Advice abounds, especially on the Internet. One common tip is that you should compare offers from lenders before settling on one – and that’s good advice.
Each lender that you visit will provide you with a form known as the Good Faith Estimate (GFE). By law, they must provide you with a GFE within three business days of receiving your application. This form contains all the information you’ll need to compare offers from lenders.
Let’s take a look at exactly what information the Good Faith Estimate provides and how you can use it when shopping for a home loan.
This section, on the first page of the GFE, tells you how long the lender will honor the stated interest rate and settlement charges, and provides dates for your rate lock period. While you may want to compare these dates to other lenders, it’s critical that you keep these dates in mind should you decide to go with that lender.
Summary of Your Loan
Also located on the first page of the GFE, this section is one you want to pay close attention to – it outlines the mortgage loan amount, the term of the loan, and the interest rate – making it easy to compare it to offerings from other lenders.
This section also specifies whether the interest rate is fixed or adjustable, whether the loan has a pre-payment penalty, and your total estimated settlement charges. It’s important to compare the estimated settlement charges to GFEs from other lenders.
Origination charges are what the lender charges you to borrow the money. You’ll find this charge listed at the top of Page 2 of the GFE. If you pay for points, these charges are then adjusted and an adjusted total is listed accordingly.
Origination charges cannot increase at settlement. In other words, the lender must honor them.
Charges for Settlement Services
The remainder of Page 2 outlines the lender’s charges for “all other settlement services.” These include the lender’s title insurance, title services, recording charges, transfer taxes, homeowners insurance, the amount of the initial deposit into the escrow account, and daily interest charges.
Which Charges Can Increase?
Many of the settlement charges are estimates, and are subject to change at settlement. Some may only increase to a limit of 10 percent, while others have no limit to the amount of increase. A chart on the next page of your GFE breaks down the charges into the three categories:
Charges that are prohibited from increasing at settlement – These include the transfer taxes, the origination charge and, after you’ve locked your rate, your points and adjusted origination charges.
Charges that may increase up to 10 percent – These include required services that the lender selects and ones you can shop for (if you use companies the lender identifies), lender-selected title services, title insurance and government recording charges.
Charges that can increase with no limit – Required services you can shop for if you do not use companies the lender identifies, self-selected title services and the lender’s title policy, the initial deposit for the escrow account, homeowners insurance, and daily interest charges.
At settlement, you’ll be given what is known as a HUD-1 form. This form is technically known as the Settlement Statement and is mandated by the U.S. Department of Housing and Urban Development. The HUD-1 lists the actual costs of the loan.
Hang on to the GFE from the lender you decide to use and compare the charges on the HUD-1 to the charges on the GFE. If the actual settlement charges you pay differ from those listed on the GFE, and that difference exceeds the stated tolerance levels, you may be due a refund from the lender.