Effective January 1, 2010

The idea behind the new good faith estimate (GFE) is that it will more easily allow consumers to shop for mortgage loans.  To do this the new GFE combines certain fees into buckets.  One of those buckets, bucket #1, is “Origination Charge”.  Unlike the old GFE which broke out all the fees for the consumer to review the new GFE just lumps a bunch of fees into these buckets.  The new “Origination Charge” bucket includes everything that is charged by the lender for originating the loan.  On the old GFE these fees may have included, but were not limited to:

• Origination Fee
• Processing Fee
• Underwriting Fee
• Doc Prep Fee
• Funding Fee
• Tax Service Fee
• Admin Fee

Depending on the lender you selected, the state you live in and the structure of your fees/rates these “origination charges” could easily exceed 1% of the mortgage loan amount.  With the old GFE the maximum “Origination FEE” was 1%.  Until this new announcement was made the new “Origination CHARGE“, to include all of the fees listed above, was still at 1%.  FHA realized that their rules were no longer suitable given the changes to the way in which lenders are now required to disclose the fees to the consumers.

How Does this Impact You?

At first glance this may seem a bad thing for consumers with FHA eliminating their maximum 1% “origination fee”.  But upon further investigation and understanding of this change, knowing it is in direct response to the new GFE and HUD which are are meant to better protect and inform consumers when obtaining a mortgage loan.  In addition, HUD further stated in their recent statement about removing the 1% max, that “FHA expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged”.

The new HUD and GFE are meant to be simplified by lumping fees into these buckets so that you may easily obtain several GFE’s from competing lenders and just look at the overall cost of the buckets to see who comes out better.  If you are familiar with the creation of the Truth in Lending Act, its enactment was also meant to help consumers better understand the financing they are apply for and enable better comparison from one lender to another.  What it did create was one of the most misunderstood disclosures used on the mortgage financing package due to the APR shown on that disclosure.  For a better understanding of what APR is review my previous post on the topic.

All of these changes, although made with good intentions, will, in my opinion, just complicate the process by providing less transparency from the lender to the consumer.  Instead of allowing consumers to see a break-down of all the fees they are now only going to see the buckets these fees fall in.  I believe that consumers are smart enough to be able to see the fees and do the comparison on their own, but HUD doesn’t seem to think so.  When everything surrounding this issue has settled down, I believe there will be very minimal impact to the mortgage industry and to consumers.  Ultimately, it comes down to trust.  Do you trust the lender you are working with to provide you with a great mortgage loan, protect your interests and provide great service while doing so?  If not, I would suggest finding another lender.  If so, then an extra $250 in fees probably isn’t going to make that big of a difference, considering you will have a lot less stress and actually close that loan when you are ready to close on your home purchase.

Lending A Hand

Scott Wynn

The Wynn Team

The Good Faith Estimate is divided up into several categories:  The loan fees, the Title and closing fees, prepaid interest and fees and reserves for the borrower’s escrow account.

The 800 section of the GFE are the loan fees, including fees actually collected and retained by the lender as well as fees paid to third parties such as the appraiser. These are the fees you will want to compare with different lenders and brokers.

The 1100 section are the fees charged by the title company.

The 1200 section are third party fees paid to governmental agencies in connection with the loan and real estate purchase.

The 1300 section are fees paid to any necessary third parties, such as inspectors.

The 900 section fees are interest from and including the day of closing to the end of the month, any upfront mortgage insurance required, the first year of homeowners insurance premium that will be paid to the borrower’s insurance company at closing.

On the GFE (Good Faith Estimate) you will notice some letters at the end of line 800: PFC, S, F, POC. PFC means Prepaid finance charge. These are the charges that are associated with calculating APR. S means Seller Paid. These are items that the seller will be paying at closing. The F means FHA allowable. These items are permitted by FHA. Lastly the POC stands for Paid Outside of Close. This means that these items will be paid for, generally, before close.

