This Word of The Week is actually a fairly mistaken document in the real estate transaction. The Good Faith Estimate (or GFE as it’s called in short-hand) is a detailed estimate of all the costs a buyer may incur in the real estate transaction. The common misconception, especially for 1st time homebuyers, is that this is the gospel truth when it comes to your interest rate, monthly payment, and closing costs paid upon settlement. Unfortunately, without a real house to base your loan off of, there is absolutely no way to 100% know what all your costs are going to be, but with the GFE you should get a pretty good idea of your payments, so that you can shop as an informed buyer.
Your loan officer and lending company is required to disclose to you, the buyer, all of the costs that may be associated with your first home purchase, including the following: interest rate, down payment percentage, mortgage insurance premium, loan origination fee, title insurance, home owner’s insurance, and property taxes just to name a few. The actual list will be even longer, so it’s important that your loan officer walk you through each estimated cost and explain to you what they mean.
A place that usually gets first time home buyers up in arms is that the interest rate written on the GFE might be different than the interest rate they actually obtain once they find a house. The reason for this is two-fold: you cannot lock in your interest rate until you have a signed copy of the purchase agreement with the seller, and mortgage rates are a fluctuating market everyday–which means they change up and down like the stock market does. Because of these two facts, it may be weeks or months in between when you get your initial Good Faith Estimate and when you can actually lock-in an interest rate–during which time the interest rate may have gone up, which is of no control of yours or your mortgage officer’s. So timing is everything (and based on luck).
Another key aspect of the GFE that buyers need to keep in mind is that it is, in fact, just an estimate. Until you find a house and can get a quote for property insurance and know the real estate taxes, there’s no way to pinpoint exactly what your costs will be.
This is why having a good agent and mortgage officer is important, so that they can keep you within your payment comfort level and not just try to sell you the highest price house with your pre-approval limit. Expect that costs will change, and always ask questions so you are comfortable with every step of the process.
Great article Steve. This new good faith estimate is an estimate, BUT, the loan officer is held financially accountable for discrepancies in any origination charges AND even title charge, though lenders don’t control those. It’s best to work with a lender that also shows you a breakdown of what the costs are, not just how they total up. Regardless, always get a copy of the good faith. It’s a crucial step in knowing what is required from you at closing. Thanks Steve!