When you purchase a home, you’ll probably have to borrow at least some of the money from the bank via a mortgage loan. Before you commit to a loan, you’ll undoubtedly want to know the terms of the loan – how long the loan will last, the interest rate, whether the rate is fixed or variable, etc. These details along with other costs associated with the loan application, e.g. loan origination fee and home inspection fee, are provided in a document known as a good faith estimate (GFE). *Note* The good faith estimate is now officially called the “loan estimate,” per the new TRID lending guidelines.
By law, a lender is required to give you a good faith estimate within three days of your mortgage application. The good faith estimate includes a list of costs that would be due at closing (also called settlement) if you’re approved for the mortgage. You don’t have to give a commitment in exchange for receiving a good faith estimate. In fact, it’s better that you avoid giving a decision about the mortgage until you’ve received, reviewed, compared, and approved the closing costs in your good faith.
New Federal law requires lenders to use a specific disclosure form designed by the Department of Housing and Urban Development. Because lenders use the same form it’s a little easier to compare good faith estimates from different lenders. It’s also easier to tell when you’re getting an official good faith estimate or simply a worksheet listing the lender’s cost. Note that some lenders do provide informal list of mortgage terms and buyer closing costs. However, this list doesn’t come with the same assurance as a good faith estimate.
What’s on the Good Faith Estimate?
Upfront you’re given important dates associated withyour good faith estimate. The lender will let you know how long the interest rate offer lasts. If your mortgage closes after that date, the lender doesn’t have to give you the quoted interest rate and monthly payment listed on the good faith estimate worksheet. There may be a separate expiration date for other settlement fees listed on the GFE. You’ll have a certain number of days to close your loan after you lock your interest rate. If you’re interested in that mortgage and the terms you’re quoted, it’s important that you act quickly.
A summary of the loan will be listed on the first page of the estimate. Summary details include:
- The amount and term of the loan,
- Initial interest rate,
- Initial monthly payment for principle, interest, and mortgage insurance (if applicable), Whether your interest rate can increase, the maximum amount of any increase, and how soon you
can expect the first increase to take place,
- Whether your principle, interest, or mortgage insurance can increase, how soon it can increase, the amount of the first increase, and the maximum amount of any increase,
- Any mortgage prepayment penalty that applies and the maximum amount of the penalty, and
- Any balloon payment that’s due, the amount of the payment, and the number of years until the payment is due.
Your lender may require an escrow account to hold funds for property taxes or other property-expenses. Any monthly escrow payment should be disclosed on the good faith estimate. There may be a fee associated with escrow.
While individual settlement costs are broken down on subsequent pages, the first page of the good faith estimate summarizes the total of all settlement costs you can expect to pay.
Certain services are required to complete closing are separated on the GFE form between services where the lender chooses the provider and services where you’re allowed to shop for the provider. You might shop for your own service provider to reduce the closing costs or to avoid bias or conflict of interest.
Fees you can expect to pay include:
- Appraisal fee
- Credit report fee
- Application fee
- Mortgage broker’s fee
- Title and insurance fee
- Settlement/Closing Fee
- Recording fee
- Transfer taxes
- Homeowner’s insurance
Certain fees are locked in by what’s listed on the good faith estimate while others are allowed to increase by 10% at the time of closing. If fees increase, your APR and loan costs will also increase.