The Good Faith Estimate form is fairly standardized with expense line items numbered for clarity. Let’s review the definitions of the line items. The first grouping is 800 Items payable in connection with loan. Some of the detail line items are 801 loan origination fee, 802 loan discount, 803 appraisal, 804 credit report, 805 lender’s inspection fee, 808 mortgage broker fee, 809 tax related service fee, 810 processing fee, 811 underwriting fee, 812 wire transfer fee. These are fairly self explanatory with the exception of 802 loan discount. That is a fee paid to lower the interest rate of the loan.
The second grouping is 1100 Title charges. Detailed line items are 1101 closing/escrow fee, 1105 document preparation fee, 1106 notary fees, 1108 title insurance, 1110 title search. These fees represent the guarantee to the lender that the title is clean, that no one else has claim to the property that the lender is using as collateral for the mortgage. And the escrow fee is the cost of paying an objective third party to collect the various funds and necessary legal documents from all parties required to complete the loan transaction.
Additional groups of fees are 1200 Government recording and transfer charges. These charges are usually fairly minor and reflect the cost of filing paperwork and payment of minor local or state taxes.
Group 900 is Items required by lender to be paid in advance. Item 901 is prepaid interest, 902 is mortgage insurance, 903 is hazard insurance. These are payments to cover the time period from the close of escrow to the first payment, so 30 days prepaid interest is common, prepaid mortgage insurance on loans greater than 80% loan to value, and prepaid hazard insurance are also common.
So comparing Good Faith Estimates is a simple process, especially so when you can compare the respective line items from different lenders. You will find that different lenders have different fee structures and so just comparing the quoted interest rate is really not a sufficient analysis. You can tell a lot by putting the entire fee structure of the Good Faith Estimates from each lender on a single piece of paper in a spreadsheet format and also making sure that you ask the lenders about additional fees that may be incurred during the life of the loan. Hard prepayment penalty (HPP) fees can be triggered when the home is refinanced or sold within a one to three year time frame and you should make sure that you are not liable for these costly fees. Or if you choose to accept a HPP fee in return for a lower interest rate you should make sure that your plans do not call for early sale or refinance.
The Good Faith Estimate template has been expanded recently for loans that are more complicated than just fixed rate mortgages. For any loan that has a creative start rate and/or start payment that is less than a full amortization payment it is possible for the loan principal to actually increase over the initial amount loaned to the borrower. This is a significant benefit for borrowers who want to stretch the amount of home they can afford in the eary years and who expect to earn more from their jobs and careers in the future to be able to make larger payments. But, if the borrower does not earn more money in future years to be able to make the higher payments there is a risk of default on the loan. So the new GFE form requires loan agents to provide a full set of comparison interest rates and payments for any adjustable rate mortgage (ARM) or option ARM. This comparison helps the borrower assess the reality of the future payment obligations that he or she will need to be able to cover and helps the borrower make a mortgage decision based on his finances, not based on hoped for appreciation of the home that might allow for a refinance before the rate and payments increase.
Since the real estate market has peaked and market values are not increasing as much as in previous years and since in some areas values are declining, relying on market appreciation to make refinancing possible is not a wise move. So with the expanded GFE the borrower is better able to decide what is actually affordable.
If you are considering an ARM or Option ARM loan and your banker or loan broker does not offer you a full GFE loan comparison spreadsheet make sure to ask for it. Insist on it.
