Understanding your Good Faith Estimate ( GFE )

 

Gone are the days when representatives of a mortgage lending company could open a briefcase or attaché case, grab an application package, and proceed to complete the generic Good Faith Estimate (GFE) and Truth-In-Lending (TIL) forms. As of January 1, 2010 the final stage of new regulations signed into law by former President George W. Bush took effect and it was then that the new GFE replaced all previous versions.

 This new version of the good faith estimate is as extensive as it is comprehensive and it entails – or attempt to be inclusive of – all aspects of a mortgage loan, especially when that loan is used to finance the purchase of a residential property. The GFE form is sectioned off in blocks and boxes and reflects a tolerance which will be explained later. Some fees reflected on this form can be changed and others cannot be changed, and some can be in the form of a flat fees  while others must be a percentage. Sounds like the old form? Well this might be where similarities end.

  GFE from the Top

 Starting from the very top of the GFE form – based on the sample HUD has made available on its website – the words Good Faith Estimate (GFE) is printed in 18 point bold lettering across the top. Then further down the form in a block on the left certain information is required to be entered concerning the originator: Name, address, phone number and email of the Originator. Originator means the lender that will process and close the mortgage loan. In a similar block on the right side of the page, information is requested about the borrower and property: Borrower, Property Address and Date of GFE.

 The standard language in this new GFE is written in a way that mortgage lenders are required to explain the purpose of providing a borrower with the form. That purpose is to give a borrower an estimate of his/her settlement charges (costs associated with the home purchase transaction) and terms of the mortgage loan if s/he is approved for the loan being applied for. The prospective borrower is then encouraged via the form language to, "...Compare this GFE with other loan offers, so you can find the best loan...” which is indicative of the essence of what the entire new regulation sets out to accomplish – increased consumer protection, awareness and freedom of choice.

 Important Dates and Disclosures

 In the Important Dates section of this new form, a prospective borrower is made aware of the GFE expiration date, as well as the expiration of any locked-in rates and terms; but one of  the more important pieces of information reflected here is the number of days in which the borrower must “go to settlement” (close the transaction) in order to receive the locked-in rate and terms. However, to get a clear understand of this new GFE a borrower should focus on one box or block at a time, know what's meant by the fees and disclosures in that box and then make a note of whether or not these fees and charges can change prior to or at closing.

 Also disclosed in the Important Dates section which a buyer should pay close attention to is what happens after expiration of the interest rate on which repayments, per diem (daily) interest and other fees & charges might be based. In this regard the buyer is reminded that, “...After this time [expiration of the GFE's interest rate], the interest rate, some of your loan Origination Charges, and the monthly payment shown below can change until you lock your interest rate.” The last 6 words of this sentence refers to the very important, but sometimes difficult decision a buyer must make in order to secure the best available loan terms.

  Charges Within Lender's Control

 Boxes 1 and 2 are the most important areas of the GFE to review as you consider lenders. Why? These boxes contain fees that are charged by, and paid to the lender and can include any origination points, discount points, underwriting fees, processing fees, and any junk fees as determined and controlled by the lender. But keep in mind that these fees CANNOT increase at the closing of your loan, so in a sense they are all locked in.

 Also included in boxes 1 and 2 are "Lender Credits" which can be explained as credits to the borrower from the lender in exchange for a slightly higher interest rate. For example, some lenders will offer, from time to time, a credit to the buyer designed to offset some of the third party fees and charges that the particular lender incurs. Such credits will be reflected on the loan proposal but omitted on the GFE in most cases since the new GFE describes individual fees, charges and costs while leaving any bottom line descriptions out of the otherwise extensive form.

  Charges the Lender Does Not Control

 Fees and charges not shown in boxes 1 and 2, as well as other information that is important to a buyer during the borrowing process should remain constant from lender to lender, so wherever you decide to get your financing, some fees reflected in the following descriptions should be the same; except that where any increase is applicable it can only be up to 10%, which is a tolerance imposed by the new regulations that kicked in on January 1, 2010.

 Box 3 contains 'Required Services that we select.' The “we” in this description refers to the lender which, depending on the loan type, might require third party vendors which you – the buyer – are required to use and therefore to pay for. The best example of a third party vendor the lender will require a buyer to use is an appraisal company from a list of lender-approved appraisal companies provided to the buyer.

 Contents of Box 4 relates to 'Title Services and lender’s title insurance.' Fees and charges associated with services provided in this section are determined by the title company and may include, but are not limited to closing or escrow fees, document preparation fees, notary fees, attorney fees, title insurance, endorsements, exam fees. A title insurance company will be required without regard to the lender a borrower uses; and while the borrower can select a title company or closing attorney that does not appear on the lenders list, s/he must keep in mind that doing so could cause the fees to increase which, in the case of such occurrence, the lender is not required to reflect such increased fees on this part of the GFE.

 Box 5 relates to 'Owners Title Insurance' which actually protects the new home buyer's title to the property. If the borrower decides to purchase an Owner’s Title Insurance policy, that charge will appear in this box, but similar to the disclosure in box 4 above, the buyer can select a title company not on the lenders list, but the fees can increase and the lender is not bound to these fees on this part of the GFE.

 Box 6 includes 'Required Services that the borrower can shop for. Any third party services a borrower can shop for will appear in this box. An example of such a third party service might be HUD consultant in the case of a 203k mortgage loan, or termite exterminator. However, if you select the company from a list the lender provides, the charges can only increase by 10%. Otherwise the cost will be the actual cost of the company selected by the borrower and the lender will not be bound by the GFE.

 Box 7 contains 'Government Recording Charges' which can be described as any recording charges your state or local government may charge for the service it provides. Also relating to governmental fees and charges, Box 8 contains charges and fees relating to 'Transfer Taxes.'  These charges are for state and local governmental fees on mortgages and home sales and are generally a set percentage or amount.

 The Box 9 through 11 sections of the GFE contain other information important to the borrower's transaction process and should remain constant regardless of the lender selected to finance the transaction. These fees and charges described in the following paragraphs CAN increase at closing.

 Box 9 contains the borrower's 'Initial deposit for [the newly established] escrow account' which simply means that any reserve funds the lender requires to be paid at closing for payment of the borrower's taxes and insurance will be placed in an escrow account held by the lender or by any other entity that services the mortgage if it is assigned to such servicing entity, an occurrence that is rather frequent in the industry.

 Box 10 contains the 'Daily Interest Charges' a borrower will pay for the remaining days of the month at closing. For example, if closing takes place on the 12^th of a given month, the  borrower will pay 19 days of interest at closing if the month has 30 days. This per diem or daily interest is calculated by multiplying the mortgage amount by the interest rate and divide the resulting number by 365 (days of the year), although some closing attorneys had been known to use a 360 day year for this calculation.

 Box 11 contains information relating to the borrower's 'Homeowner’s insurance' for which s/he is required to pay the full first year's premium prior to closing the transaction, if s/he is purchasing a home, as opposed to refinancing one.

 'Change of circumstances' is described as the event in which any of the underlying facts provided by a borrower to the lender, prior to that lender providing the initial GFE change, the lender fees can change. “In the new RESPA laws this is referred to as a changed circumstance. A new GFE will be provided within 3 days of the lender discovering the changed circumstance.”

 While there may be many other things that can be written about the new GFE, what is provided above is the most important aspects of this document that a new home buyer or prospective refinancing mortgage borrower should be familiar with, if s/he expects to exact the very best mortgage interest rate and transaction terms, or other fees and charges associated with mortgage financing.