If you apply for a loan with a lender, within 3 days you’ll receive what used to be known as the Good Faith Estimate. Today, it is actually two documents – the Loan Estimate and the Loan Closing Disclosure. The documents are supposed to give you a good idea of how much the loan will cost you at the closing as well as over its entirety. You’ll receive this document from each lender you apply for a mortgage loan with – they must send it within three business days of your loan application.
What is the Good Faith Estimate?
The Good Faith Estimate will tell you everything you need to know about your loan including the loan amount, interest rate, and the term.
You’ll also see a long list of fees. These include:
- Origination points
- Discount points
- Underwriting fee
- Processing fee
- Title fees
- Appraisal fees
- County fees
- Escrow costs
- Attorney fees
The document will include details on all costs as well as give you important details on your loan. Make sure the term is the one you wanted. Also, look at the rate and ensure it’s a type you are comfortable with (fixed or adjustable).
Is the Good Faith Estimate Accurate?
You might wonder how accurate the GFE is if the lender must send it to you within 3 days of application. There could be a month or two in between when you receive the document and when you close on the loan.
Generally, the lender fees are spot on. They may change slightly, but for the most part, they should be accurate. The lender knows what they must charge you in order to process your loan. Other fees charged by third parties, however, may not be as accurate. Title company, appraisal, and attorney fees could change. The lender can provide their best ‘estimate’ of what the lender charges, but know they are subject to change.
Compare Lender Quotes
Aside from giving you an idea of what a loan will cost, the Good Faith Estimate gives you the chance to shop around with different lenders. Once you have quotes from each lender, you can compare ‘apples to apples.’
Lay the documents out and determine which loan is right for you. Don’t just look at the interest rate. You’ll want to pay close attention to the fees charged and the APR of each loan. Other details you should pay attention to include whether or not that is a prepayment penalty and if the rate is fixed or adjustable.
Choosing the Mortgage
Choosing the home loan that works best for your plans will give you the best outcome. For example, if you know you’ll stay in the home for a long time, an adjustable rate might not be the right choice. Let’s say you took a 5-year ARM. This means in 5 years, the rate can adjust and it will adjust every year after that point. If you don’t refinance or if rates are high at that point, you could be stuck with an ever increasing mortgage payment.
If, however, you know you only plan to live in the home for 3 years, taking the lower rate on the ARM could pay off. You’ll pay less interest and never have to worry about the rate adjusting.
The Good Faith Estimate also helps you determine the best rate for your situation. For example, one lender may charge you 2 points while another doesn’t charge any points. Again, whether or not you should pay points depends on your plans. Are you staying in the home for a long time? Paying points and getting a lower rate could save you thousands of dollars over the next 30 years. Yes, the points will cost you now, but interest accrues for 30 years. This usually adds up to a lot more than the points would ever cost.
If you will be moving in a few years, though, paying points often doesn’t make sense. You won’t pay that much more in interest over a few year period if you take the higher interest rate. Generally, if you plan to stay in the home for five years or less, paying points doesn’t make sense.
Know What You Need for Closing
The final purpose of the Good Faith Estimate is to let you know how much money you need at the closing. This will take into account your closing costs, down payment, and any prepaid fees, such as taxes or insurance. Knowing how much money you need at the closing early on can help you prepare. You’ll need proof that you have the money as well as have it available in liquid form by the closing date.
The lender will need to source your funds. In other words, they must know where the money comes from. You cannot take out a loan for down payment or closing cost funds. It must be your money or money from an approved source as a gift. The lender will ask for your bank statements as well as a paper trail for any large deposits in your account recently.
The Good Faith Estimate provides you with many benefits. It helps you understand a loan you apply for, but also helps you shop around. Choosing the right loan is very important. It could affect you for the next 30 years. You want a loan you can afford, but also one that doesn’t cost too much in the long run. Your real estate is likely one of the largest investments of your life, so proceed with caution, paying close attention to the documents provided by the lender.