New Good Faith Estimate

The new RESPA rules have created many changes to the industry including a additional information added to the Good Faith Estimate (GFE). A GFE is a form provided to a potential borrower by a mortgage professional to help the borrower better understand the terms of the loan and settlement charges associated with the mortgage.

The new changes to the good faith estimate were designed to help borrowers better compare different options and lenders. There is a debate on whether these changes were necessary. This is a decision for each individual and I'm sure both sides hold merit.



Below is an outline page 1 of 3, provided by HUD, for the new good faith estimate. Pages 2 and 3 will follow shortly.

Page 1 of the GFE

Now let’s go through the GFE step-by-step. The top of page 1 of the GFE shows the property address, your name and contact information and your loan originator’s contact information

The Important Dates section of the GFE includes key dates of which you should be aware.

Line 1 discloses the date and time the interest rate offer is good through.

Line 2 discloses the date “All Other Settlement Charges” is good through. This date must be open for at least 10 business days from the date the GFE was issued to allow you to shop for the best loan for you.

Line 3 discloses the interest rate lock time period, such as 30, 45 or 60 days, that the GFE was based on. It does not mean that your interest rate is locked.

Line 4 discloses the number of days prior to going to settlement that you must lock your interest rate.

Note: “Locking in” your rate and points at the time of application or during the processing of your loan will keep the interest rate and points from changing until the rate lock period expires.

The Summary of Your Loan Terms discloses your loan amount, loan term, the initial interest rate and the principal, interest and mortgage insurance portion of your monthly mortgage payment. It also informs you if your interest rate can increase, if your loan balance can rise, whether your mortgage payment can rise and if there is a prepayment penalty or balloon payment.

In the example above, the loan amount is $200,000 which will be paid over 30 years. The initial interest rate is 5 percent and the initial monthly mortgage payment is $1,173 which includes mortgage insurance, but does not include any amounts to pay for property taxes and homeowner’s insurances if required by the lender.

In our example, the loan has an adjustable interest rate. Since the interest rate can rise, the ‘yes’ box was checked, and the loan originator disclosed that the initial interest rate of 5 percent could rise as high as 10 percent. The first time your interest rate could rise is 6 months after settlement which could increase your payments to $1,290. Over the life of your loan your monthly payments could increase from $1,173 to $1,842.

This example does not contain a balloon payment or a prepayment penalty.

NOTE: A prepayment penalty is a charge that is assessed if you pay off the loan within a specified time period, such as three years. A balloon payment is due on a mortgage that usually offers a low monthly payment for an initial period of time. After that period of time elapses, the balance must be paid by the borrower, or the amount must be refinanced. You should think carefully before agreeing to these kinds of mortgage loans. If you are unable to refinance or pay the balance of the loan, you could put your home at risk.

Escrow Account Information

The GFE also includes a separate section referred to as ‘‘Escrow account information,’’ which indicates whether or not an escrow account is required. This account holds funds needed to pay property taxes, homeowner’s insurance, flood insurance (if required by your lender) or other property-related charges.

If the GFE specifies that you will have an escrow account, you will probably have to pay an initial amount at settlement to start the account and an additional amount with each month’s regular payment. If you wish to pay your property taxes and insurance directly, some lenders will give you a higher interest rate or charge you a fee. If your lender does not require an escrow account, you must pay these items directly when they are due.

Summary of Your Settlement Charges

The final section on page 1 of the GFE contains the adjusted origination charges and the total estimated charges for other settlement services which are detailed on page 2. You should compare the “Total Estimated Settlement Charges” on several GFEs.