What Is a Good Faith Estimate?

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When applying for a mortgage loan, you want to know as much as possible about your new mortgage: the interest rate, whether that can change over time, and other key information that will help you decide whether this is the right financial decision for you.

Traditionally, this is where a Good Faith Estimate (GFE) comes in.

A GFE is a document provided to you at the beginning of the process. It is designed to set out the terms of your potential mortgage, as well as give you the opportunity to compare your loan to other options. When you shop for a mortgage, it is important to get a few different offers and compare them side-by-side to make sure you get the best possible loan.

However, starting August 1st, the GFE will be replaced by the Loan Estimate Form – a simplified version of the GFE designed to aid mortgage-seekers in a couple of key ways. We’ll talk about those changes in a minute, but first, it’s important to understand exactly how a GFE works.

What you should know about good faith estimates:

The U.S. Department of Housing and Urban Development has a sample GFE form for you to view so you can get an idea of what type of information a Good Faith Estimate will present. Whether you are using the GFE – or starting August 1st, the new Loan Estimate Form – all mortgage lenders are required to use the same form to help you easily compare mortgage loan details. Expect to see:

• Your initial loan amount
• Your initial interest rate
• Whether your interest rate can change over the course of the loan
• Any prepayment penalties, if you pay off your mortgage early
• Whether your mortgage requires you to purchase homeowners insurance

And more. Your GFE will also include a summary of estimated settlement charges, which are what you will pay your mortgage broker to set up the mortgage loan.

Although you may be tempted to go with the first mortgage loan you are offered, especially if you are in a hurry to complete the process, take some time to compare multiple mortgage loans. To quote the U.S. Department of Housing and Urban Development’s helpful guidebook, Looking For The Best Mortgage:

Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage—whether it’s a home purchase, a refinancing, or a home equity loan—is a product, just like a car, so the price and terms may be negotiable. You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars.

How much will it cost you to shop around for all of these mortgage options? As the Consumer Financial Protection Bureau explains:

You can’t be charged any fees until you get the GFE and indicate that you plan to take out the home loan. But you can be charged a credit report fee.

So! Now that you’re familiar with how a GFE works, let’s talk about the Loan Estimate Form that will eventually replace the GFE on August 1st.

The Consumer Financial Protection Bureau designed the Loan Estimate Form with the intention of making it even easier for mortgage-seekers to compare loans. In addition to a simplified format, there are two key differences:

• Like the GFE, lenders will be required to provide borrowers with their Loan Estimate three business days after the loan application date. However, the new loan estimate form and the closing disclosure form use large and bold type for important information such as the interest rate and feature highlighted headings and terms to make them easier to read.

• Second, lenders must provide a Closing Disclosure three business days before the closing. With this new 3-day requirement, Closing Attorneys and Closing Agents will not be able to wait until the day before the Closing for meter readings, or any other adjustments which needs to be included in the Closing Disclosure (HUD-1). This means Lenders, Loan Originators, Realtors, Attorneys, and Closing Agents need to all be very conscious of the new three-day requirement, and have everything ready 3 days before the Closing. “The new rule puts more responsibility on lenders for the precise timing and accuracy of the statement, which must be given to the borrower three days before closing.”

While some changes to closing costs can still occur, these are less likely to happen last minute and are unlikely to delay closing.

It is also important to note that neither a GFE nor a Loan Estimate Form guarantees loan approval. Once you decide to move forward with a potential mortgage loan, that’s when you will begin the approval process. If you have any concerns about whether your mortgage loan will be approved, talk to your mortgage lender.

Here are a few more tips to keep in mind as you begin the mortgage loan process: First, start shopping for mortgage loans at least 60 to 90 days before you plan to take residence in your new home; Also talk to your mortgage lender about potential ways to improve your loan, including paying for what are called “points” to reduce your overall interest rate.

“Many clients fail to use the GFE properly,” says Alan Reeder, a realtor based in Fort Worth, Texas. “The disclosure should be utilized to compare lenders and determine which costs have the potential to be ‘shopped’ and therefore reduced prior to closing. Far too often I find that clients simply don’t have the time or desire to follow through on either of these potential cost-saving options.

“I have personally found the estimates on the GFE to be extremely accurate, when compared to the eventual costs encountered at the closing table,” Reeder adds.

Hopefully the new Loan Estimate Form helps reduce that time crunch for homebuyers!

Finding the best mortgage loan for you is all about comparing offers. That’s where the Good Faith Estimate or Loan Estimate Form comes in. Use these documents to look at your various loan options side by side and determine which loan makes the most sense for your financial needs.

Photo credit: Bill Ward

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