As of January 2010, mortgage lenders are required to use a new form when providing Good Faith Estimates. The new standardized form is designed to give home buyers a clearer picture of their real estate settlement costs, also known as closing costs.
To go along with these new rules, the Department of Housing and Urban Development (HUD) has updated its consumer guide to mortgage settlement costs. The booklet can be downloaded in PDF format from the HUD website.
As a first-time home buyer, it’s crucial that you understand (A) what a Good Faith Estimate is and (B) how it relates to the costs of your loan. So let’s start with some key definitions:
Good Faith Estimate — Also referred to as a GFE, this is a document that mortgage lenders give to borrowers to help explain the full costs of a loan. You would receive this document during the loan application process. You can see an example of a Good Faith Estimate form to the right.
Real Estate Settlement Costs — Also referred to as closing costs, these are the various fees and charges a home buyer pays to a lender. They include mortgage application fees, origination fees, charges for credit checks, and more. These costs can add up to $2,500 or more, and most of them are due on closing / settlement day.
Here’s what the aforementioned HUD booklet says about the new GFE form:
“The GFE is a three page form designed to encourage you to shop for a mortgage loan and settlement services so you can determine which mortgage is best for you. It shows the loan terms and the settlement charges you will pay if you decide to go forward with the loan process and are approved for the loan … The GFE may be provided by a mortgage broker or the lender. Until they give you a GFE loan originators are only permitted to charge you for the cost of a credit report.”
If you click the GFE image to the right, you’ll see another important aspect of it. In the loan summary section, the document tells you if your interest rate will rise in the future. This has to do with adjustable-rate mortgage (ARM) loans. If you’re using an ARM loan, this document will tell you (A) how much the rate may increase and (B) when the first adjustment will occur. These are very important details, because they affect the size of your monthly mortgage payment.
We highly recommend that you download the new HUD booklet on real estate settlement costs, and that you read it until you understand it. It gives you the information you need to make smart mortgage choices. Here is the HUD download page again.