What Is a Good Faith Estimate (GFE)?
The term good faith estimate (GFE) refers to a document that outlines the estimated costs and terms of a mortgage loan offer. GFEs provide consumers with basic information about the offer including a breakdown of costs. This lets borrowers compare offers among different lenders and choose the one that fits their needs.
Under the Real Estate Settlement Procedures Act (RESPA), lenders were required to provide consumers with GFEs within three days of a regular mortgage application prior to October 2015. The form has since been replaced by the loan estimate form.
- A good faith estimate (GFE) details a fair assessment of the expected fees, costs, and terms of associated with a potential mortgage, allowing borrowers to comparison shop between lenders.
- Borrowers must be provided with GFEs within three business of their application.
- Lenders were required to give GFEs to anyone applying for a mortgage before October 2015—this was replaced by the loan estimate form.
How the Good Faith Estimate Works
A GFE allows borrowers to compare offers from different lenders and brokers. By comparing different breakdowns and contract terms, borrowers can make more informed decisions on which offer to accept. Borrowers must remember that the costs noted on the form are only estimates and merely provide a rough idea of how much they may be expected to spend in order to get the loan and what's expected of them before and after the loan comes due. The actual costs may ultimately be higher or lower when everything is finalized.
Borrowers may be charged a credit report fee before receiving a GFE but cannot be charged any additional fees. After a borrower receives the good faith estimate, they will indicate they wish to proceed with the mortgage loan from that particular financial institution.
GFEs and Reverse Mortgages
A reverse mortgage is a loan that aims to provide a financial cushion for people who may not have enough money when they retire. Anyone over the age of 62 with a significant amount of equity in their home may apply. Homeowners can borrow against the value of their home from a lender and receive lump-sum amounts, fixed payments, or lines of credit (LOCs). Loan balances are payable when the homeowner dies, sells their home, or moves away.
A homeowner who wants to get a reverse mortgage must first apply with a lender or broker. The bank or financial institution must provide the homeowner with a good faith estimate within three business days of receiving their application. This form includes a breakdown of all the costs associated with the loan including any fees, taxes, title charges, closing costs, administrative fees, and any additional costs. Lenders also outline any other terms and conditions of the loan including policies regarding payback.
Although lenders may charge you a credit report fee, you are not obliged to pay any additional costs before you get a good faith estimate.
There are legitimate reasons for discrepancies between the good faith estimate and the actual closing costs. The lender may not know all the costs of closing services provided by third parties, which may be considered the hidden costs of owning a home. The loan estimate form is written in clear language and was designed to help consumers better understand the terms of the mortgage for which they are applying. Borrowers may shop around and acquire multiple estimates before choosing a loan or a lender.
Consumers should beware of unscrupulous lenders who may add their fees or charge excessive fees for administrative items such as wire transfers. The official standardized estimate forms provide information about the approximated costs of taxes and insurance and how the interest rate and payments may change in the future.
Good Faith Estimates vs. Loan Estimate Forms
As noted above, GFEs are now provided to people seeking reverse mortgages. They were replaced with loan estimate forms after October 2015 for anyone seeking a mortgage. Loan estimates are, just like GFEs, an industry standard. They must be provided to mortgage applicants within three business days of their applications. Loan estimates also provide a breakdown of costs, terms, and conditions. And just like the GFE, the document allows borrowers to compare costs between lenders.
One important point to note is that borrowers applying for a home equity line of credit (HELOC), a manufactured housing loan that is not secured by real estate, or a loan through certain types of homebuyer assistance programs are not provided with GFEs or loan estimates. Instead, they receive truth-in-lending disclosures.