What Is a Limited Good Faith Estimate (GFE)?

Understanding potential loan costs is a fundamental step for borrowers. While modern lending practices have introduced standardized disclosure forms for many loan types, specific situations still rely on documents such as the Good Faith Estimate (GFE) or its more specialized counterpart, the Limited GFE. These estimates help individuals anticipate financial obligations, ensuring a clearer picture of the loan’s overall impact.

What is a Good Faith Estimate

A Good Faith Estimate (GFE) was a standardized form historically required by the Real Estate Settlement Procedures Act (RESPA) for most home loan applications. Its purpose was to provide borrowers with a clear estimate of settlement costs and loan terms within three business days of applying. The GFE aimed to enhance transparency, allowing borrowers to compare offers from different lenders by presenting estimated fees and charges in a consistent format. It itemized various fees, including those from the lender and third-party service providers, giving applicants a comprehensive overview of what they might pay at closing.

A key aspect of the GFE involved limiting how much certain fees could change from the estimated amount by the time of loan closing. In October 2015, the GFE was largely replaced by the Loan Estimate as part of the TILA-RESPA Integrated Disclosure (TRID) rule, an initiative designed to simplify and combine several disclosure forms for most mortgage transactions. Despite this widespread replacement, the GFE continues to be used for specific, less common loan types.

When a Limited Good Faith Estimate Applies

Despite the broad implementation of the TRID rule, which introduced the Loan Estimate for most residential mortgages, the Good Faith Estimate (GFE) remains applicable in certain “limited” circumstances. These specific loan types are exempt from TRID regulations and continue to utilize the GFE as their primary cost disclosure document.

For instance, individuals seeking a Home Equity Line of Credit (HELOC) will receive a GFE to understand estimated costs. Reverse mortgages, which allow homeowners aged 62 and older to convert home equity into cash, still require a GFE to disclose associated fees and terms. Certain types of business-purpose or investment loans also fall outside the TRID framework, necessitating the use of the GFE. Additionally, creditors who originate five or fewer mortgages in a calendar year are generally exempt from TRID requirements, meaning they may also issue a GFE for their mortgage transactions.

Understanding the Information on a Limited Good Faith Estimate

A Good Faith Estimate provides a detailed breakdown of the estimated costs and terms associated with a loan, helping borrowers anticipate their financial commitments. The document generally categorizes expenses into three main sections to ensure clarity. The first section includes “Origination Charges,” which are fees paid to the lender for processing and underwriting the loan, such as loan origination fees and discount points. These charges represent the cost of obtaining the loan itself.

The second category, “Charges for Services You Cannot Shop For,” lists fees for necessary services where the borrower typically cannot choose the provider. Examples often include appraisal fees, credit report fees, and flood determination services. The lender usually selects these third-party service providers, and their costs are included in this section.

The third section, “Charges for Services You Can Shop For,” encompasses costs for services where borrowers have the option to select their own provider, such as title insurance, surveys, and pest inspections. This allows for comparison shopping to potentially reduce expenses.

Beyond these primary sections, a GFE also details other significant costs that contribute to the total amount due at closing. These can include taxes and government recording fees, which are statutory charges that must be paid to local or state authorities. The estimate also covers initial escrow payments for property taxes and homeowner’s insurance premiums, which are funds set aside to cover future recurring expenses. Owner’s title insurance, while optional, may also be listed to inform the borrower of its potential cost and benefits.

Distinguishing Limited GFE from the Loan Estimate

The Good Faith Estimate (GFE) and the Loan Estimate (LE) both serve to inform borrowers about loan costs, but they operate under different regulatory frameworks and apply to distinct loan types. The GFE primarily falls under the Real Estate Settlement Procedures Act (RESPA), while the LE was introduced as part of the TILA-RESPA Integrated Disclosure (TRID) rule. This regulatory difference dictates which form a borrower receives based on the specific nature of their loan application.

A significant distinction between the two forms lies in their tolerance levels for estimated costs, which dictate how much a final charge can deviate from the estimate. Under the GFE, some fees, such as the lender’s origination charge, have a zero-tolerance level, meaning they cannot increase at all from the estimated amount.

Other fees, like those for services a borrower can shop for, may have a 10% tolerance, allowing for a slight increase, while certain prepaid items, such as initial escrow payments, typically have no tolerance limits and can change without restriction.

In contrast, the Loan Estimate employs zero, 10%, and no tolerance categories, but their application and the specific fees within each category are more strictly defined under TRID. The LE’s zero-tolerance category is broader, encompassing most lender and broker fees, while its 10% tolerance applies to the aggregate of specific third-party services. Both forms aim for transparency, yet the LE is generally considered more streamlined and user-friendly for most standard residential mortgages, whereas the GFE continues its role for specific, non-TRID mortgage products.