Among all the paperwork that is exchanged during the home buying process, the Good Faith Estimate is arguably the most important piece of information a mortgage lender will give you.
A Good Faith Estimate, or GFE, is a document your lender gives you that describes the basic terms of the loan and estimates how much it will cost in total.
By law, a lender must give you a GFE within 3 business days of applying for the loan.
Understanding your GFE
The format of the GFE should look the same no matter which lender you use, though the forms may vary slightly from state to state, says Kelly Zoudo, vice president and branch manager at 1st Advantage Mortgage in Illinois.
“I tell all my clients to take a look at the whole thing with a microscope,” he says. Know what you’re verifying, “and make sure that what your lender tells you verbally and what is written down is all the same.”
Here’s what you can expect to see when you review your GFE:
On the top of the form, you’ll see the name and contact information for your loan originator, along with your name and the address of the property you’re purchasing.
You will also see the date the form was prepared or disclosed, followed by a section of important dates. The terms outlined in your GFE are only valid for a set amount of time, so this section spells out for how long the interest rate, estimated charges, interest rate lock are valid.
The summary section will tell you the total loan amount (the loan balance minus the down payment), the loan term (the number of months you will pay the loan), your interest rate, and your monthly payment, which includes mortgage insurance if you have it.
It should also tell you if your monthly payments or loan balance are eligible to rise even if you pay on time and whether you have a prepayment penalty or a balloon payment. If any of these are checked “yes,” clarify what this means with your lender so you know what you’re getting into.
The next section will outline your escrow account. Some lenders require borrowers to establish an escrow account for property taxes and homeowner’s insurance. When that’s the case, a portion of each monthly payment you make is deposited into this account.
The final section outlines your settlement charges, which you will pay at closing.
“There are usually four items you pay for here: points charged for a specific interest rate, the appraisal, tax service, and the title fees, ,” Zoudo says. Companies lump together the processing and underwriting charges and call it an origination fee, which is the cost for getting the loan and is shown separately on the GFE.
You will also see the amount you’ll pay for transfer taxes or stamps and homeowner’s insurance.
All of these charges will be added up to comprise the total settlement charges you will owe the lender at closing.
There should be no surprises at closing
Most of these charges should not change when you sign your final settlement at closing. Some legally cannot change, such as the origination fees and transfer taxes. Other fees may change, but they cannot increase by more than 10 percent.
“If you’re dealing with a professional,” Zoudo says, “you shouldn’t expect to pay anything more than $50 beyond the estimate.”
In fact, you will likely pay less than the GFE indicates. Lenders are legally obligated to stick to that estimate as closely as possible, or they must re-disclose all of the information listed on the GFE along with the revised charges, Zoudo says.
All lenders must use the same GFE format, so you can easily compare both lenders and loan costs. You can also use the GFE as a way to compare the customer service level of a lender. Each lender you consult should take the time to make you feel comfortable with the form and the terms of your loan.
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