Every time you apply for a loan, you will receive a document called the Good Faith Estimate or Loan Estimate. This lender must send you this document within 3 days of your application by the end of the third business day; it is the law. This document gives you the information you need to compare loans with different lenders as well as understand the terms the lender decided to offer you. This way you can decide if a loan is right for you and if you want to shop around with different lenders to see what they have to offer you.
What the GFE is Not
It is important to understand that the GFE is not a guarantee for loan approval for any lender. It is an estimate, as the name suggests, of the costs you will incur if you accept the loan the lender offers. Once you accept the costs and wish to move forward with the loan process, the lender will ask you for more information to verify everything you stated on your application in order to move forward in underwriting. The best way to look at the estimate is a way to help you comparison shop with other lenders. Once the underwriter approves your loan, the lender can determine if the costs will remain the same or change based on the circumstances of your loan approval.
What does the Good Faith Estimate Show?
The Good Faith Estimate is the lender’s best guess at the costs of the loan at the time of application. You will see costs that include:
- Processing fee
- Origination fee
- Title costs
- Prepaid interest
- Escrow charges
- Third-party fees
- Appraisal costs
- Credit report fee
- Survey fee
You will also see other important information on the GFE including:
- Interest rate
- Loan amount
- Monthly payment amount
You can compare each of these fees line by line with each lender you apply for a mortgage with.
Can the Costs Change?
The GFE is an estimate, which means that the costs can change by the time you get to the closing. Generally, however, just the third-party fees that the lender has no control over change. There might be some minor changes in the lender fees, especially if your loan amount changes or a circumstance of your loan makes it riskier. Generally, you can rely on the fees that the lender specifies for themselves, though.
Using the Good Faith Estimate at Closing
One of the best uses for the Good Faith Estimate, aside from comparing costs with different lenders, is the ability to double check everything before you close. Just as the law requires the lender to provide you with a GFE three days after you apply for a loan, they must provide you with a closing disclosure similar to the GFE three days prior to your closing. The closing disclosure will have the same information as the original estimate you received. You can compare the fees to see if anything changed and have three days to inquire about them.
Using the GFE to your Advantage
There are many benefits you reap by using the GFE. Rather than ignoring its receipt in the mail, take a close look at what charges the lender reported on the estimate. You can then inquire with other lenders to see if those fees are standard for the area. Chances are you will find some fees are exactly the same while others are inflated from one lender to the next. Every lender can charge what they want up to a certain extent, which makes for a great deal of fluctuation from lender to lender.
The Good Faith Estimate is meant to help you, but if you do not understand the lines and lines of numbers, you should ask your lender. They can walk you through the estimate line by line to help you understand what the loan costs. Every lender must be transparent in their fees – nothing can get hidden in the interest rate or lumped into one fee without letting you know that this is the case. This way you can be an informed borrower that understands the implications of the mortgage you receive and eliminates any unpleasant surprises down the road.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.
