Good faith estimates used to be really important for mortgages.
Wait, used to be?
Here’s the thing about using a Good Faith Estimate (sometimes called a GFE): on Oct. 3, 2015, the U.S. government made significant changes to the rate and fee disclosures that consumers get at the beginning and end of every mortgage transaction.
So now, for most home loans you’ll just get a Loan Estimate and Closing Disclosure Form instead of a GFE. This is part of the Truth in Lending Disclosure (sometimes called TLID for short).
But the general principals and history of the GFE are still good to know, especially if you applied for a mortgage before this change occurred.
What is a Good Faith Estimate?
The government originally put GFE’s into place to encourage homebuyers to shop around. The Estate Settlement Procedures Act of 1974 helped push this issue into the public mind.
This is because it is never a good idea to purchase the very first product you look at, especially for a big purchase like a house! Your home is likely the largest financial transaction that you will ever make, so picking the right partner to finance its loan is very important.
When you shop around with different lenders for a mortgage, you can ensure that you get not only the lowest interest rate and the best terms possible, but that you also save significant amounts of money on closing costs as well.
Do you have to give a Good Faith Estimate?
Prior to the passing of the act that required the TILD, the GFE was the go-to required document. The old law required that all potential lenders give all mortgage applicants a Good Faith Estimate within three business days of their original loan application. A mortgage broker would also send a GFE if you used a broker to apply for a loan.
Now, lenders must do the same with the new documents.
Before this, the law also required that the GFE explain all the terms and charges associated with a mortgage loan. The general idea was that you could line up your GFEs from your different loan applications. Then, you would be able to easily compare and contrast them, then pick the one that’s right for you.
What are the features of a Good Faith Estimate?
When reading the GFE, you should be able to understand all of the charges and be able to easily locate them on the document. These charges could be things like the total amount of the loan, the total term of the loan, your loan’s interest rate, a prepayment penalty for closing the loan early (if applicable), and things like loan origination charges.
The Good Faith Estimate also made it very clear who pays for each real estate fee.
That’s because in the home closing process, the buyer pays for some things, while the seller pays for others. The HUD-1 Settlement Statement regulated the good faith estimates, which itemized all charges assigned to the borrower and seller for a real estate transaction.
Here are some examples of fees the GFE would explain:
- Loan fees
- Reserves or escrow paid to third parties
- Title charges (like a title search or title insurance)
- Government charges and fees
How accurate is a Good Faith Estimate?
Although now the real estate industry relies on the Truth in Lending Disclosure, when it used GFE’s, the general consensus was that a lender’s good faith estimate should be more accurate than a mortgage broker’s.
However, all parties involved kind of accepted the fact that the GFE was never going to be 100% accurate. That’s why they named it that. It is just an estimate, made in good faith.
An example of these changing numbers could be something like this: the estimate arrives with quotes from third-party providers, like a title company. However, you decide to use a different title company, or perhaps even purchase a different title or homeowners insurance. Because of this, the original numbers would no longer be accurate.
One thing to keep in mind when considering the numbers of a GFE: the associated fees are likely to increase, but never to go down. However, we must remember that when working with a GFE, it is still just an estimate.
The settlement document that you get before closing day would then list the actual fees and amount you must pay. However, you can assume that these fees would not be drastically different from each other.
How much does a Good Faith Estimate cost?
Good Faith Estimates were once absolutely free.
The hope was that if you got together with a particular mortgage lender and received a GFE, and then you would like it enough to come back and actually use that lender for your mortgage. Luckily, the new Truth in Lending Disclosure process is also free. So, just because the Good Faith Estimate is a thing of the past, it has been improved upon, not completely done away with.