Good Faith Estimates

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Rhonda Porter, author of the Mortgage Porter blog, discusses Second Opinions on Good Faith Estimates on Rain City Guide. She makes a number of excellent points and I wanted to share them here with you and add some additional thoughts.

Before we get to her comments though here are my problems with using the Good Faith Estimate (GFE)as a way to compare loan offers from various lenders:

It is entirely to easy for a loan originator to manipulate. There are no restrictions on what does or doesn’t make it on the GFE; the loan originator is usually the one completing it and based on their virtue, or lack thereof, the fees and accuracy can vary from accurate, to close, to not-so-close, to not in the same universe. There is no way to tell whether the originator has put any good faith in to the estimate.
It’s not a binding document. The rate, loan program, loan amount and fees are not "locked" in anywhere. The fact that it is called an estimate seems to have given many unscrupulous people carte blanch over adjusting it as often as they like throughout the loan process. Many times your GFE will look nothing like the settlement statement (HUD) that you see at the signing table.
Most originators don’t properly disclose all of the fees on the GFE. For example they may accurately estimate the loan program, amount and their charges – but be way off on third party charges. Third party fees include escrow, title, appraisal, and other fees. These third party charges make up a substantial portion of closing costs and should be accurate. This could be due to malice or lack of training, but either way, it doesn’t give you the ability to make a fair comparison.
Most originators don’t properly re-disclose the GFE through out the loan process. The GFE should be resent to the borrower every time there is a material change to the loan – including terms, rate, program, loan amount, etc. Most of the time, when terms change you’ll never see a new GFE. You are now working off of out-dated, useless information. Each time you agree to a change in loan program, terms, or other, request a new GFE to be sent to you.
Many originators don’t know how to fill one out properly. Look for items such as recording fees, notary fees, county taxes, impounds (if you requested them) to be present on the GFE. If they aren’t on there you have an incomplete GFE – and if it is incomplete in one respect, it is hard to put "good faith" in it in all other respects.

Rhonda says:

I often review Good Faith Estimates to check on the rate, closing costs and prepayment penalties. When a rate looks too good to be true (something I cannot come near offering), I encourage the borrower to see if they can lock it in and to have the LO provide a written lock confirmation. I also advise borrowers to see if the Loan Originator will guarantee the closing costs (Section 800) on the good faith estimate. A consumer should bring their Good Faith Estimate to their signing appointment to compare the closing costs with those on the HUD-1 Settlement Statement. If a Loan Originator starts back peddling when asked these questions, I suggest that the borrower should do the same.

This is an excellent strategy to make the Good Faith Estimate work for you – instead of against you. To summarize:

Get a copy of the rate lock. A rate lock means that the loan has been locked with the bank and that your loan is registered and expected at the bank with specific rate and terms. While the GFE is just an estimate, there is absolutely nothing estimated about a rate lock. That is a precise, accurate document of your loan. The only thing that is lacking on this document are the fees charged by the originator.
Get the originator to send you an email saying "I guarantee that you won’t have to pay more than the total charges listed on your GFE at loan signing.

Once you’ve done this request that your originator provide you with a copy of the "estimated HUD" which is the draft settlement statement that is available prior to your loan documents being sent to you. Tell the originator "I want to review an estimated HUD prior to setting up my document signing." This will allow you to see all charges associated with your loan. Take your GFE and compare it to the estimated HUD and decide how close the estimate actually is and whether you need to do some renegotiating, walk away, or sign the papers.

If you are getting a variety of GFEs from multiple lenders look at them to see who is being honest and sending an accurate GFE. To do this look for the following fees on your GFE, they are a standard part of every loan and should be on each GFE, unless you are doing a "no cost loan".

Appraisal fee – every home needs to be appraised in one way or another for a 1st mortgage loan
Notary fee – all loan documents need to be signed and witnessed by either a notary, lawyer, etc.
Recording fee – each county recorder office will charge a fee to record the new deed on your property
Escrow fee – each loan will need to go through an escrow company
Title fee – each loan will require a title insurance policy to be issued by the title company

While these fees may not be on every loan, they are staples and can be used as good indicators as to whether you are receiving an upfront, honest estimate from your originator.