What is a Good Faith Estimate and How Do I Use It?

by on April 30, 2012Tim Houghten

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.

good faith estimateThis 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.

2. Apples-to-Apples

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.

{ 3 comments… read them below or add one }

Agatha May 18, 2014 at 1:11 pm

I signed off on a GFE for a deal that was promised from the inital stage by the broker and a few days before closing the broker resend a new GFE with three times the first GFE closing cost and is rushinge me to resign. What will happen if I refuse to sign the new GFE. Do I have to sign the new GFE with the higher closing cost

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Dan October 15, 2013 at 6:25 pm

We got six GFEs about two years ago for six rental property refinancings. The numbers did not look too bad so we proceeded without signing anything on the GFEs. When we closed about 7 months later the actual closing costs were about 400 per cent higher than the GFEs.
We were at the closing table so we closed anyway. Even though the mortgage rep could not be there and the closing was performed by an attorney in Iowa the mortgage rep called me over 12 times wanting us to sign the docs which included the actual costs and a new GFE for each property.
Should I sue since the the actual costs were over 400 per cent or so higher than the first set of GFEs?

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Banker Bob August 5, 2014 at 2:55 pm

Seriously? You closed SEVEN months after applying for the refi loan? A GFE is only meant to be good for 10 – 45 days. If you couldn’t close in that time you must have had some serious financial and/or appraisal issues that likely created some major loan costs! I’m surprised ANY lender would have allowed you to refi with that much of lag time between application and closing! If that was in 2012-13 the rates went from 2.75 to 4.25 in some areas, and property values and appraisals started into a quasi dive and for six buildings, yeah, I can imagine that your costs WOULD have gone up a lot! Hell, the bank probably borrowed/reserved money at one rate and by the time you got ducks in a row the price of that money probably negated any profit they hoped to make on the 1st GFE they issued. I suspect there’s something you’re not disclosing to folks here……..

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