In this installment of our “All About” series (aimed at providing important information to first-time homebuyers regarding the home buying and financing process), we’re covering one of the most important documents you’ll see in the course of obtaining your mortgage: the Good Faith Estimate (or GFE).
What is a Good Faith Estimate, and why should I care?
A GFE is given to you by a lender once they accept your mortgage application—usually within a few days. This document serves as the lender’s proposal for how much they will lend you (and at what cost), and it provides the most holistic, accurate snapshot of the expenses associated with the origination, dispersal and repayment of your mortgage loan. Beyond teaser rates and inexact advertised rates, the Good Faith Estimate is just that—an estimate of your expenses and fees, estimated in good faith by your lender. It tells you what you will really have to pay in order to obtain a mortgage for your home purchase.
What will I find on the GFE?
The Department of Housing and Urban Development (HUD) offers a glimpse at a typical Good Faith Estimate on their website. By looking at this example, you can see that a GFE outlines the basic numbers on your loan (loan amount and terms), then goes on to enumerate the charges for originating the loan (getting you the money), settling title insurance, and filing government paperwork, among other things. It then goes on to calculate the cost of your deposit into the escrow account, the costs associated with third-party services involved in the sales transaction, and states the pro-rated interest you will owe for the time between your closing and your first mortgage payment. In short, it is a summation of all of the charges you will be expected to pay on the day of your closing, as well as the costs of the mortgage that you will pay monthly thereafter.
What makes the GFE so important?
Because it is a clear-cut estimation of the fees and costs associated with your loan, you can use GFEs generated by different lenders to compare quotes from those lenders and brokers. This means that you won’t get swayed by a lower rate on one loan, only to find out that the low-rate lender is charging hundreds or thousands more in fees and closings costs than a competitor with a slightly higher rate. The GFE also means that you won’t be surprised when you encounter all of those fees on the closing date!
Are the numbers on the GFE binding to the lender?
The Good Faith Estimate is just an estimate, so the final numbers you see at your closing may be slightly different. However, the information that the lender provides to you regarding origination costs generally cannot be changed once the GFE is issued to you, the borrower. The final closing costs usually cannot go over the estimated costs by more than ten percent of the stated third-party fees—such as for appraisals, inspections and credit reports—so your final costs should be well approximated by the GFE, if not exactly so.