When you go through the mortgage loan closing process, one of the documents that you will encounter is the Good Faith Estimate (GFE). The GFE is provided by the mortgage lender (or mortgage broker) and it gives the potential borrower an estimate of how much the loan will cost.
What is in the Good Faith Estimate?
Because there have been concerns about hidden charges and fees associated with the mortgage loan closing process, the Real Estate Settlement Procedures Act (RESPA) was passed to ensure more transparency in the closing process and to help protect consumers. The Good Faith Estimate contains a list of itemized charges and fees so that the borrower can see what they will owe at mortgage loan closing.
The expenses that appear on the Good Faith Estimate generally fall into one of the following six categories:
1. Loan Fees
This often includes fees for mortgage application, loan origination, property appraisal, credit check, broker services, and other items associated with mortgage loan closing.
2. Reserves
You normally have to place funds for mortgage insurance, homeowners insurance, and property taxes in a reserve fund (i.e. escrow account) at mortgage loan closing. This helps ensure the mortgage lender that these expenses will be paid.
3. Advance Fees
The up-front fees for mortgage loan closing may include pre-paid mortgage interest (i.e. mortgage points), funding fees for government-backed loans (FHA loans or VA loans), mortgage insurance premiums, and other expenses.
4. Government Charges
State and local governments often charge recording fees, taxes, and other fees associated with the mortgage loan process.
5. Title Charges
Escrow fees, closing fees, documentation fees, attorney fees, the cost of a title search, and title insurance are all considered part of the “title charges.”
6. Additional Charges
These are additional fees, for things such as pest inspection, which are considered “extra.”
When you receive your Good Faith Estimate (GFE), it’s a good idea to look over all the charges and make sure you understand them. As you can see, it is easy for mortgage loan closing fees to start adding up. Therefore, it is essential that you consider these costs when trying to determine how much you can afford.
In some cases, mortgage lenders will allow borrowers to roll the closing costs into their mortgage loan. In that scenario, the mortgage loan closing costs will cause your loan balance to go up. This information should be supplied on your Good Faith Estimate so you can evaluate the benefits/drawbacks of rolling-in closing costs. [See related article “Get Help Paying for Mortgage Closing Costs”]
It’s important to understand that the Good Faith Estimate is only an estimate and may not reflect the actual final amount. You must be on the watch for any additional charges that appear on mortgage loan closing day and double-check all closing documents before you sign.