Good Faith Estimate (GFE)
You can grab the Full 49 Page HUD’s new settlement cost booklet (updated 1/6/2010 with corrections of minor detail)
The GFE is a three page form designed to encourage you to shop for a mortgage loan and settlement services so you can determine which mortgage is best for you. It shows the loan terms and the settlement charges you will pay if you decide to go forward with the loan process and are approved for the loan. It explains which charges can change before your settlement and which charges must remain the same. It contains a shopping chart allowing you to easily compare multiple mortgage loans and settlement costs, making it easier for you to shop for the best loan. The GFE may be provided by a mortgage broker or the lender. Until they give you a GFE loan originators are only permitted to charge you for the cost of a credit report.
In the loan application process, the loan originator will need your name, Social Security number, gross monthly income, property address, estimate of the value of the property, and the amount of the mortgage loan you want to determine the GFE. Your Social Security number is used to obtain a credit report showing your credit history, including past and present debts and the timeliness of repayment.
Your GFE Step-by-Step
Page 1 of the GFE
Now let’s go through the GFE step-by-step. The top of page 1 of the GFE shows the property address, your name and contact information and your loan originator’s contact information.
The Important Dates section of the GFE includes key dates of which you should be aware.
Line 1 discloses the date and time the interest rate offer is good through.
Line 2 discloses the date “All Other Settlement Charges” is good through. This date must be open for at least 10 business days from the date the GFE was issued to allow you to shop for the best loan for you.
Line 3 discloses the interest rate lock time period, such as 30, 45 or 60 days, that the GFE was based on. It does not mean that your interest rate is locked.
Line 4 discloses the number of days prior to going to settlement that you must lock your interest rate.
Note: “Locking in” your rate and points at the time of application or during the processing of your loan will keep the interest rate and points from changing until the rate lock period expires.
Summary of Your Loan
The Summary of Your Loan Terms discloses your loan amount, loan term, the initial interest rate and the principal, interest and mortgage insurance portion of your monthly mortgage payment. It also informs you if your interest rate can increase, if your loan balance can rise, whether your mortgage payment can rise and if there is a prepayment penalty or balloon payment.
In the example above, the loan amount is $200,000 which will be paid over 30 years. The initial interest rate is 5 percent and the initial monthly mortgage payment is $1,173 which includes mortgage insurance, but does not include any amounts to pay for property taxes and homeowner’s insurances if required by the lender.
In our example, the loan has an adjustable interest rate. Since the interest rate can rise, the ‘yes’ box was checked, and the loan originator disclosed that the initial interest rate of 5 percent could rise as high as 10 percent. The first time your interest rate could rise is 6 months after settlement which could increase your payments to $1,290. Over the life of your loan your monthly payments could increase from $1,173 to $1,842.
This example does not contain a balloon payment or a prepayment penalty.
NOTE: A prepayment penalty is a charge that is assessed if you pay off the loan within a specified time period, such as three years. A balloon payment is due on a mortgage that usually offers a low monthly payment for an initial period of time. After that period of time elapses, the balance must be paid by the borrower, or the amount must be refinanced. You should think carefully before agreeing to these kinds of mortgage loans. If you are unable to refinance or pay the balance of the loan, you could put your home at risk.
Escrow Account Information
The GFE also includes a separate section referred to as ”Escrow account information,” which indicates whether or not an escrow account is required. This account holds funds needed to pay property taxes, homeowner’s insurance, flood insurance (if required by your lender) or other property-related charges.
If the GFE specifies that you will have an escrow account, you will probably have to pay an initial amount at settlement to start the account and an additional amount with each month’s regular payment. If you wish to pay your property taxes and insurance directly, some lenders will give you a higher interest rate or charge you a fee. If your lender does not require an escrow account, you must pay these items directly when they are due.
Summary of Your Settlement Charges
The final section on page 1 of the GFE contains the adjusted origination charges and the total estimated charges for other settlement services which are detailed on page 2. You should compare the “Total Estimated Settlement Charges” on several GFEs.
Page 2 of the GFE
The price of a home mortgage loan is stated in terms of an interest rate and settlement costs. Often, you can pay lower total settlement costs in exchange for a higher interest rate and vice versa. Ask your loan originator about different interest rates and settlement costs options.
Your Adjusted Origination Charges, Block A
Block 1, “Our origination charge” contains the lender’s and the mortgage broker’s charges and point(s) for originating your loan.
Block 2, “Your credit or charge point(s) for the specific interest rate chosen.”
- If box 1 is checked, the credit or charge for the interest rate is part of the origination charge shown in Block 1.
- If box 2 is checked, you will pay a higher interest rate and receive a credit to reduce your adjusted origination charge and other settlement charges.
- If box 3 is checked, you will be paying point(s) to reduce your interest rate and, therefore, will pay higher adjusted origination charges.
