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How to's and money-saving tips from resident homeowner and mortgage professional, Cathy West

Documents like good faith estimates and Loan Estimates encourage borrowers to seek multiple loan rates.

What is a good faith estimate?

A good faith estimate is a three-page document that breaks down the costs owed when closing on a mortgage loan. This paperwork allows homebuyers to understand the full costs involved with taking out a mortgage loan. Zillow lists the terms included in a GFE:

  • Loan amount.
  • Interest rate.
  • Term.
  • Prepayment penalty (if applicable).
  • Origination charge.

GFEs don't include the costs of homeowners insurance or property taxes.

Good faith estimate vs. loan estimate
According to the Consumer Financial Protection Bureau, buyers applying for a mortgage after October 3, 2015 receive a loan estimate instead of a GFE. If they applied for a mortgage before this time, they will obtain a GFE. Homeowners requesting a reverse mortgage will also receive a GFE.

The CFPB initiated this mortgage disclosure act to improve borrowers' experiences in obtaining valuations. Loan estimates are considerably easier to understand than GFEs and highlight more information, such as the short- and long-term costs of a loan. In addition, loan estimates allow borrowers to compare their approximations with their closing disclosures for several days leading up to the closing agreement.

How lenders determine their estimates
Lenders mostly use general information, including tax costs and their processing fees, to generate estimates. A lender can also take a borrower's credit score into account when forming an evaluation.

Some homeowners are surprised when their estimates are slightly lower than the actual fees. Third-party services, like attorneys, can increase the closing cost above the estimated number because lenders do not handle these expenses. Although lenders try to make these numbers as accurate as possible, it's important to understand that these are simply estimates. Fortunately, the final number borrowers would pay for a mortgage loan is typically only slightly higher.

The waiting period
Homeowners and buyers applying for a good faith estimate do not have to wait long. Lenders are legally required to send this form within three days after a loan application is submitted.

How buyers can use GFEs and loan estimates to their advantage
When homebuyers and homeowners apply for mortgages, they are not binding themselves to a lender; they have the right to decline moving forward without justification. Buyers looking for a mortgage, or homeowners seeking a reverse mortgage, might apply for loans through multiple lenders to compare their estimates. Realtor.com suggested shopping around for two or three GFEs or loan estimates before deciding on a lender. Homebuyers seeking mortgage estimates can apply for loans through CapWest's user-friendly online form.

For more information about this article, call 866-614-5959.

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