What Is a Good Faith Estimate of Closing Costs?

Understanding the Good Faith Estimate

The Good Faith Estimate, often called a GFE, served as a document provided by mortgage lenders to borrowers. Its primary purpose was to outline an itemized list of estimated costs associated with obtaining a mortgage loan. This estimate helped borrowers understand the full financial commitment beyond the principal loan amount and interest payments. Lenders or mortgage brokers furnished this document after a borrower submitted a loan application.

This estimate was not a final bill but rather a projection of the closing costs and loan terms. It allowed prospective homebuyers to anticipate expenses and compare offers from various lenders. The GFE was used for certain mortgage loans, including purchases, refinances, and home equity lines of credit, before regulatory changes altered the disclosure landscape.

Key Costs Included

A Good Faith Estimate itemized various costs associated with securing a mortgage, generally falling into three main categories. Lender charges included fees directly imposed by the financial institution for processing the loan. These could encompass origination fees, which are compensation for the lender’s services, or discount points, paid to reduce the interest rate over the loan’s term. Application and underwriting fees, covering the cost of evaluating the loan application and borrower’s creditworthiness, were also included.

Third-party charges represented services provided by entities other than the lender, which were necessary to complete the transaction. Examples included appraisal fees, paid to a professional to assess the property’s value, and credit report fees, for reviewing the borrower’s credit history. Title insurance fees, covering potential claims against the property’s title, along with escrow fees for managing closing documents and funds, were also listed. Additionally, costs for attorney services, recording fees to officially register the new ownership, and survey fees to confirm property boundaries might appear.

Prepaid items constituted expenses that borrowers paid in advance at closing. These included property taxes and homeowner’s insurance premiums, typically paid for the first year of coverage. Another prepaid item was mortgage interest, covering the period from the closing date to the first full month of the mortgage payment. These upfront payments ensured that necessary services and obligations were covered from the outset of the loan.

Reviewing and Comparing Estimates

Borrowers would review the Good Faith Estimate to understand all associated costs before committing to a mortgage. This document served as a tool for comparing loan offers from different financial institutions. By examining the itemized breakdown of fees, borrowers could identify potential discrepancies and negotiate terms with lenders. The goal was to secure the most favorable loan terms and minimize unexpected expenses at closing.

The GFE also operated under specific “tolerances,” which dictated how much certain estimated costs could increase between the estimate and the final closing. Some costs, such as the lender’s origination charge, could not increase at all, meaning they had a zero tolerance for change. Other costs, like those for third-party services where the lender allowed the borrower to shop, had a 10% tolerance, meaning they could increase by no more than 10% from the estimated amount. Costs for services where the borrower could not shop, such as required services chosen by the lender, also had a zero tolerance for increase.

Understanding these tolerances was important for borrowers to anticipate potential shifts in their final closing costs. This framework aimed to protect consumers from significant last-minute increases in fees. This provided a clearer financial picture and helped borrowers avoid surprises as they approached closing.

From Good Faith Estimate to Loan Estimate

The Good Faith Estimate, along with the Truth-in-Lending disclosure, was largely replaced for most residential mortgage applications. This significant change occurred with the implementation of the TILA-RESPA Integrated Disclosure (TRID) rule, effective October 3, 2015. The new regulation introduced two standardized forms: the Loan Estimate and the Closing Disclosure.

This regulatory shift aimed to simplify and combine the previously separate disclosures. The aim was to make the information more transparent and easier for consumers to understand and compare loan offers. While the GFE is obsolete for new mortgage applications today, understanding its principles remains valuable.

The Loan Estimate now serves a similar purpose to the GFE, providing estimated closing costs and loan terms in a clear, standardized format. This document helps consumers shop for and compare mortgage loans more effectively. It represents the current standard for providing estimated costs to borrowers early in the mortgage application process.