Understanding the New Good Faith Estimate
Posted by Hamid Grinage on Wednesday, February 24th, 2010 at 11:29am.Typically when you obtian a loan, you are provided with GFE or "Good Faith Estimate" which outlines the terms of the loan as well as the closing costs and the total amount the borrower will need to bring to escrow to close the deal. Due to concerns relating to the mortgage meltdown, the rules concerning GFE's have changed.
Previously, the GFE was only supposed to disclose fees and costs that are being charged to the buyer. The new rules stipulate that the GFE is to include ALL FEES related to the transaction such as pest and home inspection fees, and other fees which may or may not actually be paid by the buyer. For instance-I'm currently in escrow on a Condominium in the Lake Merritt area which already had a pest report done which was provided in the disclosure package. My clients lender contacts me and asks me if there were any inspections done..I tell her about the pest inspection and she says that she must disclose the cost of it on the GFE EVEN though it was already paid for by the seller and there would be no cost to the buyer at the close related to the pest inspection. So basically, the GFE in almost every case will not be accurate because the lenders are being forced to disclose all fees, even those that the buyer doesnt have to pay!
Although a competent mortgage broker can explain this in detail, it still is causing some confusion and it's also causing deals to take an extra week or two to close. If there is more than a 10% difference in the fees that are disclosed vs the actual fees at the closing, the process must start all over again. Most mortgage professionals agree that the new rules have went a bit too far, they view it as an over-correction for the mistakes that some believe lead to the decline in the market.
I want to give a bit of a heads up to anyone who plans on obtaining a mortgage from now on that if your loan officer or mortgage broker shows you a GFE and the estimate is high and they tell you "trust me, it will be less than that" then just know that they are doing so because if the fees end up being MORE not less than were disclosed on the GFE, then the LENDER is the one who has to eat the cost. So naturally, lenders are being very careful and in most cases they will have to overestimate the fees in order to protect themselves. So it's possible to see a GFE that states you will need to bring $25k to close, when it reality you may only need to bring $22k. The other 3k could be fees that have already been paid by the seller, although still disclosed.
One concern is that it forces mortgage professionals to rely on "Trust Me" instead of providing concrete numbers about what the buyer will have to pay. What they are doing to help alleviate the problem is filling out a separate sheet with all the "other" fees related to the deal, then they are subtracting the total of all those fees from the amount they are coming up with based on the new rules. So a good mortgage broker will be able to calculate the "actual" costs pretty closely, although the GFE will say something different.
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