Taxation and Regulatory Compliance

What Is a Good Faith Estimate Mortgage and How Does It Work?

Understand how a Good Faith Estimate mortgage outlines loan costs, what impacts final expenses, and how to review estimates for accuracy before closing.

Understanding the costs associated with a mortgage is important for homebuyers, and lenders must provide an estimate of these expenses early in the process. This document helps borrowers compare loan offers and anticipate financial obligations before committing.

To make informed decisions, borrowers should understand what’s included in this estimate, when updates may occur, and how certain costs are regulated.

Key Items on the Form

The Good Faith Estimate (GFE) outlines the costs borrowers will encounter when securing a home loan. Some expenses come directly from the lender, while others involve third-party services or government fees. Understanding these charges helps borrowers assess whether the loan terms fit their budget.

Loan Origination Charges

This section details the fees a lender charges for processing a mortgage application, including underwriting, administrative, and processing costs. Lenders may also offer discount points, which allow borrowers to lower their interest rate by paying an upfront fee. One discount point generally costs 1% of the loan amount and reduces the interest rate by about 0.25%.

Some lenders advertise low interest rates but offset them with higher origination fees, making it important to compare both the rate and total upfront costs. The Truth in Lending Act (TILA) requires lenders to disclose the Annual Percentage Rate (APR), which includes these charges to provide a clearer picture of the loan’s true cost. While origination fees are usually non-negotiable, some lenders may adjust them in competitive markets.

Title Services

Title services cover the costs of verifying and securing legal ownership of the property. A title search ensures there are no outstanding liens, unpaid taxes, or ownership disputes. Lenders also require title insurance, which protects against claims that may arise after the purchase.

There are two types of title insurance: lender’s and owner’s. The lender’s policy is mandatory and covers the loan amount, while the owner’s policy is optional but recommended to protect the buyer’s financial interest. Costs vary by state—some have fixed rates, while others allow insurers to set their own pricing. Borrowers can shop around instead of using the lender’s suggested provider, which may lead to savings.

Government Recording Fees

These fees cover the cost of registering the mortgage and property ownership with the local government. Recording fees vary by jurisdiction and are based on factors such as the number of pages filed or the loan amount.

Unlike lender-imposed charges, government recording fees are non-negotiable. Some states also impose mortgage recording taxes, which range from 0.1% to over 2% of the loan amount. In New York, for example, the mortgage recording tax varies between 1.8% and 2.8% in certain areas, significantly increasing closing costs. Reviewing these charges in advance helps borrowers budget appropriately.

When Updates Are Provided

Lenders must provide the Good Faith Estimate shortly after a borrower submits a loan application, but the figures listed are not always final. Certain circumstances require updates to ensure the estimate reflects the most current information.

Changes in loan terms, such as switching from a 30-year fixed mortgage to a 15-year term, require a revised estimate. Market conditions also play a role—if a borrower does not lock in their interest rate at the time of application, the lender may adjust the estimate to reflect current rates.

A borrower’s credit score can also affect the estimate. If the score changes before final approval, the lender may adjust loan pricing, impacting interest rates and required fees. Property-related factors, such as a lower-than-expected appraisal, can also lead to updates. A lower appraisal increases the loan-to-value (LTV) ratio, which may require private mortgage insurance (PMI) or a higher interest rate. Similarly, if the borrower decides to buy a more expensive home or increase their down payment, the estimate must be updated to reflect the new loan amount and associated costs.

Tolerance Rules

Not all costs listed on the Good Faith Estimate are fixed. Federal regulations establish tolerance rules that limit how much certain fees can change between the initial estimate and final closing costs. These rules protect borrowers from unexpected increases and ensure transparency in the mortgage process.

Zero Tolerance Items

Certain charges cannot increase from the initial estimate to closing. These include lender fees such as loan origination charges, application fees, and underwriting costs. The Real Estate Settlement Procedures Act (RESPA) and its implementing regulation, Regulation X (12 CFR Part 1024), require these costs to remain fixed unless the borrower makes a change that affects the loan terms.

For example, if a lender quotes a $1,500 origination fee on the GFE, they cannot charge more at closing unless the borrower modifies the loan type or amount. Transfer taxes, which are imposed by state or local governments on property transactions, also fall under this category. If a state charges a 1% transfer tax on a $300,000 home, the borrower should expect to pay exactly $3,000 at closing. Any increase in these zero-tolerance fees without a valid reason could require the lender to cover the difference.

10% Tolerance Items

Some costs can increase, but only by a limited amount. Fees for third-party services required by the lender, such as title insurance, appraisal, and government recording charges, fall into this category—provided the borrower selects a provider from the lender’s recommended list. Under RESPA guidelines, the total increase for these services cannot exceed 10% from the initial estimate.

For example, if the GFE lists $2,000 in title services and $500 in recording fees, the total of $2,500 can rise by no more than $250, bringing the maximum allowable charge to $2,750. If the final costs exceed this threshold, the lender must refund the excess to the borrower within 30 days of closing. However, if the borrower chooses a service provider not recommended by the lender, the 10% tolerance rule no longer applies, and the final cost may vary significantly.

No Tolerance Restrictions

Certain expenses can fluctuate based on market conditions or borrower choices. These include homeowner’s insurance, daily interest charges, and escrow deposits for property taxes and insurance. Since these costs depend on external factors, lenders provide estimates, but the final amounts may differ.

For example, if a borrower’s property tax escrow is initially estimated at $3,000 per year but the local tax authority reassesses the home’s value, the actual tax bill could rise to $3,500, requiring a higher escrow deposit. Daily interest charges also vary based on the closing date. If a borrower closes on June 15 and their first mortgage payment is due August 1, they must prepay interest for the remaining 15 days of June. If the interest rate is 4% on a $250,000 loan, the daily interest is approximately $27.40, leading to a total of $411 in prepaid interest.

Verifying Accuracy Before Closing

Before signing the final loan documents, borrowers should carefully review the Closing Disclosure, which replaces the Good Faith Estimate at the end of the mortgage process. This document provides a detailed breakdown of the final loan terms, interest rate, monthly payments, and closing costs. Comparing it against the initial estimate helps identify discrepancies.

Lenders must provide this disclosure at least three business days before closing, giving borrowers time to spot errors or question any unexplained changes. One area that requires close attention is prepaid expenses, such as property taxes and homeowners insurance. These are typically collected upfront to fund an escrow account. If the escrow calculation is incorrect, the borrower may face a shortfall, leading to higher monthly payments later. Checking the escrow breakdown can prevent surprises and allow for corrections before closing.

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