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The New Good Faith Estimate – GFE

January 27, 2010 | By Kelley Koehler | Filed Under Home Buying, Loans and Financing 

Yesterday, we talked about the RESPA reform that took effect January 2010.  That change means you’ll be seeing a new Good Faith Estimate when you apply for a home loan.

A Good Faith Estimate – or GFE – is a disclosure document.  It gives you an estimate of the charges and loan terms specific to the loan for which you’re applying.  Basically, it details out the costs of a loan, as well as the interest rate and applicable dates.

Here’s a sample Good Faith Estimate.

A lender must provide a GFE within 3 business days of application, and the terms there are good for at least 10 days, unless otherwise specified.  Oh – except for the interest rate and rate related charges, because those can change daily (if not more frequently). 

We’ll go section by section.  Which means this post will be a little long, but – i hope – comprehensive.

Page 1:

The GFE starts with some basic contact information.  There’s a couple of important dates here.  At the upper right, the “Date of GFE” – the terms in this estimate are good for 10 days from that date, unless otherwise stated in #2 of the “Important Dates” section.  #1 in “Important Dates” tells you how long that lender will honor that interest rate quote – remember that interest rates can change very frequently.  #3 tells you the duration of your rate lock, if you were to lock in that rate.  The duration of your rate lock needs to be coordinated with the closing of your purchase.

This section is a summary of your loan.  This section is fairly self-explanatory: loan amount, terms, and disclosures about variable rates, prepayment penalties, and balloon payments.

This A+B section is the end of page one – and all these costs come from the next page.  We’ll go through where they come from, but that final number is an estimate of what you’d need to pay at closing.

Page 2:

This section is all about paying your lender for their services.  These are – more or less – the only charges the lender is in complete control over.  Lenders collect their fees in two ways – either up front with an origination fee, or by giving you a higher rate and being paid for that when they sell the loan to someone else.  It’s called a yield spread premium (YSP).  Or a combination thereof.  You also have the option of paying more money up front to buy down your rate – we call it paying discount points.  So if you want a really  low rate and have extra cash, you could elect to do that.

Disclosure of those fees is in this section.  In this example, the origination fee is $6,750.  The buyer is paying a slightly higher rate, so they’re going to get a credit of $3000 because the lender will make that money when they sell the loan and therefore won’t collect it from the buyer.  We subtract the two, and the lender origination fees are $3,750.  This figure gets carried over onto the front page in that A+B section.

If a buyer was paying discount points to buy down the rate, you’d have seen the third box checked and a charge instead of a credit.

Here’s where things get a little more complex.  These are charges for everyone else involved in the home purchase.  The lender, most often, does not control these costs, and some of these service providers the buyer gets to pick.  So the lender has to estimate these charges, but may not know the exact figures for the service providers you select.

Which puts the lender in a bit of a pickle.  Because at closing, the cost estimates provided here can only vary by a certain amount.  And the lender bears the burden of responsibility.  Which hopefully should make charge estimates much more accurate.

Couple items to watch for:

#3 – the estimate here is not allowed to go up at closing.  The price for those services quoted here should be accurate.  If anything, that figure can only go down.

#4 & #5 – these two items have a 10% tolerance.  These are estimates for the title insurance, escrow services, any endorsements, that sort of thing.  At closing, the sum of these items can’t be more than 10% different than what was estimated.

#6 – these are services that a Buyer can select.  Because the buyer gets to pick, the estimate of these charges can change completely at closing.

So you add all those things up – line item “B” – add it to the origination (item A) and that’s the estimate of what you’ll need to close the deal.

Still with me?

Page 3:

In that last section, we talked about how some costs can’t increase, some can change by 10%, and some can change completely.  This section at the start of page 3 breaks down which costs belong to which bucket.

 

Remember at the start of page 2 we looked at the origination fees?  And how you can pay more up front for a lower rate or pay less up front for a higher rate?  This tradeoff table shows you how that works in a little more detail. 

The first column is the description of the loan as quoted.  But – if you were to decide you needed to hold on to more of your cash, you could elect to take a higher rate and hold on to more money.  That’s the option in column 2.  If you’ve got plenty of cash and are going to hold on to the loan for long enough, you might choose to pay more up front for the lower rate.  That’s column 3. 

  

Finally, they give you a handy-dandy table to compare loans, so you can get other estimates and compare them.

And voila!  That’s the new Good Faith Estimate.

Tomorrow – the new HUD-1 Settlement Statement…

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