The Good Faith Estimate (GFE) encourages consumers to first shop and then compare fees from various lenders before choosing a mortgage. It helps consumers understand what services they can shop for -- so they not only can receive the lowest interest rate and best terms, but can save significantly on closing costs as well.
Borrowers are typically presented with a slew of documents at the settlement of a real estate transaction. The HUD-1, deed, promissory note, homeowner’s insurance, and many other documents must be signed and notarized. Often, a borrower is seeing these documents for the first time and is asked to sign them without the opportunity to read them in their entirety. The Good Faith Estimate gives borrowers the chance to review some of those costs upfront while they are still shopping for a loan.
The Purpose of a Good Faith Estimate
The Good Faith Estimate helps borrowers avoid overpaying for a loan and sets forth the interest rate. For home buyers, lower closing costs could mean affording a larger home within their current budget, lowering their overall mortgage payments or simply being able to bring less money to the closing table. Note: in some instances, sellers might agree to pay all or some of the buyer's closing costs.
What is a Good Faith Estimate?
In 1974, Congress passed the Real Estate Settlement Procedures Act (RESPA) with the intent of protecting consumers by requiring the disclosure of all costs associated with a real estate purchase and / or loan transaction. In 1992, HUD went a step further by issuing Regulation X, which required a more detailed disclosure about any Affiliated Business Arrangements that might exist between parties involved with a real estate purchase. The Good Faith Estimate revision released in January of 2010 is the latest step taken by HUD to protect and assist consumers.
In the past, lenders had provided potential borrowers with Good Faith Estimates. However, there are major differences between what borrowers have historically received and what they receive today. There are four major changes:
- Lenders are required to issue the Good Faith Estimate in 3 days.
If a loan originator does not provide a Good Faith Estimate within 3 business days of receiving a completed loan application, that lender is in violation of Section 5 of RESPA. HUD provides the specific criteria for what constitutes a complete loan application:
- Borrower’s Name
- Borrower’s Monthly Income
- Borrower’s Social Security Number (to obtain a credit report)
- Property Address
- Estimate Value of the Property
- Loan Amount
- Anything Else the Lender Deems Necessary
- The Good Faith Estimate is standardized.
All lenders must provide consumers with the exact same document. Loan charges, third-party fees, and other costs must be displayed uniformly. Previously, lenders were not uniform in their interpretations of what fees should be included on the Good Faith Estimate and where such fees should be disclosed.
- The Good Faith Estimate encourages consumers to shop.
Since lenders are required to issue a standardized Good Faith Estimate in a specific
time frame, consumers are provided an opportunity to compare lenders and their products. Furthermore, HUD states that prior to the issuance of a Good Faith Estimate, lenders can only charge potential borrowers a fee to cover the expense of a credit report. The relative low cost of credit reports ($15 - $30) results in a consumer's ability to comparison shop among many lenders at a minimal cost.
Experts suggest that borrowers compare the rates and fees they will be charged by asking for a Good Faith Estimate from several lenders. Having a credit report pulled multiple times over several weeks may indicate to credit bureaus that a borrower is being repeatedly denied and the borrower's credit score may be negatively affected. To avoid this, keep mortgage shopping to 15 to 30 days of the first credit pull.
- Lenders are accountable for their quotes.
Each section in the Good Faith Estimate directly corresponds to a section of the HUD-1. The HUD-1 is a standardized document that lists every expense involved in a real estate or refinance transaction and is presented to the borrower during the closing process. Sections in the Good Faith Estimate are designated tolerance levels. There are three different tolerance levels:
- 0% Tolerance
If, at the closing, any item in the “0% Tolerance” category is higher on the corresponding section of the HUD-1 as compared to the original Good Faith Estimate, the lender is responsible for covering the difference.
- 10% Tolerance
Unlike the “0% Tolerance” category, these items are not compared individually to their corresponding section in the HUD-1. Instead, all items in the “10% Tolerance” are aggregated on the Good Faith Estimate and compared to the aggregated corresponding items on the HUD-1. In the event that the HUD-1 has a total more than 10% higher than the total on the Good Faith Estimate, the lender is responsible for any expense in excess of the 10% increase. This means that any one item in the 10% tolerance category can increase more than 10% from the Good Faith Estimate to the HUD-1 without a penalty to the lender, as long as the sum of all the items does not increase more than 10%.
- No Tolerance
A few sections of the Good Faith Estimate fall into the “No Tolerance” section. These quotes can change with no penalty to the lender.
- 0% Tolerance
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.