9. What is a Good Faith Estimate?

by Local Title

A Good Faith Estimate (GFE) is a document that provides borrowers with an estimate of the costs associated with obtaining a mortgage loan. It helps borrowers understand the fees and expenses they will incur during the home buying process. Although the GFE was replaced by the Loan Estimate form in 2015, understanding its components remains relevant for comparing loan offers and ensuring transparency in mortgage transactions.

Purpose of a Good Faith Estimate

The primary purpose of a GFE is to provide borrowers with a clear and detailed overview of the costs they can expect when taking out a mortgage. This allows borrowers to:

  • Compare Offers: Evaluate and compare different mortgage offers from various lenders.
  • Understand Costs: Gain a clear understanding of the various fees and charges associated with the mortgage.
  • Plan Finances: Prepare financially for the costs of securing the loan.

Components of a Good Faith Estimate

A GFE includes several key components that outline the costs associated with the mortgage. These components help borrowers understand what they will be paying for and ensure transparency in the lending process.

Loan Terms

The GFE provides details about the loan terms, including:

  • Loan Amount: The total amount borrowed.
  • Loan Term: The duration of the loan, typically 15, 20, or 30 years.
  • Interest Rate: The fixed or adjustable rate applied to the loan.
  • Monthly Payment: The estimated monthly payment amount, including principal, interest, taxes, and insurance (PITI).

Estimated Settlement Charges

Settlement charges, also known as closing costs, are fees paid at the closing of the mortgage transaction. The GFE breaks down these charges into different categories:

  • Origination Charges: Fees for processing the loan application, including origination fees and points.
  • Title Services: Fees for title search, title insurance, and other title-related services.
  • Appraisal Fees: The cost of having the property appraised to determine its market value.
  • Credit Report Fees: Charges for obtaining the borrower’s credit report.
  • Government Recording Charges: Fees for recording the mortgage documents with the appropriate government office.
  • Tax and Insurance Escrow: Prepaid amounts for property taxes and homeowners insurance held in escrow.

Estimated Prepaid Items

Prepaid items are expenses paid upfront before closing. These can include:

  • Homeowners Insurance: The cost of insuring the property against damage or loss.
  • Property Taxes: Prepaid property taxes due at closing.
  • Mortgage Insurance: If applicable, the cost of private mortgage insurance (PMI).

Estimated Reserves

Reserves are funds set aside to cover future payments, such as:

  • Escrow Reserves: Funds held in escrow to cover property taxes and insurance premiums.
  • Interest Reserves: Prepaid interest due at closing.

Total Estimated Settlement Charges

The GFE provides a summary of all estimated settlement charges, giving the borrower a clear picture of the total costs involved in securing the mortgage.

Importance of the Good Faith Estimate

The GFE is important for several reasons:

  • Transparency: Ensures borrowers are fully informed about the costs associated with their mortgage.
  • Comparison Shopping: Allows borrowers to compare different mortgage offers and choose the best option.
  • Financial Planning: Helps borrowers prepare financially for the expenses of buying a home.

Transition to the Loan Estimate Form

In 2015, the GFE was replaced by the Loan Estimate form as part of the TILA-RESPA Integrated Disclosure (TRID) rule. The Loan Estimate combines the GFE and the initial Truth-in-Lending (TIL) disclosure, providing a more streamlined and user-friendly document.

Key Features of the Loan Estimate

  • Simplified Format: Easier to read and understand, helping borrowers make informed decisions.
  • Standardized Information: Ensures consistency across lenders, making it easier to compare offers.
  • Three-Day Requirement: Must be provided to borrowers within three business days of submitting a loan application.

Understanding the components and purpose of the GFE, and its successor the Loan Estimate, is crucial for anyone navigating the mortgage process. These documents play a vital role in ensuring transparency, aiding comparison, and helping borrowers make informed financial decisions.