Mortgages > Purchase
Good Faith Estimate
The good faith estimate is very important in the beginning of the mortgage process. While in the beginning stages of either home hunting or refinancing a current property, make sure you prepare for comparing good faith estimates. Good faith estimates are an excellent way for consumers to compare apples to apples for each lender you choose to compare. Be aware of the good faith estimate : IT’S VERY EASY FOR LENDERS/BROKERS TO HIDE FEES. The fact that they’re hidden does mean that they are there, you just need to know what to look for when reading a good faith estimate. In most cases the lender is very good about getting their fees on the good faith estimate, because of the state regulatory agencies have done a great job auditing most mortgage companies these days. The days of predatory lending are getting slimmer and slimmer. Put simply, if the fees are not on the good faith estimate that you signed then you shouldn’t have to pay them. During an audit from a state to a mortgage company, if any fees are not included on the good faith estimate or broker agreement / disclosure that you signed and acknowledged, the state may refund you that money later (if the mortgage company is not disclosing the fees appropriately. A lender may revise the good faith estimate multiple times, but what you see at the closing for fees on behalf of the lender/broker should be the last signed copy of the good faith estimate and this should be only be what they get for fees. A lender is required to give you this regulated legal form three days prior to closing. Consider comparing at www.lendingtips.com, www.bankrate.com, www.interest.com, or your local banks.
Let us take a look at the GOOD FAITH ESTAMATE
The first section of the good faith estimate should be pretty straight forward. The top portion of the good faith estimate is about you and the loan. In here you should see your info (name and address), address of the property (if different ), sales price (purchasing a home not refinancing), loan amount, interest rate, type of loan, and date prepared. The loan number is generated from the broker/lender you are dealing with. Make sure the good faith estimate accurately reflects the interest rate and terms you agreed upon with the broker / lender. BE AWARE: the interest rate may change if a lock is not performed (typically the rates are good for the quote given), so the good faith estimate may change later. Rates can vary depending upon the lender you choose and rates can change multiple times a day. If you received a good faith estimate from a “qualified mortgage company” don’t be scared that they call you up and tell the rate has changed (provided they are not “bait and switching” you or trying a predatory lending trick). Mortgage companies are in a very competitive business, so what they usually will do is post the lowest rate possible for that “minute” and raises / lower the rates if rates change. They typically are not doing anything illegal. When you receive a good faith estimate it doesn’t mean that you are committing to a lender. You are not committed until the day you sign at closing, and on a refinance you have a three day right to rescind. Remember: as stated on the GOOD FAITH ESTIMATE in bold letters “the information provided below reflects estimates of the charges which you are likely to incur at the settlement of your loan. The fees listed are estimates – actual charges may be more or less. Your transaction may not involve a fee for every item listed.”
Section 800-899 of the Good Faith Estimate (here’s a breakdown of the items to be aware of)
Items payable in connection with loan:
This section of the Good Faith Estimate has the most potential to be negotiated. The mortgage lender or mortgage broker control most of the fees related in this section of the Good Faith Estimate. Pay attention to what they are disclosing for fees. This is your best section to compare apples to apples when broken down correctly.
Item 801 Good Faith Estimate– Origination Fee: The mortgage lender or broker controls this fee and may be negotiated. The fee is either a flat fee or a percentage. Origination Fee can not be deducted on your taxes (check with your accountant) so making the best deal here can save you a lot of money in the long run.
Item 802 Good Faith Estimate – Discount Fee: This fee is what the mortgage broker or lender is using to buy down the interest rate agreed upon. Be aware of mortgage companies that state low rates, because any mortgage company can get low rates but the real question is how are you getting the low rates. Discount Fees or points is usually how the low rate is achieved. This fee is paid at closing either rolled into the loan or paid out of pocket, it’s basically prepaid interest and may be deducted on your taxes (ask your accountant). Buying down the interest rate with discount points may or may not be a good option for you. There are many factors to figure out what is best for you (again ask your accountant), but here are some basic thought to think about:
1) Think about the length of time you are in the home. The longer you are committed to staying in the home and paying the mortgage the more advantageous the discount can be (if rates don’t drop in the near future).
2) Take a look at how long it will take you to break even (or recapture the prepaid interest (discount points or fees).
3) Cash flow (can you afford to pay this fee). If this fee does exist and you can’t afford it or don’t want it than most likely the interest rate will be higher. Typically 1% discount fee will reduce your interest rate .25% on a 30 year mortgage.
Item 803 Good Faith Estimate – Appraisal Fee: This part of the Good faith Estimate may be possible to negotiate. Some lenders will waive the fee and some will put what the average appraisal will be. Whenever a mortgage company or mortgage lender buries fees be careful, because they have to make it up somewhere. They are not usually doing you a cost favor by waiving it (they need to make money too). The estimate of a typical appraisal need for a home with under $300,000 is about $350.00. You can shop yourself for your own appraisal, but be cautious because not all appraisal companies are accepted by all mortgage lenders. Your best bet is to let the mortgage company or lender shop this fee for you. Many times mortgage lenders or mortgage brokers have discounts because of the volume of business they send to a particular company.
