The Good Faith Estimate (GFE) is a document that lenders are required to give you within three business days of your submission of a loan application, unless the application was rejected prior to that three-day period. The GFE, along with the Truth-in-Lending form (TIL), summarizes important information about your loan terms and costs so that you can make better comparisons between loan offers and not be blindsided by unexpected costs.
The GFE covers the terms of your loan and the costs to expect at closing, while the TIL covers the annual percentage rate (APR) of your loan and the overall costs — total amount paid over time (assuming regular payments), breakdown of the finance charges, and similar long-term costs based on the interest rate and other information from the GFE. The presence of a GFE doesn't mean that you have agreed to buy the home or that the lender has agreed to loan you money. It's an outline of the costs and terms should both parties decide to proceed.
The GFE is typically a three-page document and the format may vary slightly from lender, but it must contain the same set of information.
- Basic Information – The name and address of borrower and the property to which the mortgage loan applies..
- Dates – Since the GFE is an estimate based on conditions at the time, such as the interest rate and understood value of the home, the GFE will contain several important dates. The date of preparation is the baseline, with the applicable interest rate for that point in time, and the expiration date tells you for how long the GFE information is valid. If an interest rate lock is available on your loan, there will be an expiration date for that offer as well. For floating rates, the GFE defines the lock down period — how many days before closing that the rate must be locked..
- Loan Terms – The basic loan information — size, term, initial interest rate plus rules of rate changes for variable rate loans, monthly payments, and disclosure of any other features such as prepayment penalties or presence of balloon payments..
- Escrow – If an escrow account was required for the interest rate you were quoted and/or is included in the pricing, that information must be disclosed..
- Closing Cost Summary – The expected closing costs under the GFE terms. Essentially, it is closing costs plus whatever escrow money is required, with any applicable closing credits subtracted..
- Origination Charges – A summary of all the lender's charges for the loan, such as processing fees. It will not be itemized in the GFE. If the interest rate in the GFE requires paying points, the points information is included as well..
- Other Settlement Services – These are the other costs associated with the loan that the lender doesn't control. Examples are appraisal fees and deed recording costs with your local government entity. These charges should be similar among different lenders' GFEs.
- Settlement Information – This outlines the charges that can and cannot change at settlement. A GFE commits the lender to the quoted interest rate and points until the expiration date of the GFE. Some service costs are allowed to increase by up to 10% during that time, such as title service fees, as long as you are using a lender-approved provider. Using your own non-approved provider takes the lender off the hook for changes. Other fees that are out of the lender's control, such as homeowner's insurance premiums, can change.
The GFE includes a trade-off table that allows you to compare three different combinations of points and interest rate from that lender, and the shopping chart allows space to hand-write offers from different lenders for comparison.
Keep in mind that as the loan is processed, new information may be uncovered that releases the lender from the GFE terms. For example, if an appraisal is significantly off from the estimated value of your home used in the GFE, the application process must start over and a new GFE and TIL will be required based on that new information.
Refinancing in some cases does not require an updated appraisal, such as for FHA streamline loans, so in those cases, you must decide whether an appraisal would be to your advantage. A higher appraisal could help secure a lower interest rate, among other benefits.
The GFE as a separate form is in its last days. The Consumer Finance Protection Bureau (CFPB) issued a ruling combining the GFE, TIL and the HUD-1 settlement statement into two new, more consumer-friendly documents: the Loan Estimate and the Closing Disclosure. The same information is included, just in a different format. This new format is scheduled to begin on August 1, 2015, but may be delayed. Examples of the new forms may be found here.
Regardless of the format, the GFE or its replacement contains important information for you to consider as you review your mortgage loan options. Review the information carefully, use the information for comparison-shopping — and most importantly, if you do not understand any of the information, ask. Feel free to bounce your questions off a MoneyTips mortgage professional. Misunderstandings can cost you thousands of dollars over the years of a loan.