pays what.
- For the total monthly payment and cash required at closing, look at the Residential Loan Application, referred to as the 1003, Sections V and VII.
Remember, your first time homebuyers have never seen the old GFE, so they don't know the difference. Don't dwell on the change, just focus on new scripts to help your buyer best process the information disclosed in the formats we are required by law to use.