Not many documents create more confusion in a buyer's mind during a home purchase as the Good Faith Estimate. The GFE invariably causes frantic phone calls from the buyer to his loan officer and his real estate agent, so have been prompted to write a simple explanation on how to understand a GFE. There are instructions published by HUD about the GFE, but then those are the same folks who thought up the form that confuses many buyers in the first place. The comments below hopefully help a buyer isolate the costs he or she is actually responsible for in regard to their specific purchase.
In a home purchase, it is important to differentiate between RECURRING and NON-RECURRING costs the buyer may have to pay for.
RECURRING (meaning Buyer pays them year after year): Always prorated to the exact date of ownership at close of the sale. They are property taxes, mortgage interest, hazard insurance, and HOA monthly dues
NON-RECURRING: One-time fees necessary to close the sale. Escrow fees, recording fees, title insurance, HOA documentation and transfer fees, appraisal fees, private transfer taxes in some developments, notary, messenger, wire fees etc.
The GFE is a form which is now used by lenders throughout the US prior to a buyer's commitment to the lender and service providers. Different states, and in CA even different areas of the state, have varying customs as to which party pays for what. The buyer may see charges on his GFE that are actually paid by the seller, as negotiated and mutually agreed on in the sales contract.
Breaking down the GFE:
Page 1 reiterates the loan terms the buyer discussed with the loan officer. If the terms do not match the verbal discussion, now is the time to speak up!
Section A: Lender's fees for originating the loan, sometimes called POINTS
Section B. 3 reflects buyer cost estimates on Initial Fee Worksheet (IFW) which should have been provided by the loan officer prior to the GFE being prepared
Section B. 4 The total includes escrow/closing agent, lender's title policy as well as notary, messenger and even a few hundred dollars padding for later refund.
Section B. 5 The owner's title policy is many times paid by the seller (In CA this is negotiated in the offer)
Section B. 6 is self-explanatory. Some of the costs are negotiated in the contract and may be seller's expense
Section B. 7 the County will charge so much per page or document. This is not a profit the lender makes, it's a pass-through expense
Section B. 8 Transfer taxes are payable to County and in some areas the City and are a pass-through expense. Which party pays for transfer taxes is negotiated and agreed on in the purchase contract.
RECURRING Section B. 9 Estimate of prepaid property taxes and hazard insurance. Escrow will calculate the exact amounts at closing.
Section B. 10 Interest between close date and end of month, i.e. to the next loan payment due date
Section B. 11 Hazard insurance estimate. Lender will estimate the absolute TOP premium amount. Buyer should obtain an actual quote by shopping insurance providers. Only the actual gets charged at the close.
Total section B on page 2: Estimated amount of cash needed for closing, excluding the down payment. The total is NOT necessarily ALL paid by the buyer who may be looking at it in horror.
Page 3 of GFE: Spells out the loan amount, rate and monthly payment in clear terms. See remarks for page 1.