A Good Faith Estimate (GFE) is one of the most important yet confusing mortgage documents buyers and those refinancing their homes will encounter.
A GFE may also be one of the most powerful negotiating tools you have on your side to hook the best deal on a home loan. But, is there any reason to have good faith that you will wind up with the same terms you are quoted at the closing table?
Good Faith Estimates 101
What is a Good Faith Estimate, how do I get one and how do I use it?
A Good Faith Estimate is your accounting of estimated closing costs associated with taking out a mortgage loan to buy or refinance real estate.
This includes a summary of your anticipated loan terms, an itemized list of all the various costs involved with financing, and – often most importantly – how much money you will need to bring with you to the closing table to seal the deal.
To say that a GFE is complicated for any first-time homebuyer is an understatement of huge proportions. If your head starts spinning, your eyes glaze over and your heart is pumping like crazy at the long list of numbers you don’t understand, don’t worry, it happens to everyone the first time around. However, it is a lot easier if you do a little homework first.
The Department of Housing and Urban Development (HUD) made major changes to the Good Faith Estimate format, which went into effect on January 1, 2010. While these changes were intended to make things easier for borrowers to understand, it actually stretched a relatively simple (in comparison) one-page document into three pages, with even more figures and fine print.
By law any bank, mortgage broker or lender you apply for a loan with must provide you with a Good Faith Estimate within three days. The best will provide one at the time of application, and some brokers may send you one upfront to give you an idea of the costs involved even before making an application.
Your GFE – A Negotiating Power Tool?
Your GFE is essentially your quote. You can use this document to shop around and compare quotes from different lenders and for different loan programs. This will enable you to more accurately compare rates, lender fees and terms side-by-side.
Three important caveats to consider:
1. Bait & Switch Scams
While shopping around and negotiating is smart, if you push too hard, some desperate lender may eventually tell you what you want to hear just to get your business. Do the background checks before committing to any lender.
Make sure you are truly comparing apples-to-apples. Some unscrupulous lenders may understate third party fees to make their overall quotes look smaller and then blame someone else when they come in higher. Make sure you understand which fees are being charged by the lender and get your own quotes for insurance and title work to make sure estimates are accurate.
3. A Lesson from “The Art of War”
Those who have read Sin Tzu’s book,“The Art of War,” are aware of the concept that sometimes defeating your enemy actually does harm to yourself too. This is definitely true here. Get a fair deal, but if you hammer your loan officer so badly that he or she is making nothing from helping you, you can expect your loan to end up on the bottom of the pile and to be the first tossed when it gets difficult. Perhaps fairly compensating your loan officer for their hard work and motivating her to do her best is smarter when so much is on the line.
Making Sense of Your Good Faith Estimate
The mass of numbers and new terms can be confusing even for those who were great at math in school. Don’t be afraid to ask questions. Make sure you understand what each charge is for, who it goes to and perhaps most important, whether that amount may change later.
A good loan officer and closing agent will be more than happy to answer your questions.
Don’t Get Scammed
What happens if you arrive at the closing table only to find your final closing costs, interest rate and monthly mortgage payments much higher than those listed on your GFE?
This can happen for a number of reasons. If there are legitimate changes, your lender is required to send you a new disclosure in advance. However, some unscrupulous lenders will prey on the fact that you will be too afraid of losing more money by not signing. Don’t sign!
Give the lender a chance to explain or correct mistakes. Otherwise, the threat of a complaint ought to motivate them to do the right thing, if they want to stay in business. No one wants the FBI going through their files.