What is a good faith estimate?

In the aftermath of the burst housing bubble, many first time home buyers are hoping to take advantage of the plummeting price of homes. Countless purchasers are also finding that buying a home can be a stressful venture, particularly if one doesn’t have a clear understanding of the process.

Many a novice buyer has been caught off guard by the discrepancy between the good faith estimate (GFE) quoted at the beginning of the process, as compared to the United States Housing and Urban Development (HUD) figures given at the end.

So what exactly is the difference between the two? The Real Estate Settlement Procedures Act of 1974 requires that within three days of applying for a loan, the customer be given a statement itemizing the estimated costs of all fees associated with the loan.

This legislation was enacted in an attempt to dissuade lenders from adding kickbacks or other unforeseen expenses to loans, thereby inflating the cost of real estate and taking advantage of unwary customers.

Hence, the introduction of the GFE, an itemized list of the estimated costs associated with the loan. This list arranges fees into six basic categories: (a) fees associated with the loan itself, (b) upfront appraisal and inspection costs, (c) reserves, such as prepayment of tax or insurance requirements, (d) fees associated with title charges, (e) government charges, and (f) any additional charges required by the lender, such as pest or septic inspection.

Although the GFE is a forecast of expenditures, it is no guarantee of what the actual HUD fees will be at closing. Uninformed borrowers are often surprised at closing to find that the numbers are higher than expected.

There are many reasons for this, with the most common being that, given the rapid fluctuation of interest rates, the interest rate quoted in the GFE often differs from the interest rate on the day of closing.

For this reason, it’s imperative that buyers keep tabs on interest rates over the days leading to closure, in an attempt to lock in at the lowest possible rate. It isn’t uncommon for interest rates to jump half a point or more in the weeks leading to closure, and the unprepared buyer can easily find himself paying much more on a thirty year loan that had previously been expected.

Each charge on the GFE is proceeded by a number that corresponds to the same item on the HUD. It’s important for buyers to carefully compare the two documents at closing to gain an understanding of any changes in fees. If discrepancies are noted, don’t be afraid to ask for an explanation, and remember that the transaction is not complete until all signatures are in place.