Item 804 Good Faith Estimate – Credit Report: A mortgage company or mortgage lender is not allowed to make an up charge on these third party fees, so if you see a credit report fee of $50.00 be cautious. A typical charge for a credit report can be from $5-$15 each. If your credit report needs a lot of work to get it cleaned up than you can incur $100’s of dollars in fees, but this may be worth it in the long run. Always check your credit on a yearly basis. Check it at www.freecreditreport.com.
Item 808 Good Faith Estimate – Mortgage Broker Fee: This fee can mean a lot of things. A mortgage company can group or lump all their junk fees in this item. If things are waived and the rate is low than the mortgage company may try and make up the fees lost on other items in this one item. Lenders and mortgage companies need to make money so the fact that they have “junk fees” doesn’t mean they are all bad you just need to know how to compare them on the Good Faith Estimate.
Item 811 Good Faith Estimate – Application fee: This item in the Good Faith Estimate is more than negotiable. This fee is very important for the mortgage company because if you pay them an application fee up front than that means you are a serious buyer (to get a loan) and they can make better predictions about their pipeline with an application fee. This fee should run more than $500.00. Don’t give an application fee to anyone besides the one you are going to do business. Good Faith Estimates are free so compare first before sending any money! Check to see if this fee in the Good Faith Estimate is refundable and if so when. Some are only refundable at closing (you only get it back if you close) and some have a timeline when you can receive a full 100% back.
Item 813 Good Faith Estimate – Lender’s Rate lock-in Fee: This is very similar to item 811 in that this follows the same rules. This can be negotiated and should be paid only when committing to that lender. Be careful when you shop lenders that you don’t try and lock in with multiple lenders at the same time, because you might not get what you ask for. If you lock in a loan with one mortgage company and let’s say the rates drop and you want to lock in at the lower rate so you change mortgage companies you might not be able to. There are a handful of large lenders out there and if the new mortgage company tries to lock you with the same lender they won’t be able to because of your previous lock. Make sure you are ready to lock and can accept the terms if the rates change.
Item 814 Good Faith Estimate – Processing Fee: This fee varies depending upon the mortgage company. This is a “junk fee” and could make a difference when comparing Good Faith Estimates. This fee is to cover part of the expense associated with processing your loan (basically labor and materials for the loan).
Item 815 Good Faith Estimate – Underwriting Fee: This is a “General Fee” for underwriting your loan (time and materials). This varies depending upon the lender involved with the loan. The mortgage company you received this good faith estimate may also be the lender for this loan. This loan is typically not negotiated or able to be changed.
Section 900-999 of the Good Faith Estimate
Items required by lender to be paid in advance:
Items 900-999 of the Good Faith Estimate should be the same for all lender provided that they are putting down the same closing date. This is not a section that the mortgage broker or mortgage lender makes money. Section 900 of the Good Faith Estimate are truly estimates at this point, but will become actuals later in the process. A lot is variable in this section based on the closing date, insurance companies, and how your city/town does their taxes.
Section 1000-1099 of the Good Faith Estimate
Reserves deposited with Lender:
Items 1000-1099 of the Good Faith Estimate are reserves that are required by the lender and will vary depending upon when you close your loan. These fees / reserves should be the same for all the mortgage companies. Their best estimate is put in this section and the final numbers will be filled in closer to closing date.
Total Estimated Monthly Payment:
Make sure you are paying close attention to what the final mortgage payment is that includes principle and interest. The taxes is not a factor when comparing mortgage companies or lenders, because your city/town sets this amount.
Title Charges:
Items 1100-1199 of the Good Faith Estimate –Title Charges: This is a fee that you can compare with different mortgage companies or mortgage lenders, but they will not be able to negotiate. This fee is an estimate of fees that their typical title company charges in your area. This is a third party fee that gets passed on to you. You may be able to shop for a cheaper attorney or title company yourself, but they may to be approved with the mortgage lender involved. Typically mortgage companies don’t care who you choose for an attorney, so do your homework and possibly save $100’s here.
Items 1200-1299 of the Good Faith Estimate – Government recording and transfer charges: This section of the Good Faith Estimate is what they are. The mortgage lender or mortgage brokers are not going to negotiate here! There’s nothing you can do it’s the government.
Items 1300-1399 of the Good Faith Estimate – Additional Settlement Charges: This section is up to you. The survey is always recommended on your new property, but does not have to be done. The pest inspection fee is up to you as well. This is not something the average homeowner acquires, but can be purchased if needed. Do your shopping for these items of the good faith to save you some money if you want to. Don’t forget to get an inspection of the property (it comes highly recommended even if the house “looks good”) this could save you problems in the future.
Wow! The Good Faith Estimate is very complex but yet simple to understand if you know what you are comparing. I want to caution you about negotiating on the Good Faith Estimate fees because the fees are going to be incorporated somewhere and the best place (if they have to be included) are to be paid upfront. If the mortgage broker or mortgage lender has to burry the fees in the interest rate of the Good Faith Estimate than you will be paying for it over the life of the loan. A simple $350.00 appraisal that gets buried in the interest rate could cost you $1000’s later. Be a smart shopper and ask questions about the Good Faith Estimate.
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The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).
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