New Rules for Good Faith Estimates – Effective January 2010

Starting in January 2010, mortgage lenders will face some new rules regarding the “good faith estimates” they give out to borrowers. The goal is to give home buyers a more accurate picture of the costs they will incur.

Editor’s Note: This is an update to an older news story, which will come to fruition in the next month. These changes were actually put in motion at the end of 2008. The changes take effect at the beginning of 2010, two weeks from now.

Before we go any further, a definition is in order:

New GFE formGood Faith Estimate (GFE) — An estimate, provided by a mortgage lender, detailing the full costs of a loan. Among other things, it must include the interest rate and all other costs and fees associated with the loan (i.e., closing costs).

In accordance with the Real Estate Settlement Procedures Act (RESPA), the good faith estimate must be given to you within three business days of your loan application. This helps borrowers comparison-shop between different lenders.

There are two key parts to this statement — “estimate” and “good faith.” Because it’s an estimate, it may be slightly different than the amount you end up paying at closing. But it’s also supposed to be made in “good faith,” which means the lender has tried their hardest to be accurate and forthcoming. But this is not always the case.

In the past, these estimates have been, shall we say, less than faithful. Mortgage lenders have been known to downplay various fees, in order to make the loan seem more affordable up front.

Often, home buyers are surprised to find additional costs and fees on closing day — items or amounts that were not disclosed in the good faith estimate. Sometimes, even the true structure of the loan is not fully disclosed. This is a criminal act, plain and simple.

Changes to Good Faith Estimate Paperwork

In truth, this has been a problem for a long time. So these recent actions to increase the accuracy of GFEs are long overdue. These estimates will never be 100% accurate (they are called “estimates,” after all), but these new changes may at least reduce the willful omission of costs. Time will tell.

The new guidelines are intended to increase the accuracy and completeness of GFEs, partly by mandating the use of standard forms and disclosures.

The Department of Housing and Urban Development (HUD) will require usage of the new standardized form for good faith estimates, starting on January 1, 2010.

The first document above (the GFE) is the one discussed in this article. The second document (the HUD-1 Statement) is one that you’ll get a few days before the actual closing.

What This Means to Home Buyers

As a home buyer, one of the best things you can do is to save as much money as possible. You’ll need money for a down payment, closing costs on the mortgage, moving expenses, and probably a few other things you’re not even thinking about right now.

While the Good Faith Estimate might be more accurate in 2010, it’s still only an estimate. Whatever amount of closing costs your lender discloses, you should prepare yourself for a higher amount on closing day. If their GFE is accurate, great! But if the actual costs are higher (which is so often the case), you will at least be prepared for it.