The Basics of a Good Faith, or Loan, Estimate
The Loan Estimate Helps Borrowers to Comparison Shop a Mortgage
The Good Faith Estimate (GFE) was designed to encourage consumers to first shop and then compare fees from various lenders before choosing a mortgage. Its original purpose was to help 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. The Good Faith Estimate is no longer used in the lending industry. It has been replaced by the Loan Estimate under TRID guidelines.
For those of you who would like to review the original intent and terms of the Good Faith Estimate, the following are procedures that are no longer utilized. Yet the Loan Estimate under TRID follows many of these same principles.
Borrowers are typically presented with a slew of documents at the settlement of a real estate transaction. The HUD-1 (now replaced by the closing statement), 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, now the Loan 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 a/k/a Loan Estimate
The Good Faith Estimate, which is now the Loan 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 of the Loan 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. In October of 2015, the Loan Estimate became the go-to disclosure.
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 received with the Loan Estimate. There are a few changes:
- Lenders are required to issue the Loan Estimate within 3 days. If a loan originator does not provide a Loan Estimate within 3 business days of receiving a completed loan application, that lender is in violation. HUD provides the specific criteria for what constitutes a complete loan application. Lenders are required to issue a Loan Estimate within 3 days of applying for a loan or within 7 days prior to closing.
- 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 Loan 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 Loan Estimate encourages consumers to shop. Since lenders are required to issue a standardized Loan 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 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 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 used to directly correspond to a section of the HUD-1. The HUD-1 was a standardized document that listed every expense involved in a real estate or refinancing transaction and was presented to the borrower during the closing process. The HUD has been replaced by the Closing Statement, and the Closing Disclosure now designates tolerance levels. There are three different tolerance levels:
- 0% Tolerance
- 10% Tolerance
- No Tolerance
NOTE: THE GOOD FAITH ESTIMATE HAS BEEN REPLACED BY THE LOAN ESTIMATE, ACCORDING TO TRID.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.