No “Good” in Good Faith Estimates?
Posted May 10, 2008
How close an estimate are you given?
When you apply for a mortgage loan, lenders are required to offer a form known as the “Good Faith Estimate.” This form is supposed to provide the borrower with a realistic estimate of the costs involved in obtaining a mortgage loan. This should provide the borrower with the knowledge up front to know if they can afford to obatin the mortgage. However, some argue that these should be used to compare and shop lenders. But could this be just a “fantasy” notion which can backfire on the borrower? Let’s consider this…
The Good Faith Estimate (commonly referred to as the GFE) is designed to be a disclosure of what to expect. But becuase so many “experts” and “talking heads” have preached and continue to instruct borrowers to compare GFE’s between lenders, many lenders have begun to go “skinny” on their estimates. As a result, many do not provide a real estimate to the consumer in ‘good faith.’ Since these lenders are afraid of the consumer using it to shop them against other lenders, many will play a kind of ”bait and switch” game just to look the best and get the application.
The problem is that when a good faith estimate does not provide realistic numbers, borrowers get hurt. Let’s say for example that you are looking to buy a home and obtain a good faith estimate from “Big Bank USA”. On this GFE, the money you need to have ready to close on your loan is roughly $2,500. You evaluate your money and feel confident you can handle this. So you begin the home buying process and find a home. After inspections and appraisals (which you ususally pay upfront out of your pocket) you are finally about ready to close. But when you get to the attorney’s office you find out that your closing costs are actually $4,000 and you need $1,500 more to close on your loan, or lose your home! Yikes!
What happened? Well, the loan officer at “Big Bank USA” was afraid that you might shop his GFE against other lenders. So he did a “skinny” verison of an estimate. He “miscalculated” the amount of money needed to establish your escrow account. Although he knew the closing would be mid-month, he only figured 1 day of pre-paid interest instead of 15. The estimate for home owner’s insurance and taxes were “low balled.” The attorney, title insurance and other fees related to the closing were “slightly off”. All of which adds up! (Of course, he won’t actually be at the closing, but over the phone he will “confess” that these items were all “outside of his control.”)
So I wonder if using a Good Faith Estimate for “shopping” is what it should be used for? Regardless, I would suggest that you should definetly review the estimate and see if it is something you can afford. And be sure to ask some questions…
- Is this accurate?
- What on here might change?
- Which are actual lender fees and which are “outside of your control?”
Listen to the responses and you will quickly see if the one you are talking to has provided you something you can be confident in. After all, its not what someone “promises” when you apply… it’s what they deliver when you close.
Ed Nailor is a mortgage specialist with Residential Mortgage Center.
Residential Mortgage Center is a HUD approved Mortgage Lender offering FHA and VA loans, in addition to the hundreds of other conventional and jumbo mortgage loans available. We proudly serve home owners and home buyers in the Charlotte area (including Concord, Gastonia, Matthews, Monroe, Huntersville and Ft. Mill as well as all of North and South Carolina.)
Apply online for your Charlotte area mortgage loan
or call 704-651-8704 for your free mortgage consultation.
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