January 25, 2010

By Deanna Valeo, NMLO #91421
Loan Consultant with Cunningham & Company Mortgage Bankers, The Valeo Croy Team

Following hot on the heels of the mortgage meltdown in the last 2 years, home owners are still reeling from all the changes and uncertainly in this industry. In order to further protect the consumer, the federal government’s Department of Urban Development (HUD), has instituted a Good Faith Estimate (GFE) document that is required by law, to be completed by the lender prior to official loan application. This is to ensure that the borrower does not get any unexpected surprises when they get to the closing table. The law came into effect on January, 1, 2010 and requires that the GFE closing costs and rates quoted be nearly identical to those on the final HUD Settlement Statement.

Contained in the GFE are fees that have Zero tolerance for change: origination charges, which include, what was previously referred to as the origination fee; discount points; lender fees such as application, commitment, wire fees, and/or processing fees. In addition, there can be no more than a +10 % discrepancy at the closing table for certain fees : the closing attorney or agent’s total fees; the lender’s title insurance policy and the owner’s title insurance policy.
If either of these tolerances are exceeded the lender has to eat up this charge and pay the borrower the difference.

Borrowers, and especially first time home owners need to take note of this, as some lenders are now providing a ‘work sheet’ for clients who have not yet found a property they wish to buy, while they ‘shop around.’

Lenders are not legally obliged to provide the GFE until there is an actual property being financed. Some buyers may confuse this ‘work sheet’ with the new GFE document. This ‘work sheet’ does not guarantee that the estimate they are given will be applied, and they run the risk of it not protecting them. Borrowers need to ask for this GFE in its new form so they can be confident that the rate and fees that they are given, will be honored at the closing table.

On the flip side, the loan officer needs a certain amount of information in order to quote accurate rates and fees which under the new law cannot be provided until the borrower’s acceptance of the GFE. Furthermore, if anything changes with regard to the borrowers income, employment situation or assets, the GFE immediately becomes void.
With this new law now in place, buyers need to be very particular about to whom they give their mortgage business to, for the following reasons:

· The GFE is now a legally binding contract between the lender and the customer

· The rate on the GFE is time sensitive (most will only guarantee 1 second to 1 hour for the rate quoted, unless it is formally locked in)

· The estimate includes a time limit for all settlement charges as well. The borrower must agree to the terms within 10 days in order to lock them down. In the meantime, the rate could have changed if it wasn’t locked in. The lender cannot lock in without an accepted GFE. So this can result in a Catch-22 situation.

· Once you agree to lock the origination charge and discount fees (points) this cannot change unless the loan does not close before the lock expires (you will have to get your supporting paper work in and the inspections done quickly). Like Appraisal, Tax Service, Flood Certification, Up Front Mortgage Insurance, Mortgage Insurance rates and Pest Inspection.

· Title Insurance, Owner’s Title Insurance, and Attorney fees may not increase more than +10% from the promised fees shown on the GFE. These fees are quoted from specific providers identified and disclosed by the lender. The lender may have selected a provider with high fees. This doesn't mean that this will be the final fee, if the borrower selects a different provider. The fees disclosed for the identified providers cannot go up, but it's acceptable that they can go down.

· There are certain fees the borrower can "shop" for, such as structural inspections and a survey. If the lender does not name the services, they are not held to the final fee when the settlement statement is prepared.

· The GFE will only show the amount of borrowing costs, it does not show the monthly payment or the amount needed to close. Both of these are shown on the loan application but you can’t see that, until you have accepted the GFE.

· The new GFE does not reflect any upfront (earnest money deposits) or seller paid closing costs. These are to be found on the HUD.

· Home Owner Association transfer fees, property (flood, wind, hail) insurance, property taxes, are other fees that a lender can only estimate, as a cost at closing.

· The HUD dictates that tax stamps or transfer fees (this is like sales tax on a retail purchase in a store) are a buyer's charge. In NC, this fee is customarily a seller's expense unless otherwise specified in the contract. Typically new construction builders will require the buyer to pay this tax. In NC, this is considered an exception. Some lenders disclose this fee which can make total closing costs, appear even higher.

Buyers need to understand the difference between the old-style ‘good faith estimate” and the new GFE. In the past it was just that – an estimate – now it’s legally binding with the lender. In the past, this document was often abused by unethical lenders who low-balled their quotes to get a borrower to commit, and once the buyer got to the closing table, it was way too late to back out of the deal, even if the numbers had been changed.

This GFE does not inform the buyer what he needs to bring to the closing table to close the deal, but a professional loan officer will provide this information in good time to avoid any last minute unpleasant surprises.

The Valeo Croy Team members will be glad to answer your questions on this new law and how it impacts the home owner. Contact us at

A sample of the new GFE can be found here.