Good Faith Estimate – What is it and why do you need it

Once you complete mortgage application and submit it along with all necessary documents, you can expect to receive a few documents from your lender if your application is not denied within three days. The Good Faith Estimate, often abbreviated as GFE, is one such document, which your lender is required by law to send you within three days of application.

What is Good Faith Estimate?

The GFE is simply an estimate of the fees and charges that you are required to pay at the time of closing if you happen to pass through all steps of mortgage approval. Besides, the document also contains some important information about your loan. Here is a detailed description of what you can expect to find in the three-page document.

The First Page

The first page of Good Faith Estimate contains a summary of your loan terms and whether or not you need an escrow account. The following are some of the items you can see on this page.

  • The principal loan amount
  • The term of the loan
  • The interest rate
  • The monthly payment
  • The loan type
  • Whether your loan has a prepayment penalty
  • Whether you need an escrow account to pay for insurance premiums and taxes

The Second Page

The second page is dedicated to listing the various settlement costs, including fees of professionals and service charges that your lender will need to use for loan processing. Also known as closing costs, these can be grouped under two headings – adjusted origination charges and other settlement services.

The origination charges are usually expressed in points. Each point typically equals one percent of the amount borrowed. These points are of two types. The first type represents the fees of the lender for your loan processing and you must pay for it. The second type is optional and is used to buy down the interest rate, reducing the cost of the loan over the full term.

The second page of the Good Faith Estimate lists a number of settlement services also besides origination charges. These may include the following.

  • Appraisal fee
  • Credit report fee
  • Title Service fee
  • Government recording charges
  • Homeowners insurance
  • Initial deposit for your escrow account, if you are required to open one

The Third Page

The GFE’s third page contains tables, which you can use to compare rates and settlement charges from others. It is indeed the purpose of Good Faith Estimate. You can use this document to compare offers from several lenders.

What is the Use of Good Faith Estimate?

It is usually a good practice to shop around and find the lender with best offers. To do so, you are highly recommended to apply at two or more lenders and obtain a copy of Good Faith Estimate from each. However, you must note two things when doing so.

  1. You should avoid applying at too many lenders simultaneously. Doing so is not good for your credit. Two or three lenders at a time sound ideal and risk-free.
  2. You don’t have too many days to defer your decision after you have obtainted the Good Faith Estimate from a lender. It is good for 10 days only. The lender is not bound by it after this period.

The Good Faith Estimate is also used to compare the actual charges on the HUD-1 Settlement Statement, which you receive from a lender just a few days before the closing. The GFE contains allowable limits of change against each item it displays. You have a reason to ask your lender if the charges increase dramatically on the HUD-1 Settlement Statement.

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