The Good Faith Estimate (GFE) is designed to encourage consumers to first shop and then compare it with the contributions of different lenders for choosing a mortgage. The original goal was to help consumers understand what services they can shop for – so that they not only receive the lowest interest rate and the best terms, but can save significantly on closing costs too. The Good Faith Estimate is no longer used in the lending industry. It has been replaced by the Loan Estimate under TRID guidelines.
For those of you who would like to assess the original intention and conditions of good faith Estimate, the following procedures are no longer used. The Loan Estimate under TRID follows many of these same principles.
Borrowers are usually presented with a whole series of documents when settling a real estate transaction. The HUD-1 (now replaced by the final statement), deed, a promissory note, homeowner’s insurance, and many other documents must be signed and notarized. Often a borrower is seeing these documents for the first time and is asked to sign them without the ability to read them in their entirety. The Good Faith Estimate, now the Loan Estimate, gives borrowers the opportunity to review some of these costs in advance while they are still shopping for a loan review.
The purpose of a good faith estimate/Loan Estimate
The Good Faith Estimate, which is now the Loan Estimate, helps borrowers not to pay too much for a loan and a statement of interest. For home buyers, lower closing costs could mean offering a larger home within their current budget, lowering their total mortgage payments, or simply the option to spend less money at the closing table. Please note: in some cases, sellers would agree to all or part of the buyer’s closing costs.
What is a good faith estimate for the Estimate loan?
In 1974, Congress approved the Real Estate Settlement Procedures Act (RESPA) with the intention of protecting consumers by requiring disclosure of all costs associated with a property purchase and / or the loan transaction. In 1992, HUD went one step further by issuing Regulation X, which required a more detailed description about any Affiliated Business Arrangements that could exist between the parties involved in a property purchase. The Good Faith Estimate review released in January 2010. In October 2015, the Loan Estimate became the go-to revelation.
In the past, lenders had potential borrowers with good faith estimates. However, there are major differences between what borrowers have received in the past and what they receive with the Loan Estimate. There are a few changes:
Lenders are required to issue the Estimate loan within 3 days
If a loan originator does not provide a Loan Estimate within 3 business days of receiving a completed loan application, that lender is in violation. HUD offers the specific criteria of what constitutes a complete loan application. Lenders are required to provide a loan estimate within 3 days of applying for a loan or within 7 days prior to closing.
- Borrower name
- Borrower monthly income
- Borrower Social Security Number (to obtain a credit report)
- Property Address
- Estimation value of the property
- Loan amount
- Anything Else de Lender deems necessary
The Loan Estimation is standardized
All lenders must provide the consumer with the exact same document. Loan costs, reimbursements from third parties and other costs must be shown uniformly. Previously, lenders were not uniform in their interpretations of what fees should be included in Estimate’s good faith and where such fees should be disclosed.
The Loan Estimate encourages consumers to shop
Because lenders are required to provide a standardized Loan Estimate in a specific time frame, the consumer is offered the opportunity to compare lenders and their products. In addition, HUD states that prior to issuing a loan (Estimate), lenders can only provide a potential fee to any potential borrowers to cover the cost of a credit report. The relatively low cost of the credit reports ($ 15 – $ 30) results in a consumer’s ability to shop comparison at many lenders at a minimal cost. Some experts point out that borrowers will compare the rates and costs by asking for an Estimate loan from different lenders being charged. However, having a credit report withdrawn several times over a number of weeks can draw the attention of credit bureaus that a borrower is repeatedly denied and the borrower’s credit score can be adversely affected. To prevent this, mortgage shopping involves 15 to 30 days of the first credit pull.
Lenders are responsible for their prices
Different parts of the good faith Estimate used to directly correspond to a part of the HUD-1. The HUD-1 was a standardized document that summed up every expense involved in a real estate or refinancing transaction and was presented to the borrower during closing. HUD has been replaced by final statement and the Closing Disclosure now indicates tolerance levels. There are three different tolerance levels:
- 0% Tolerance
- 10% tolerance
- No Tolerance