What Does My Good Faith Estimate Say?

Many people - from Realtors to consumers to other loan officers - have asked me questions about the new Good Faith Estimate. What does it mean? Do I have to bring this much money to closing? Why is this fee listed here? So, I decided to compile information about the new three-page form that should answer many of the questions that people, especially consumers, may have about the form.

As of January 1, 2010, there have been some major changes to RESPA. The most important of these changes are the new Good Faith Estimate (GFE) and the HUD-1 Settlement Statement (HUD1). The changes make it important for me to quote accurate fees because I will be bound to them. If the fees differ at the closing, I could have to pay the overages out of my own pocket.

There are now three pages to the GFE. Page 1 is a summary page and speaks about the loan, the rate, can the payments change during the life of the loan, etc. Page 2 is a "breakdown" of the fees, charges and credits associated with the loan. I placed breakdown in quotes because the new GFE doesn't detail the fees as much as the old GFE. Page 3 is a comparison page.

What You Need to Know About Page 1:

•- The rate and payment quoted on the GFE expires. The date and time of expiration should be clearly stated in #1 on Page 1. Since the interest rates offered by lenders are highly volatile and can change day-to-day (and also during the day depending on fluctuations in the market) the expiration could be midnight of the current day. This is because we cannot possibly know what interest rates could be tomorrow! If you are dealing with a government program, such as CHFA here in CT, rates are released every Thursday so it would be possible to quote a rate for longer than a day.

•- The other settlement charges are guaranteed for 10 days. This includes attorney fees, transfer fees, title insurance and appraiser fees, among others. There is a built-in tolerance to some of these fees and some do not have a set tolerance for increasing.

•- The Total Estimated Settlement Charges at the bottom could be much higher than you would be expected to pay or bring with you to your closing. This is because it includes fees that you may not be paying out of pocket or even at all. As an example from a loan that I am currently working on, Page 1 of the GFE says that the settlement charges are more than $12,000, however the buyer will bring an estimated $1000 to the closing. Page 2 explains where this number comes from.

What You Need to Know About Page 2:

•- Section A, #1 contains the "Origination Charges" which are the broker's and lender's fees all lumped together. The numbers in this section cannot change without a "changed circumstance". The list of changed circumstances is not very long and includes things like an "act of God" or an "act of terrorism". What this does is bind me and other loan officers to costs that are quoted including pass-through fees such as those paid to the lender. There is ZERO tolerance for increase of these fees.

•- Section A, #2 contains information about the Yield Spread Premium, which is the commission paid by the lender to the broker for originating the loan. This figure is now displayed as a credit to YOU, not to the broker. This makes explaining a "no closing cost" loan easier to do. It is shown in this section to reduce the amount of your origination/lender charges by providing the amount of the Yield Spread as a credit. If points are being paid to the lender for a reduced rate, the amount will show in this section.

• For example, if the total origination charge payable to the broker and the lender total $4000 and you receive a credit for the Yield Spread of $4000, then your out-of-pocket cost in Section A is $0.00.

•- Section B, #3-7 are subject to a 10% tolerance of the total if I (or the processor) choose the service provider or if you choose the service provider from a list that I give to you. If you choose someone not on the list, their fees are not subject to the tolerance threshold.

•- Section B, #3 will include any up-front mortgage insurance that will be collected for the loan. FHA, VA and USDA all charge up-front mortgage insurance. However, this fee is usually financed into the loan and typically you do not have to bring this amount to the closing. (An example of why the Total of the charges may not be the same as the money needed for closing.)

•- Section B, #8 is for Transfer Taxes and is subject to zero tolerance for increasing. In CT, transfer taxes are typically paid by the seller. However, if you are buying a bank-owned property, the addendum to the Purchase and Sale Agreement could state that you are to pay this fee. If this is not disclosed on the GFE, then I could end up paying for it!

•- Section B, #9-11 are fees that do not have set tolerances because I cannot be expected to maintain control of the costs of these items.

•- The total at the bottom are the total settlement charges and may NOT be the amount you need to bring to closing. Some of the fees in this total may be financed or the seller is paying for them.

What You Need to Know About Page 3:

•- The top section breaks down the tolerances for the fees/charges listed on Page 2. #1, #2 and #8 have a ZERO tolerance for increasing. #3-7 have a 10% tolerance for increasing if I select the service provider or you select the service provider from a list that I give to you. #9-11 do not have set tolerances and can change freely.

•- I think the middle section is a great tool for consumers. It shows the settlement charges of the loan as it is. It also shows what would happen if you selected a higher interest rate to offset some or all of the closing costs. And it illustrates what it would look like if you were to buy down your interest rate by paying points. These three examples are side-by-side for an easy comparison.

•- The bottom section provides an area where a borrower can compare different loan offers. However convenient this may appear, you must still be careful that the numbers that you are comparing - especially pertaining to the closing costs - are accurate.

Granted, some of the above can be confusing but for someone with a good grasp of how this new form works, I can easily explain through the confusion so you completely understand the form.

If you are confused about a Good Faith Estimate that you have received, please feel free to contact me at eric@righttracfg.com or call me at the office at 860-647-7701 x13. I would be happy to work with you so that you understand what the GFE says.

When it comes to No Money Down Financing, we are the Experts!

Eric Boucher
Right Trac Financial Group
860-647-7701 x13 Office
860-324-3324 Cell
eric@righttracfg.com