Note: This article refers to a form that is in use until October 3, 2015. For those who submit a mortgage application on or after this date, two new forms, called a "Loan Estimate" and a "Closing Disclosure," replace the HUD-1 Settlement Statement, the Good Faith Estimate, and the Truth-in-Lending disclosure form that were formerly required in mortgage loan closings. If you applied for your mortgage loan prior to October 3, 2015, you should have received a Good Faith Estimate within three business days of your initial application. This article will help you better understand that form.
The U.S. Department of Housing and Urban Development (“HUD”) created the GFE in accordance with Real Estate Settlement Procedures Act (“RESPA”) (12 U.S.C. § § 2601–2617) and regulations HUD drafted to implement this law, called Regulation X (12 CFR Part 1024). You can see a copy of HUD’s GFE Form on the HUD website.
The GFE tells you what you will pay to the lender, or to other parties providing services to the lender, in addition to your basic repayment of principal and interest.
What Information the GFE Gives You
You will find the following on the GFE:
- Name and contact information for the loan originator. The loan originator is the mortgage banker or mortgage broker who takes in your application and negotiates the terms of the loan with you.
- Important dates. The GFE shows these key times:
- the date through which the interest rate is good, sometimes called “the lock date”
- the date the estimate of charges listed on the GFE will expire
- the number of days after the lock day you have to close the loan, and
- the number of days before the closing you have to lock in your interest rate.
- Loan terms. The GFE will summarize the basic terms of the loan and matters that can affect your monthly payment, including:
- the principal amount of the loan
- the term, meaning the number of years you will pay out the loan if you do not sell the property, refinance, or make additional payments
- your initial monthly payment, the amount of principal and interest that is due each month. (This can change for subsequent payments because of a rate adjustment in a variable rate loan or the loan being recast after you make a large extra payment, or due to changes in additional payments required to fund property tax or hazard insurance escrows.)
- if your loan is a variable rate loan, the maximum possible first interest rate change, the number of months after which your rate can first change, and the maximum possible interest rate
- if your principal loan amount can change, the maximum potential principal amount
- whether you will incur a penalty for prepayment, and the maximum prepayment penalty, and
- if your loan has a balloon payment, the amount of the payment and the number of years from the loan date until the balloon payment is due.
- Estimated loan and settlement charges. The GFE will list the estimated charges that are expected for your loan application and closing, including:
- origination charges, the loan fee for taking out the loan, and points, which are additional fees you pay (or sometimes a discount or credit from the lender to you) for the particular interest rate you have locked in, and
- charges for settlement services, which are the fees for all of the services required by the lender to close the loan, such as credit reports, appraisals, title insurance premiums, government charges to record the mortgage, state and local transfer taxes on home sales (and on mortgages in some states), hazard and any other types of insurance required by the lender (i.e. flood, earthquake or wind), initial escrow deposits for property taxes and insurance that will be paid at the closing, and interest from the closing date to the day your first payment is due.
When Fees Estimated on the GFE Can Change
The loan and settlement charges shown on the GFE are estimates. They are not necessarily what you pay at the closing. However, the law limits which charges can differ, and by how much those charges can increase from what you are shown on the GFE. These limits are described on page 3 of HUD’s official GFE form, but can be shown elsewhere on any particular lender’s form.
By law, some charges cannot change at all. These are the origination fee, points, and government transfer taxes. This means that, at the loan closing, you should pay the exact same amount for these items as was shown on the GFE.
Some charges may increase, but by no more than ten percent. These charges include fees for the credit report, appraisal, title insurance, or any other product or service for which the lender chooses the provider or identifies the preferred provider, and governmental charges for document recording with the county recorder of deeds.
There’s a reasonable possibility that you will end up paying more than the estimates shown on the GFE for any service you can shop yourself, including:
- hazard or other types of insurance
- title insurance, if you choose the title insurer
- tax and insurance escrow payments, and
- daily interest charges, the amount of interest you will pay at the closing for the time between the closing and your first monthly payment.
Other Features of the GFE
The GFE includes a tradeoff table, which shows how the loan terms would change if you were to decrease your settlement charges or your interest rate. It also includes a shopping chart that allows you to fill in key features of loans from other lenders to make your own comparison.