The New Good Faith Estimate
As of 1-1-2010, Mortgage Brokers and Mortgage Bankers are required to issue a new Good Faith Estimate form when quoting a mortgage loan interest rate. This is good news for homeowners and potential buyers because the new estimate has very thin margins for error built in. Lender/broker fees need to be 100% correct as well as transfer fees for the state. Third part fees have a tolerance of 10% error. Escrows allowed for tolerances because those fees are at the discretion of the borrower.
In years passed if the person providing the estimate did a lousy job it was the borrower who picked up the tab at closing. Now the differences between the initial fees disclosure and actual numbers at closing are covered by the broker/lender. The new HUD-1 closing statement will itemize the GFE disclosure and the actual fee being charged the borrower. The differences are then carried to a third column and then tallied up. Approaching the Good Faith Estimate this way mandates that the person providing the piece of paper puts some time and effort into it, otherwise his paycheck will suffer.
The intent of the new form is good but as a disclosure it has a lot to be desired. The #1 complaint that I hear from customers is that it does not provide any measure of cash to close. In order for the borrower to check that final number for closing the broker/lender must issue an additional disclosure entitled "initial disclosure" which is basically the old style good faith estimate with a different name.
Also the New Good Faith Estimate estimate is not required unless the borrower has fulfilled all of the requirements of applying.
The fundamental components required for a true mortgage application are:
- Borrower name
- Borrower income
- Social security number
- Loan amount
- Property address
- Estimate of Value
This means if a borrower shopping doesn't wish to give his/her social then the lender/broker can use the old form which is not binding. Also for someone purchasing, if they have not found their property address yet, the new disclosure is not required. This is only fair to the lender/broker because depending on where the property is located will determine transfer fees and title charges that he is now responsible for quoting.
Please see my article written for Huliq.com that has more on the subject
As of 1-1-2010, when they are quoting a mortgage rate, Mortgage Brokers and Mortgage Lenders are required to provide a new and improved version of the Good Faith Estimate . This will make borrowers happy because the risk of a bad estimate has been shifted from the borrower’s shoulders to the mortgage broker and mortgage lenders pockets.
This measure was taken to try to make the document easier to understand for the average customer and also to make it much more binding on the person providing the estimate. I am not sure if it is necessarily easier to understand this quote of a mortgage rate but it certainly does protect the borrower and is a great step against predatory lending.
For those of you who are not familiar with mortgage lending or getting a quote of a mortgage rate, the Good Faith Estimate is a very important document that is disclosed within three days of the initial application. The purpose of the Good Faith Estimate is to provide an accurate measure of final closing costs and out of pocket expenses for the borrowers. A good loan officer will check the fees of the lender, the fees of the title company involved and also take into account escrows for taxes and insurance and transfer fees of the state in which the subject property is located. A good loan officer should be able to come within $200 of the final number. A bad loan officer in the past would employ selective memory by leaving a few fees off to make his estimate appear less expensive then the next guys.
The new Good Faith Estimate for 2010 is better because the customer is protected against a really bad estimate because of tolerance thresholds placed on the lender/broker. For example, lender fees must be 100% correct or quoted higher than necessary or the originator absorbs the difference. Third party fees have a tolerance of 10%. State transfer fees need to be exact. There is tolerance for differences in taxes and insurance but that is understandable because those numbers are determined after the customer makes a decision on which insurance policy they are going to go with.
When it comes time for closing, borrowers will now sign the new HUD closing statement which is compared directly against the New Good Faith Estimate they were provided. Closing agents will simply do the math to see if there are any discrepancies and then the loan officer will write the check if there is a major difference.
Under the new rules, a typical Good Faith Estimate is a quote of a mortgage rate that is good for about 10 days then it expires. If the loan is locked, then it is good for the duration of the lock. Also the originator is not required to provide the estimate unless the customer fulfills all of the requirements of a real deal. The customer will need to provide: name, gross monthly income, social security, number (to obtain a credit report), property address, loan amount sought and estimate of value. So in other words if you are searching for a home and have not found it yet, you will receive an initial disclosure form rather than a good faith estimate.
The initial disclosure form looks a lot like the old good faith estimate but is not nearly as binding. In all fairness to the loan officer, it does take a lot of time to track down each fee on a file with 100% certainty. Also, if a customer wants to play games by getting five good faith estimates, they will have their credit pulled five times now which probably isn’t smart. If a customer is just shopping for the sake of shopping for an interest rate, the initial disclosure form should suffice until they step up to the plate and decide which lender they want to work with and make a commitment.
Written by Preston Ware
Email is email@example.com.