It is important to keep a copy of the original GFE you are shown, to compare it to the final closing statement before you sign your loan documents.

Items checked as pre paid (PFC) finance charges will affect the final APR of your mortgage.

Federal law requires lenders and brokers to provide a written Good Faith Estimate within three days after taking an application associated with a property from a borrower.

Have each mortgage professional go over the Good Faith Estimates with you. Compare the items line by line. If you notice the cost of any item on a GFE significantly higher or lower than that of the same item on other GFE’s, ask the loan officer to explain the difference. Some dishonest loan officers might “low ball” their settlement costs to gain your business.

Sometimes the fees listed on the Good Faith Estimate can change before closing. Some reasons include-

• Your mortgage broker may have to submit your loan application to a different lender, either to get a better rate or because the underwriter at the first lender didn’t approve your loan (different lenders have different fees)
• If your appraisal is sent to appraisal review by the lender, some lenders charge a fee for that
• If you decide to use a different loan program or a different loan amount
• If you close earlier or later in the month than estimated
• If you decide to use a different home owner’s insurance company, policy, or deductible amount

Generally, other fees may vary a little as they are estimates (such as courier fees, which will rise as more packages are sent), but they should be pretty close.

In some states, if there are changes to the initial estimate but before closing, new GFE’s are required to be sent out prior to closing.

A Good Faith Estimate can inform you of the some or all of the costs necessary to complete a real estate transaction, but changes such as title, real estate or lender issues may arise through no fault of your mortgage broker. While your mortgage broker is responsible for giving you a Good Faith Estimate, it is not the responsibility of your mortgage broker to guarantee third party costs.

It is important for borrowers to understand the Good Faith Estimate because the fees listed are what they are being charged to close their loan transaction. Borrowers should have all fees explained to them by their loan officer and to challenge any fees they feel are unnecessary.

The Good Faith Estimate also discloses the interest rate on the loan, the approximate monthly payment and the amount the borrower will need to bring to closing.  Some sellers pay some or all of the borrowers closing costs.  These amounts are also show on a Good Faith Estimate. 

Understand that a Good Faith Estimate (GFE) is just that, only an estimate. Your costs at closing and the monthly payment can vary from the amount on the GFE.

Good Faith Estimate documents with unrealistically low figures are a common tactic used by less scrupulous mortgage companies to “bait and switch” borrowers by locking them into a loan process with the promise of abnormally low rates and fees, only to change the deal at the last moment, often at the closing table itself.  Be sure to check out who you are working with and make sure they are reputable. 

Lending A Hand

On the post about How Lenders are Paid, I showed you a rate sheet the lender looks at when deciding what rate to quote.  Well, the rate not only impacts the amount of income the lender earns but also allows the lender to provide you a credit to pay for your closing costs.  To determine whether or not it makes sense to cover the costs in the mortgage, you should consider how long you anticipate living in the home you are purchasing.  Here is how I calculate whether this makes sense for my customers:

1. Determine the market (par) rate, or the rate in which the lender would typically charge you.
   • For example, 6.5%
2. Determine the amount of fees you want to cover in through increasing the rate.
   • For example, $2,000
3. Calculate the fees as a percentage of the mortgage loan amount.
   • Consider a mortgage amount of $200,000 so the percentage would be 1%
4. Increase the price (not the rate) associated with the rate by the percentage of fees you want to cover.
   • This might increase the rate to 7% and would vary day to day and lender to lender, so this is just an example for explanation purposes.
5. Determine the payment difference between the rates.
   • Payment @ 6.5% = $1264.14 and the payment @ 7% is $1330.60 so a difference of $66.46
6. Determine the break even point by dividing your savings at the time of closing by the cost each month.
   • $2000 savings at closing divided by $66.46 = 30 or 30 months
7. So, if you plan to keep your mortgage for 30 months or greater it will not make sense to increase your rate, but if you will be there a shorter amount of time it would.

Now you know how to calculate whether to fee or not to fee.

Scott