The Good Faith Estimate Has Been Replaced by the Loan Estimate
The loan estimate helps borrowers to comparison shop a mortgage
The Good Faith Estimate (GFE) was designed to encourage consumers to shop and then compare fees from various lenders before choosing a mortgage provider. Its original purpose was to help consumers understand what services they could shop for—so they not only received the lowest interest rate and best terms but saved significantly on closing costs as well.
The GFE has been replaced by the Loan Estimate, and the HUD-1 by the Closing Disclosure. If you purchased a home after October 3, 2015, you should have received these documents.
The Purpose of 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 or loan transactions.
In 1992, Housing and Urban Development (HUD) went a step further by issuing Regulation X, which required a more detailed disclosure about any affiliated business arrangements (AfBA) that might exist between parties involved with a real estate purchase.
An example of an AfBA could be if your realtor is also an owner of the title insurance company, and they were pressuring you to use their companies services.
The GFE helped borrowers avoid overpaying for a loan and set an interest rate. It was also designed to provide more transparency in real estate transactions. Transparency was needed because home buyers were being preyed upon by unscrupulous realtors and others involved in the sale of real estate.
This reduced unknown costs for home buyers, gave them confidence that they were not being taken advantage of, and reduced instances of fraud.
The Loan Estimate
Lenders are required to issue the loan estimate within three days of a home loan application or seven days prior to closing. If a loan originator does not provide a loan estimate within three business days of receiving a completed loan application, that lender is in violation.
HUD provides specific criteria for what constitutes a complete loan application. It should include:
- The borrower’s name, income, and social security number
- The property address
- The estimated value of the property
- The loan amount
- Anything else the lender deems necessary or that was agreed upon with the buyer
The loan estimate is standardized, and lists services you are allowed to shop for. You may not be able to shop for an appraisal fee or a credit report fee, but be able to shop for a land survey and title insurance. Lenders will vary in their requirements.
All lenders must provide consumers with the exact same document. Loan charges, third-party fees, and other costs must be displayed uniformly. The GFE had no such uniformity requirements.
The loan estimate encourages consumers to shop by issuing a standardized loan estimate in a specific time frame. Furthermore, HUD states that prior to the issuance of a loan estimate, lenders can only charge potential borrowers a fee to cover the expense of a credit report.
The relatively low cost of credit reports ($15 - $30) results in a consumer's ability to comparison shop among many lenders at a minimal cost. Some experts suggest that borrowers compare the rates and fees they will be charged by asking for a loan estimate from several lenders.
However, having a credit report pulled multiple times over several weeks may lead credit bureaus to believe that a consumer is being repeatedly denied credit, causing them to negatively adjust the borrower's credit score.
To avoid this, limit your mortgage shopping to between 15 and 30 days of the first credit pull.
The Closing Disclosure
Lenders are held accountable for their quotes. Each section in the GFE used to directly correspond to a section of the HUD-1. You used to receive a HUD-1 upon closing, which was a standardized document that listed every expense involved in a real estate or refinancing transaction.
The HUD-1 has been replaced by the Closing Disclosure, which designates fee tolerance levels. What this means is that a fee cannot increase from the loan estimate over the tolerance set for the category the fee is in, unless there is a permitted triggering event. There are three different tolerance categories to be aware of—0%, 10%, and no tolerance.
The zero-tolerance category includes fees for the services for the creditor, broker or any business affiliates of anyone involved in the process. These fees cannot change.
The 10% tolerance category allows for a 10% variance of recording fees, title documents, and services the buyer has to shop for—such as a home inspector.
The no-tolerance category allows for unlimited changes in fees for services not required by the creditor, such as a septic inspection or a property survey.