Note: A point is equal to one percent of your loan amount.
After adding or subtracting Block 2 from Block 1, “Your Adjusted Origination Charge” is shown in Block A.
In the example shown, the origination charge is $6,750. No points were paid to reduce the interest rate. Instead, because of the interest rate chosen, the offer contains a $3,000 credit that reduces the adjusted origination charge to $3,750.
Your Charges for All Other Settlement Services, Blocks 3 through 11
In addition to the charges to originate your loan, there are other charges for services that will be required to get your mortgage. For some of the services, the loan originator will choose the company that performs the service (Block 3). The loan originator usually permits you to select the settlement service provider for “Title services and lender’s title insurance” (Block 4). “Owner’s title insurance” is also disclosed (Block 5). Other required services that you may shop for are included in “Required services that you can shop for” (Block 6).
Block 3 contains charges for required services for which the loan originator selects the settlement service provider. These are not “shoppable” services and often include items such as the property appraisal, credit report, flood certification, tax service and any required mortgage insurance.
Block 4 contains the charge for title services, the Lender’s title insurance policy and the services of a title, settlement or escrow agent to conduct your settlement.
Block 5 contains the charge for an Owner’s title insurance policy that protects your interests.
NOTE: Under RESPA, the seller may not require you, as a condition of the sale, to purchase title insurance from any particular title company.
Block 6 contains charges for required services for which you may shop for the provider. Some of these items may include a survey or pest inspection.
Block 7 contains charges by governmental entities to record the deed and documents related to the loan.
Block 8 contains charges by state and local governments for taxes related to the mortgage and transferring title to the property.
Block 9 contains the initial amount you will pay at settlement to start the escrow account, if required by the lender.
Block 10 contains the charge for the daily interest on the loan from the day of settlement to the first day of the following month.
Block 11 contains the annual charge for any insurance the lender requires to protect the property such as homeowner’s insurance and flood insurance.
Total Estimated Settlement Charges
“Your charges for All Other Settlement Services”, Blocks 3 through 11, are totaled in Block B. Blocks A and B are added together resulting in the total estimated settlement charges associated with getting the loan. These Blocks are carried forward to the bottom of page 1 of the GFE.
Page 3 of the GFE
Page 3 of the GFE contains important instructions and information that will help you shop for the best loan for you.
Understanding which charges can change at settlement
There are three different categories of charges that you will pay at closing: charges that cannot increase at settlement; charges that cannot increase in total more than 10%; and charges that can increase at settlement. You can use this as a guide to understand which charges can or cannot change. Compare your GFE to the actual charges listed on the HUD-1 Settlement Statement to ensure that your lender is not charging you more than permitted.
Written list of settlement service providers
A written list will be given to you with your GFE that includes all settlement services that you are required to have, and that you are allowed to shop for. You may select a provider from this list or you can choose your own qualified provider. If you choose a name from the written list provided, that charge is within the 10% tolerance category. If you select your own service provider, the 10% tolerance will not apply.
Even though you may find a better deal by selecting your own provider, you should choose the provider carefully as those charges could increase at settlement. If your loan originator fails to provide a list of settlement service providers, the 10% tolerance automatically applies.
Using the tradeoff table
The “tradeoff table” on page 3 will help you understand how your loan payments can change if you pay more settlement charges and receive a lower interest rate or if you pay lower settlement charges and receive a higher interest rate.
The loan originator must complete the first column with information contained in the GFE. If the loan originator has the same loan product available with a higher or lower interest rate, the loan originator may choose to complete the remaining columns. If the second and third columns are not filled in, ask your loan originator if they have the same loan product with different interest rates.
Using the shopping chart
You can use this chart to compare similar loans offered by different loan originators. Fill in each column with the information shown in the “Summary of your loan” section from the first page of all the GFEs you receive. Compare each offer and select the best loan for you.
After You Choose the Best Loan for You
After comparing several GFEs, select the best loan for you and notify the loan originator that you would like to proceed with the loan. Keep your Good Faith Estimate so you can compare it with the final settlement costs stated on your HUD-1 Settlement Statement. Ask the lender and settlement agent if there are any changes in fees between your GFE and your HUD-1 Settlement Statement. Some charges cannot be increased, and your lender must reimburse you if those charges were illegally increased.
New Home Purchases
If you are purchasing a new home that is being built or has not been built yet, your GFE could change. If the GFE can change, the loan originator must notify you that the GFE may be revised at any time up to 60 days before settlement. If you get a revised GFE, look at it to determine if the loan and settlement costs it discloses are the best for you.
If there are changes involving your credit, the loan amount, the property value, or other information that was relied on in issuing the original GFE, a revised GFE may be issued. Only the charges affected by the changed circumstance may be revised.