Do I Need a Good Faith Estimate?

Yes, you need a Good Faith Estimate – often called a GFE. Lot’s of reasons come to mind.

Your mortgage broker and lender must provide a GFE under the requirements of RESPA - the Real Estate Settlement and Procedures Act of 1974.

RESPA deals with the information and disclosures to which you are entitled as a buyer or mortgagor of residential real estate. It is a Federal law and applies to all residential transactions throughout the United States.

A well-prepared GFE will itemize to a reasonable precision what it will cost to close your loan and or purchase.

Be sure that you do not lose sight of an important distinction: The GFE is an estimate, not a firm price list.

The GFE is usually prepared very early in the loan application process, at a time when a number of the items will yet not be known and, therefore, can only be approximated. So it is important when working with the GFE to understand that by the time you get to the closing many of the items will be somewhat different – some more, some less.

At the very least, however, the GFE will give you enough information so that you can plan your closing budget and make other decisions, as well.

Too many borrowers treat the GFE as a price quote to close their loan. This is a serious mistake.

A careful borrower should consider that a low GFE may be an indication that some cost estimates may have been omitted. Do not assume that a higher GFE is committing you to higher closing costs.

It is not in the interest of the mortgage broker or the lender to “high-ball” the GFE. But, it is in your interest to see all the possible costs; and it’s the law that they be disclosed to you.

The reality is that once the closing statement has been prepared, the costs will be what the actual costs are, not those appearing on the GFE.

For example, suppose that in your area appraisal reports generally cost about $200 for a home in your price range. Most mortgage brokers would estimate $200 on the GFE. Whether the appraisal comes in at $175, $200 or, even $225, it will be the actual cost that will appear on the Closing Statement.

The point of all this is that many borrowers who use the GFE as a competitive tool to get some mortgage broker to write a low GFE are working against their own interest.

Wouldn’t you rather have a reasonable GFE, even if it were higher, than one that looks really cheap and then sneaks up on you at the closing table with an additional $1,000 of costs you hadn’t planned on? Think about it. You are dealing with an important transaction, perhaps the largest financial transaction of your lifetime.

Don’t set yourself up for bad surprises; make sure your GFE has the right stuff!

Here are some typical, though by no means universal, costs you may see on your GFE:
Points: If you will be paying points, each point is worth 1% of the loan value. Remember there is an inverse relationship between points and the interest rate on your new loan.
Appraisal: For homes valued up to $250,000; $175 to $300
Credit Report: Varies depending on detail from about $18 to $75 or so
Processing/Underwriting Fees: Varies widely by lender
Items required by lender to be paid in advance: This includes prepaid interest from closing day to the 1st of month after closing, hazard insurance and other items as well.
Reserves Deposited with Lender (Escrows): Hazard insurance premiums, mortgage insurance premiums (if any), and taxes.
Title Charges: Escrow fee, document preparation fee, Notary fees, attorney fees, abstract and title insurance.
Government Recording and Transfer Charges: Recording fees, city/county tax/stamps and state tax/stamps.
Additional Items: Pest inspection, building inspection, survey, and other miscellaneous expenses.

Note that most of the items shown do not have estimates associated with their listing. These are all items that will vary either due to market conditions, the value of the property, area of the country or the size of the mortgage. Most are driven by specific formula or common usage. So, ask your mortgage broker about them.

At the bottom left of the GFE there is a small area where your mortgage broker will summarize the Funds Needed to Close. Go over this area carefully with the broker so that you understand it completely. At the bottom right is a summary showing what your Total Estimated Monthly Payment may be. Again, review this area thoroughly. It’ is a good insight of what your mortgage payment will be.

Finally, if you have received your GFE from a mortgage broker, there will be a statement at the bottom of the form that discloses, as follows: “This Good Faith Estimate is being provided by (name of mortgage brokerage business), a mortgage broker, and no lender has been obtained. A lender will provide you with an additional Good Faith Estimate within three business days of the receipt of your loan application.”

In conclusion, the GFE is probably the first document you will receive from your mortgage broker. You will probably receive it even before he has had the full opportunity to qualify you for a loan program, and certainly before all of the final facts are known about the transaction. So utilize the GFE in the manner of its intent, as a way to get a handle on the costs of the transaction you are anticipating and to judge how best to adapt and prepare yourself for the closing to come.

Good Luck!

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