You have decided on a home. Now you need to find a way to pay for it. Like most of us you probably won’t be paying the entire price in cash, so you will need to select a lender. A few years back (1974) the Federal Real Estate Settlement Procedures Act began requiring lenders to provide potential borrowers with a Good Faith Estimate (GFE)
This is a standardized form showing the closing costs (3-5% of loan amount) charged by that lender, the interest rate it is offering, and other numbers you will need so you can decide which lender to favor with your business.
Obtaining Your Good Faith Estimate
You obtain a GFE by filling out a loan application for each lender. The lender will need to obtain your credit score and is allowed to charge you for that (around $30). You will also need to provide:
- Borrower name
- Borrower social security number
- Borrower monthly income (pay stubs or tax return)
- Property address
- Estimated value of the property (from the appraisal)
- Loan amount
Elements of the Good Faith Estimate
Fortunately, the Good Faith Estimate comes on a standardized form that will be the same from lender to lender, making it much easier to compare them side by side. The form is 3 pages long and each section contains important information about the loan.
Overview of GFE form
On page 1 the top 2 sections have a summary of the loan terms and the estimated settlement charges (another name for closing costs). This will give you a ballpark to work with while shopping around.
Page 1 will also have the section with a very important date: the expiration date of the estimate. Alongside will be whether the interest rate is locked or floating. Floating interest rates often come with a short expiration date. A locked rate will be good for longer.
Another section is the loan summary with information on:
- Initial loan amount
- Interest rate
- Monthly payment (principle + interest + mortgage insurance)
- Loan terms
This section will also tell you if the rate, loan balance, or payment can increase. Most importantly it will show if there is a prepayment penalty or a balloon payment. A summary of the settlement charges will be presented splitting out the total lender loan origination charges and the total of fees for other settlement services.
Sections 3-11 summarize other closing costs. Some of these cannot change, some can only increase up to 10%, and some are unrestricted and could go up as much as the lender likes. Other information includes whether there are any reductions in the charges or points to be paid.
On the last page will be 2 tables. One shows the trade-offs between paying higher or lower closing costs and the impact on the monthly payment. A second table has the summaries of 4 loans side by side to help you with your shopping. You can easily compare terms and the total estimated charges.
Now you know what to expect from a Good Faith Estimate and how to get one. The main thing to remember is that this is an estimate. This means the numbers could change at closing. In the meantime, it is a good way to compare lenders before committing to a loan.