Closing Costs Explained - Good Faith Estimates

"Explaining the Good Faith Estimate of closing costs and loan fees."

A Good Faith Estimate ( GFE ) is a lender's proposal as to what your closing costs and loan fees will be associated with your real estate financing request.

California has a special home loan and mortgage good faith estimate form. It's called the California Mortgage Loan Disclosure Statement.

It's always a good idea to request a good faith estimate in writing when shopping for a home loan as mortgage fees and interest rates will vary. Another important consideration is to shop lenders on the same day as current mortgage interest rates do change daily.

A mortgage lender is required by the federal Real Estate Settlement Procedures Act (RESPA) to provide a prospective home buyer with a good faith estimate of the loan fees due at closing within three days of a borrower applying for a loan.

These mortgage loan fees, also called settlement costs, should cover every expense associated with your home loan. Examples include: inspections, title insurance, lender fees, taxes and other charges.

An accurate Good Faith Estimate is essential for a prospective refinance client or home buyer to make an informed decision about the exact settlement costs associated with their loan.

In choosing a home loan lender, always request a comprehensive “Good Faith Estimate” making sure the lender discloses all closing costs and fees for the loan you are seeking. In addition compare the APR (Annual Percentage Rate) from one lender to another. For the same interest rate, a lower APR means there are lower fees associated with obtaining the loan.

The borrower should hold the lender to this estimate, with some obvious leeway. The lender must inform the borrower immediately of any changes in the loan program, rate, pricing and closing costs.

Obviously, the lender can only guess at the time of application what expenses such as attorney fees, title charges, investor fees, inspection costs and other such variable expenses will be. These expenses are set by other parties or chosen by the seller or buyer, not the lender. However, the lender should be accurate with its own fees.

As a rule of thumb, the borrower should be concerned if the final closing costs are more than 15% higher than the estimate. The exception is if the borrower is fully informed by the lender beforehand that these items will be higher, and the borrower accepts. Note also that other expenses not anticipated by the lender may appear during the processing period. If they are legitimate, they will often be unavoidable.

First of all, remember that the amounts indicated in the GFE are projections based on the lender's experience with the real estate industry and the area. The numbers may change as your loan, closing and transaction terms develop. The good faith estimate is prepared by the lender based on industry norms.

However, the lender has no control over how much your attorney or the title company will charge for their services.

However, you should be able to count on your final expenses to be very close to the projections provided in good faith estimate.

A good rule of thumb is that your final closing figures should be within 10% of the estimated amounts. This should especially be true with the lender charges, unless there are significant changes in the loan program or your qualification.

Note: a "point" is one percent of the loan amount. A fee of 2 points on a $100,000 loan is $2,000; a fee of 5 points on a $50,000 loan would be $2,500. Points are normally tax-deductible for homeowners.

Please remember that there are often options to eliminate closing costs.

For more information, see the E-Loan website.

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