Know Your Mortgage

*As of  October 2015, the Good Faith Estimate, or GFE, has been replaced by the Loan Estimate. Find out more about Loan Estimates and other changes here.

Getting your first mortgage can seem like an intricate and flustering process at first, much like a ballroom dance. At first step (like when you decided to buy a home) you may be heavy footed (confused) or new to this type of dance (naïve to the mortgage process), but so is everyone. After you get your first rehearsals in order (appraisals, credit score checked) you begin to get the feel of it. And while you may feel like you’re ready to hit the dance floor (buy a house; I hope we’re all following the metaphor now) there’s still other steps to learn (the topic of this week’s Know Your Mortgage. Just read on.) All confusing metaphors aside, it’s important you know what you’ll be paying for before you jump head first into a new home. That’s why this week we’re focusing on a vital part of the mortgage process: the Good Faith Estimate.

What Is a Good Faith Estimate?

A Good Faith Estimate (GFE) is a written form estimating the total settlement costs you’ll have to pay at the closing of your loan. It’s done to give the borrower a solid idea of what they will owe so they can prepare their expenses accordingly. It’s important to emphasize that the title describes it perfectly: an estimate. The cost may fluctuate for better or worse, but the difference from the actual costs will only be 10% of any third-party fees. The important part of the GFE shows you what the interest rates and closing costs will be so you have an opportunity to shop around for the plan that works best for you. GFE’s are required by law to be given within three days of applying for a loan by RESPA.

What’s RESPA?

RESPA stands for the Real Estate Settlement Procedures Act, which has been in effect since December, 1974. The bill was enacted to help curb shady kick-back practices done back in the day by some lenders. Another important part of RESPA is requiring lenders to provide GFE’s for potential borrowers. This made the process safer and easier for potential borrowers looking to start down the road to home ownership.

What Goes Into a Good Faith Estimate?

The good news is that no matter where you get your mortgage from, the GFE form will stay the same. The sheet itself and the information provided on it are based on HUD forms, so no lender gets special treatment. You can search online to find the information on a standardized template for a GFE form which typically includes  your estimated monthly payments, origination charges (charge for getting the loan to you) and settlement services (various insurance charges mostly). At the end of this three-page document, you’ll get your total estimated settlement charges, and a lovely estimate of your closing costs.

What’s Stopping My Estimate from Getting More Expensive?

Again, RESPA has got you covered here. Different sections of your GFE have different tolerance levels given to them, as in how much the estimate can fluctuate before the lender has to cover the difference in the estimate (if any). Some things have 0% tolerance (like your origination charge) and the lender must cover any difference in price; others have a 10% tolerance (like title insurance and services) and can increase up to 10% before the lender must cover the difference. Finally, some things have no tolerance (like initial deposit for escrow or homeowner’s insurance) and can change at settlement. All of the tolerance percentages and what payments fall under which categories are all available online.

So, if a mortgage is a ballroom dance, consider your Good Faith Estimate the helpful instructor (albeit, government mandated ballroom dance instructor). If you have any lingering questions or confusion on the ins and outs of a Good Faith Estimate, please watch our video and leave a comment below.

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