What is a good faith estimate? A good faith estimate, referred to as a GFE, is a standard form which is intended to be used to compare different offers (or quotes) from different lenders or brokers.
A good faith estimate must be provided by a mortgage lender or broker in the United States to a customer, as required by the Real Estate Settlement Procedures Act (RESPA). The estimate must include an itemized list of fees and costs associated with the loan and must be provided within three business days of applying for a loan.
These mortgage fees, also called settlement costs or closing costs, cover every expense associated with a home loan, including inspections, title insurance, taxes and other charges.
It is important to remember that a good faith estimate is only an estimate. The final closing costs may be different, however the difference can only be 10% of the third party fees. Once a good faith estimate is issued the lender/broker cannot change the fees in the origination box.
Because all good faith estimate must not follow a specific format, it is easy to compare loan rates. Before the law was changed in January 1, 2010, lenders were not uniform in their interpretations of what fees should be included on the GFE and where such fees should be disclosed.
Per federal law, lenders are now required to issue the GFE- If a lender does not provide a GFE within 3 business days of receiving a completed loan application, they are in violation of Section 5 of RESPA. HUD provides the specific criteria for what constitutes a complete loan application:
- Borrower’s Name
- Borrower’s Monthly Income
- Borrower’s Social Security Number (To obtain a credit report)
- Property Address
- Estimate Value of the Property
- Loan Amount
- Anything Else the Lender Deems Necessary
TIP -Having your credit pulled multiple times over several weeks may indicate to credit bureaus that you are being repeatedly denied and your credit score may be negatively affected. To avoid this, keep mortgage shopping to 15 to 30 days of your first credit pull.Keep in mind-
- Origination charges can vary widely from lender to lender, and can result in savings if you are willing to shop around.
- The new GFE does not state the sum of a borrower’s principal, interest, taxes and insurance, known as PITI. This is an important difference. In the past many GFEs provided the final PITI amount. You might still ask your lender to calculate this amount.
- Keep in mind that the GFE does not state the property purchase price, only the total loan amount. The GFE focuses on loans and was designed specifically to help borrowers compare lenders and other closing costs.
- The lender’s receipt of the entire loan application triggers the 3 business day period in which the lender is required to furnish the potential borrower with a GFE. Keep this in mind. It is a very good idea, to have all the documentation available to your lender during the prequalification period of the home purchase, before you write an offer.
Act Quickly and Provide All Required Documentation. Before searching for a new home, most buyers receive a pre-qualification letter from a lender. A pre-qualification letter states the amount a potential purchaser is likely able to borrow based upon information provided to the lender, including estimated home value, monthly income, and other factors. And while obtaining pre-qualification letters is common practice, the letters are in no way legally binding.
Once an offer to purchase is accepted, the contract generally stipulates a deadline for the purchaser to receive a mortgage commitment. The mortgage commitment states that the lender is willing to loan the purchaser a set amount of money by a specific expiration date. Prior to a lender issuing a mortgage commitment to any buyer (or homeowner hoping to refinance), the lender must receive a completed loan application. This means you must act quickly in order to comparison shop and stay within the guidelines of your executed offer to purchase the home.
Get familiar with a Good Faith Estimate form. The table on page three provides a handy tool to compare lenders. You can access a pfd form for the Good Faith Estimate here.
Additional notes on fees-Each section in the new GFE is assigned a tolerance level for variation in fees. There are three different tolerance levels:
1. 0% Tolerance - If at the closing, any item in the “0% Tolerance” category is higher on the corresponding section of the HUD-1 compared to the original GFE, the lender is responsible to cover the difference.
2. 10% Tolerance - Unlike the “0% Tolerance” category, these items are not compared individually to their corresponding section in the HUD-1. Instead, all items in the “10% Tolerance” are aggregated on the GFE and compared to the aggregated corresponding items on the HUD-1. In the event that the HUD-1 has a total more than 10% higher than the total on the GFE, the lender is responsible for any expense in excess of the 10% increase. This means that any one item in the 10% tolerance category can increase more than 10% from the GFE to the HUD-1 without a penalty to the lender, as long as the sum of all the items does not increase more than 10%.
3. No Tolerance - A few sections of the new GFE fall into the “No Tolerance” section. These quotes can change with no penalty to the lender.
