Good Faith Estimate

             The Real Estate Settlement Procedures Act (RESPA) requires that a Lender or Mortgage Broker give you a pamphlet entitled Shopping for Your Home Loan within three days of applying for a loan.  In addition, the Lender must provide you with a Good Faith Estimate of your closing costs which could be expected at closing.  As of January 1, 2010, the Good Faith Estimate became uniform under RESPA and all Lenders and Mortgage Brokers with whom you apply must follow these guidelines strictly.  In addition, the Lender and Mortgage Broker cannot refuse to issue you a binding Good Faith Estimate once you supply the essential application information such as social security number, property address, estimated value, etc.  Also, the Lender or Mortgage Broker cannot state that you will only get a Good Faith Estimate once you commit to go with them as your Lender.  The reason for this is that the concept of these revised procedures is to allow you to shop intelligently for the best deal for you by comparing multiple Good Faith Estimates.  Furthermore, it is important to note that until you receive a Good Faith Estimate, the Lender or Mortgage Broker can only charge you for the cost of a credit report.

             The purpose of this article is to explain the various sections of the Good Faith Estimate in easy to understand terms so you understand exactly what it is you are trying to understand and how to compare what you are going to be paying.  It is important to note that this is an Estimate but, as will be explained later, certain costs are not allowed to change, while others may only rise 10% and still others will change at the closing.

             The first page of the Good Faith Estimate contains basic information at the top such as the name of the Lender and their contact information, along with your name, the property address and the date of the Good Faith Estimate.  A little further down is a section which sets forth the important dates relating to the loan.  It sets forth the date through which the interest rate that has been quoted and the estimate for settlement costs is good through.  It also sets forth the timeframe in which you must close (rate lock period) and sets the last date that you can lock in the interest rate. 

             Also on page 1, the Good Faith Estimate provides a summary of your loan.  The following information is set forth for easy reference:

             1.         Your initial loan amount

            2.         The term of your loan

            3.         Your initial interest rate

            4.         Your initial monthly payment for principal, interest and mortgage insurance
            5.         Indicates whether interest rate can rise (adjustable rate) and, if so, the maximum rate it can rise to and the date of the first change

            6.         Indicates whether your loan balance can ever rise and, if so, the maximum amount

            7.         Indicates whether your monthly payment can ever rise and, if so, the maximum amount it can raise on the first increase and maximum amount it can ever be raised to

            8.         Indicates if there is a prepayment penalty

            9.         Indicates if there is a balloon payment

             Also included on page 1 is information concerning escrow accounts.  Many Lenders require that escrow accounts be established for the payment of property taxes, homeowner's insurance, flood insurance, etc.  The Good Faith Estimate contains a separate section informing if they require that you establish an escrow account which would increase your monthly payment amount.  If the Lender does not require an escrow account it must be noted that you will be required to pay these items yourself when they become due.

             The final section of Page 1 of the Good Faith Estimate is a summary of your settlement charges.  It is a good idea to compare the Total Estimated Settlement Charges with Good Faith Estimates from several Lenders.

             Page 2 of the Good Faith Estimate sets forth the estimated settlement charges.  Section 1 sets forth the Lender's origination charge which is their charge to you for obtaining the loan at the particular interest rate.  Section 2 sets forth whether the Lender will give you a credit at closing for accepting this loan which would reduce your settlement costs or if the Lender will be charging you points for this loan which would increase your settlement costs.  Note that a point is equal to one percent of the loan amount.  The total of the origination charge and the credit or points is referred to as your adjusted origination charge which cannot change as further explained below.

             Sections 3-11 on Page 2 of the Good Faith Estimate sets forth the various other settlement charges which will be required at the time of closing.  Note that these charges are subject to change.  These fees include, but are not limited to: title insurance, recording fees, transfer taxes, escrow deposits, daily interest charges, homeowner's insurance, etc.  some of these services will be provided by third parties chosen by the Lender and other services will be provided by third parties chosen by you.

             Page 3 of the Good Faith Estimate reveals that the costs due at closing are broken down into three distinct categories:

            1.         Costs which cannot increase at settlement

                       a.         Lender's origination charge

                       b.        Lender's credit or charge (points) for the specific interest rate you choose (after you lock in the rate)

                       c.         Your adjusted origination charges (after you lock in the rate)

                       d.         Transfer taxes

            2.         Costs which can increase collectively up to 10% at settlement

                        a.         Required services that the Lender selects

                        b.        Title services and Lender's title insurance (if the Lender selects the title insurance company or you use companies identified by the Lender)

                        c.         Owner's title insurance (if you use companies identified by the Lender)

                        d.         Required services that you can shop for (if you use companies identified by the Lender)

                        e.         Government recording charges

            3.         Costs which can change at settlement

                         a.         Required services that you can shop for (if you do not use companies identified by the Lender)

                        b.         Title services and Lender's title insurance (if you do not use companies identified by the Lender)

                        c.         Owner's title insurance (if you do not use companies identified by the Lender)

                        d.         Initial deposit for your escrow account

                        e.         Daily interest charges

                        f.          Homeowner's insurance

             The Good Faith Estimate also gives the Lender the opportunity to offer you the option to accept the loan with a higher or lower interest rate.  If you wish to have a lower interest rate then your settlement charges will be higher.  If you wish to have lower settlement charges then your interest rate will be higher.  Note that the Lender does not have to offer you these additional options.

             Finally, the Good Faith Estimate has a section called the "shopping cart".  This section is meant to be filled out by you to compare the various Good Faith Estimate so you may shop for the best loan to suit your needs.