Shopping for a home loan is not much different than any other major purchase. You want to compare the costs and benefits of the available products before you make your choice. The Good Faith Estimate (“GFE”) is a standard form that lets you do this type of comparison for home loans.
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 lender is, under RESPA, supposed to give you a copy of the GFE within three business days of your initial application.
The GFE helps you shop for loans by telling 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. By comparing the GFEs from one loan to another, you can tell which loan has more requirements or is more expensive.
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. You can direct your questions about the loan to the loan originator, who should be licensed and knowledgeable about home loans and the home financing process. To confirm that you are working with a licensed loan originator, check with your state’s department of professional licensing and registration.
- 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 will 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 now includes a tradeoff table, which helps you compare different loans with the same lender. The tradeoff table 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.
How to Use the GFE Before the Closing
When you receive the GFE, you will also receive a Truth-In-Lending form (“TILA”). The GFE shows you raw numbers of the fees you will pay for your loan, while the TILA makes some calculations using those numbers, to help you understand the full economic effect of your loan. For each loan you applied for, you can compare the GFE and TILA to see which is cheaper in the short term or in the long term, or which loan has more, or more expensive, requirements. For additional information on the TILA, see Nolo’s article: “Home Buyers: What You Can Learn From the Truth-In-Lending Disclosure.”
Be careful not to confuse the GFE with a preliminary loan cost calculator or loan fee estimate worksheet your lender may give you when you first apply for your loan. These calculators and worksheets are not the same as the GFE, and the rules regarding increases do not apply to them.
How to Use the GFE at the Closing
Bring your GFE to the closing to compare the interest rate, loan fees, and settlement charges estimated there to the actual charges you will pay as shown on the HUD-1. For more information about the HUD-1, see Nolo’s article: “Home Buyers: How to Read Your HUD-1 Statement.”
Charges that cannot increase should be the same on the GFE and HUD-1, and charges that can increase up to 10% should not increase by more than that. Before the final closing, and before you sign the HUD-1, you should report any inappropriate or unlawful fee increases to your escrow closer, your attorney (if you have one), or directly to your lender.