How to Read a Good-Faith Estimate (GFE)
By law, lenders must provide a good faith estimate (GFE) within three days of your loan application. The idea behind a GFE is to keep lenders honest by laying out an estimate of fees and costs that will correspond to the documents you receive at closing, called the HUD-1 Settlement Statement. However, it is important to note that a GFE is only an estimate. In particular, the interest rate is subject to change every day until you lock the rate. And while the GFE does show both your interest rate and discount points, it does not show your annual percentage rate (APR), which is an important point of comparison between loan offers.
Here’s help interpreting the costs and fees on a good faith estimate:
Lender and Advance Fees (the 800 and 900 series)
The Lender Fees include the origination fee (think of as the lender’s service charge) and other service fees the lender passes on to you from third parties, like the appraisal, the title search, and the credit report. Some line items are interchangeable, so be aware of any lender that has a fee listed on every line. Watch out for big differences in fees between lenders and be sure to ask if you don’t understand what a particular fee means. The 900-series includes required fees such as pro-rated interest, mortgage and hazard (homeowner’s) insurance. Depending on when in the month you close, amount of pro-rated interest could vary widely.
Reserves (Escrow, the 1000 series)
These are escrow items that the lender holds to cover future expenses such as property taxes and hazard insurance. Many lenders require that monthly taxes and insurance be paid out of an escrow account. The lender then uses this account to pay the monthly tax and insurance fees on your behalf.
Title, Government Recording and Transfer Charges (the 1100 and 1200 series)
These are fees that are charged by the title company, which handles all the financial and legal transfers of the transaction, and government agencies, which record the sale of property as a matter of public record.
Remember, it’s only an estimate
There’s no legal penalty for an inaccurate Good-Faith Estimate, only for failing to provide one. If you get a good-faith estimate that’s mostly blank, or looks suspiciously low, be wary and consider getting another lender.
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