GFE - A Document You Must Understand
The Good Faith Estimate
Of all of the documents that you’ll receive in the beginning phase of financing a home, be it a purchase or a refinance, none are more important than what is called the Good Faith Estimate. The GFE is a document that gives you an estimate, and a very good one, of what your total out of pocket expenses will be in the course of that transaction.
This document must be provided to you, by law, within 3 business days of your placing a mortgage application. In this article we'll get into what this documents is, and why you need to understand it.
Why the new GFE?
Before the current version of the Good Faith Estimate, or GFE, which has been in place for a couple of years now, there were a lot of lenders that had room to operate in what you would consider less than good faith.
This means that they could, at the beginning of the financing process give you one estimate of what your closing costs would be, then, as you sat at the closing table with you life's possessions sitting in a moving truck waiting to be delivered to your new home, present you with a different set of numbers.
You basically had two choices at this point. The first was to halt the process and pick it up with another lender while you lived in a hotel and have your furniture in storage. The second choice was to come up with the extra funds that you need to complete the transaction. 99% of the time you would select the latter option.
Regulations were put into place to prevent this from happening. Now, the terms of the loan cannot change without re-disclosing 3 days prior to the closing date. Enter new version of GFE.
What is on the New GFE?
The new GFE is a 3 page document that lays out all the terms of the mortgage and other important information about your loan:
- Date of application
- Originator and company contact info
- Loan amount
- Down payment needed
- Interest rate (locked or not)
- Pre-Payment penalty (present or not, usually not)
- Credits from the seller for closing costs
- Escrow deposits to establish a reserve for Taxes and Insurances
Of course the detailed document explains the costs and fees associated with the transaction.
There are three type of expenses that are disclosed on the GFE and they are:
Lender Fees:These include origination, processing and underwriting fees, or all that you pay directly to the lender in the course of the transaction. These must, at the end of the transaction be the same or less than what you were quoted at the beginning.
If the lender underestimates or omits any of these fees, they, as opposed to you, will be the ones that will absorb them at the closing table.
Third Party Fees:These are fees that are incurred in the transaction from outside entities such as appraisers, surveyors, recording and transfer fees, etc. These have some tolerance for movement, but not much. Lenders will often artificially inflate these on the GFE so that in the event that they are in reality higher, they won't absorb the difference.
Title and Closing Fees: Title fees work a little differently on a purchase transaction than on a refinance transaction. On a purchase transaction in many states the seller, and their real estate agent and/or attorney get to pick the place of settlement. This means more or less that the seller will determine how much you will pay for some of the title related expenses. This being the case, your lender can give you their best estimate, but may be unaware of what the true costs will be until they contact the seller's title company.
Probably the most important change to the document is the presence of detailed explanations of each element of the disclosure.
[caption id="attachment_1741" align="aligncenter" width="567"] Example of Definitions on the New GFE[/caption]
These explanation boxes are present throughout the document.
In the past all this information was jammed into a single legal size page. The new GFE is a 3 page, letter size document which is loaded with explanations and examples.
The new GFE also includes a handy"Loan Shopping Chart" you can use to match loan proposals up side by side.
Read and understand your GFE when you apply for a mortgage, and if you have questions about it, make sure you ask before you move forward with the transaction. If you have a GFE and would like to shop lenders, give us a call here at Poli Mortgage Group and we'll be glad to take a look at it for you.