The Good Faith Estimate (GFE) has been used somewhat as a tool that homebuyers use to shop around for lenders. It is a break down of the costs and the total cash that the borrower will need to close the loan. In the past, lenders have created their own formats for the GFE and some have not even provided one at all. After several decades of using the GFE, the Real Estate Settlement Procedures Act (RESPA), has made some changes to and new rules for it.
First of all, in order for a borrower to receive a Good Faith Estimate, they must have submitted a loan application. In order for the loan application to be considered submitted and received by the lender the following six pieces of information must have been received: The borrower’s name, the borrower’s income, the borrower’s social security number (in order for their credit report to be obtained), property address, estimated purchase value/property value, and the loan amount.
It is now required that lenders provide a standard (and more simple, in order for the consumer to better understand) GFE to all possible buyers. The GFE used to be just that, (an estimate) that lenders and buyers would use as a guideline when it actually came time to getting the mortgage loan. Because of the new RESPA rules, it is now no longer an “estimate”, but an actual cost. Now, lenders must stick to the changes and rates stated in the GFE or the transaction will not close. In addition, the issued GFE will only be good for 10 days after the borrower receives it; after that time has expired the lender is no longer bound by it. So, within 10 business days of receiving the GFE, the borrower must express intent to proceed with the terms and conditions of the loan stated in the GFE.
The new GFE will not include the specific loan product (FHA, VA, conventional etc.), and will not inform the borrower of actual monthly payments in principle, property taxes, and home insurance. It will inform the borrower if (and until when) their interest rate is locked, if there are any credits or charges for the specific rate, if it has a balloon payment, if it is interest only, and if there is a pre-payment penalty.
The GFE also includes a list of services the borrower may shop for (for example an escrow), but the service provider chosen does not have to be one of the ones on the list. If it is not on the list provided by the lender then there is no restriction on charges in relation to the GFE.
Also stated are any recording and transfer tax fees from government agencies, an estimate for the homeowner’s insurance policy, any changes that may or may not happen to any charges in the future, and a (not required) comparison made by the originator with other rates and fee options for the borrower.
A copy of the GFE should be brought to the escrow company by the borrower and compared with their HUD-1 form to see if there have been any changes made that would make the transaction no longer enforceable. Since the GFE is now somewhat binding the escrow companies, the escrow and title companies will need to disclose to the lender, up front, their fees so that they match the ones the lenders are disclosing on their good faith estimate. How will they react to this? And taking into consideration how the market is today, will this affect how and when lenders write the GFE? We will see.