Your Good Faith Estimate is a disclosure document that is supposed to give you an estimate of various fees and costs associated with your mortgage.
It is important to understand that the Good Faith Estimate is simply an estimate and does not have to accurately represent your total costs and fees when taking out a mortgage loan. Many brokers lowball third party settlement fees and conveniently omit their markup in order to make the loan offers appear more attractive. Here are several tips about your Good Faith Estimate in order to avoid being burned with your next mortgage loan.
The Good Faith Estimate (GFE) is an itemized estimate showing your closing costs, insurance, tax reserves, estimated payment, and other fees. It is important to understand that the GFE is just an estimate given in “Good Faith” and in the real world could come nowhere close to what you actually pay. This is why you should carefully compare what your broker puts on your Good Faith Estimate to the actual HUD statement and have a heart-to-heart discussion with your broker about any discrepancies you find. (Your HUD-1 looks very similar to a GFE)
The Good Faith Estimate is divided into several sections that you’ll want to pay close attention to.
Section 900 Items Required by Lender Paid in Advance
Section 1000 Reserves Deposited With Lender
Section 1100 Title Charges
Section 1200 Government Recording and Transfer Charges
Section 1300 Additional Settlement Charges
You’ll want to pay very close attention to section 800, “Items Payable in Connection With Loan.” Don’t accept section 800 at face value…question your broker about the charges listed there. Here’s an itemized list of what you can expect to find in section 800.
801: Mortgage Origination Fees
This section will disclose the fee you pay the lender for loan origination. A reasonable origination fee to pay is one point or one percent. If your fee is higher ask why.
802: Loan Discount
This section will show discount points required by the lender or that you’ve agreed to pay.
803: Appraisal Fees
If your lender is requiring an appraisal the fee will be listed here. If you have an old appraisal or have already paid outside of closing this amount should be zero.
804: Credit Reports
This is the fee your lender is charging you for credit reports. The cost for a tri-merged credit report (tri-merged reports include data from Equifax, Experian, and Trans Union) should not be more than $20. Question your broker if this fee is higher.
805: Lender Inspection Fee
This fee is rarely used and applies to an inspection of your property prior to closing.
806: Mortgage Insurance Application Fee
If you are required to purchase Private Mortgage Insurance because your loan to value ratio is less than 80% the fee will be listed here. If you are using an 80/20 loan to avoid Private Mortgage Insurance this fee should be zero.
807: Assumption Fee
If you are assuming an existing mortgage this fee should not be more than one percent.
808: Mortgage Broker Fee
The mortgage broker fee is the origination fee you pay the broker for their part in arranging your loan. Remember, a reasonable fee to pay is one percent of your loan amount and not a penny more.
809: Tax Related Service Fee
This is a lender fee paid for tax related processing and should only be a small amount if present.
810: Processing Fees
Loan processing fees appear on line 810. These are administration fees for preparing your application running credit, collecting pay stubs and bank statements, ordering a title check and appraisal. Yield Spread Premium is often cleverly disguised here if disclosed along with many garbage fees you don’t need to pay…be careful with this section.
811: Underwriting Fee
This is a fee used to pay the underwriter for loan approval.
812: Wire Transfer Fee
Wire transfer fees are usually charged for escrow accounts for wiring money around.
813: Rate Lock Fee
This is a junk fee charged for locking in your mortgage interest rate. Your broker is not charged a fee for locking your rate so any fee listed here is being diverted into your mortgage broker’s pocket.
814: Application Fee
Some brokers and lenders charge application fees. This is another garbage fee you should simply refuse to pay when negotiating with your mortgage broker.
If you are working with an honest mortgage broker they will happily answer all of your questions about the Good Faith Estimate and haggle with you over any fees that are negotiable. When scrutinizing your Good Faith Estimate always pay close attention to lines 810, 811, and 812. If “lender paid compensation” or Yield Spread premium paid to broker is not listed your broker may have just left it off. Always reconcile these sections against your HUD-1 statement after having a conversation with your mortgage broker about Yield Spread Premium on your loan.
You can learn more about the Good Faith Estimate and your mortgage refinancing options, including expensive pitfalls to avoid by checking out my free online mortgage videos. The best approach to finding the right mortgage for you: Underground Mortgage Videos.
I agree that there should not be a rate lock fee. But if a broker locks a rate with one bank and finds a better rate at another, some banks will charge fees for locking a rate that never turns into a funded loan. A one point fee is a fair charge. Keep in mind that banks such as B of A, Chase, Wells Fargo, etc may not be able to give you a loan as financially beneficial as mortgage broker that has several banks at their disposal. You also need to speak to the lending institution about yield spread and prepayment penalties. Prepayment penalties should be avoided in most, if not all, cases if possible. If a company offers a no point or a no closing cost loan, be careful of doing business with that institution. It can often end up much more costly over the life of the loan than one that has intial fees from the beginning. Have the professional discuss scenarios for staying in the loan for two, three, five, ten, or thirty years and see which makes the most economic sense for your financial situation. Unfortunately, brokers are getting a bad reputation, because many brokers(and direct lenders alike) in the industry believe in making as much money as possible off each client and not building a relationship where they are looking out for their clients best interests.
My suggestion is to inquire at your bank and a mortgatge broker. Make sure they have a detailed understanding of your situation. We often refer to loan officers( loan specialists, mortgage specialists, mortgage officers) as order takers. They are not looking out for the clients best interests. They are either trying to put the most money possible in their own pocket or they simply are not educated enough in the industry. Feel free to call and ask any questions you may have.
Thanks for your comments, you bring up some great points. One thing I tell my visitors is to avoid banks completely when it comes to home loans. Banks are exempt from the Real Estate Settlement Procedures Act and they are not required to disclose anything about their profit margins or markup of your mortgage. Why go with a lender that doesn't have to play by the rules? As for Wells Fargo Mortgage, they've pretty much written the book on predatory lending practices and taking advantage of their customers. Wellsfargo and countrywide are partly responsible for the mess we're in right now. Brokers are getting a bad name; however, the industry is getting a bad name overall. People talk about buyer beware when buying a used car…used car salesman have nothing compared to some of the shady mortgage deals you read about coming out of Wellsfargo and Countrywide Home Loans.
More consumers need to know all about GFE's and how they are put together. I always encourge home buyers to take control and fully understand their GFE. Thanks for your blog