Breaking Down the Good Faith Estimate

If you haven’t applied for a home loan lately, you may not know about the new Good Faith Estimate (GFE) that was rolled out in early 2010. Designed to simplify the mortgage shopping process, the new GFE is a standardized form that conveys the important details of a loan in straightforward and easy-to-understand language.

For those unfamiliar with a Good Faith Estimate, it is a document that discloses the loan’s terms, closing costs, fees and other information to the consumer. The GFE must be provided to the consumer within three business days of a lender receiving an application. Here are a few of the new features of the GFE:

Summarizes the loan’s important details up front. The loan’s main features—initial interest rate, monthly payment, settlement charges, amount of the loan, term, etc.—are clearly listed on the first page of the GFE and are explained in plain English. Also, the borrower can see the total estimated settlement charges (the old form did not provide a total).

Answers common questions about the loan and its features. Many frequently asked questions are answered right on the front page: Can the interest rate rise? Can the loan balance or monthly amount owed rise? Does the loan have a prepayment penalty? Is there a balloon payment? Does the lender require an escrow account?

Clearly states where specific charges come from. The GFE shows which charges are coming from the lender and which charges are coming from third parties, such as the appraiser, title company, etc. The lender charges consist of two charges: the lender’s origination charge and the fees the borrower pays to reduce the interest rate (points paid).

Shows which charges can change and which cannot. Once the interest rate has been locked in, points paid and the origination charges cannot change. The new form also sets specific limits on how much certain fees can change, with some charges capped out at a 10 percent increase.

Provides a “tradeoff table” and “shopping chart” for comparisons. The tradeoff table lets the borrower compare different options for the same loan, such as paying points or rolling settlement charges into the loan. The shopping chart is a fill-in table that allows the borrower to compare different loans from different lenders.

Although the new Good Faith Estimate does not cover all areas (such as total payment or cash required at closing), many mortgage providers furnish borrowers with additional documentation to fill in any gaps in the GFE.

If you have questions, talk your lender or broker or visit The Department of Housing and Urban Development’s website at www.HUD.gov for their “Settlement Cost Booklet,” which provides a line-by-line breakdown of the new GFE. ∆