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Buying homeFinancing Your HomeDo the Paperwork

The Good Faith Estimate (GFE) describes your loan and how much it costs. In 2009, HUD revised the form to make it easier to understand and easier to compare the costs listed here with the HUD-1 form you receive at the closing. Another improvement: Lenders must stick by this estimate. The fees the lender charges to originate and process your loan cannot change between the time you receive the GFE and the closing. (Some third-party costs, over which the lender has no control, can change.) Holding lenders to their estimated loan origination fees prevents those fees from increasing and junk fees from creeping in. HUD estimates that the new GFE rules will save the average borrower $700 in closing costs.

Your GFE won't do you much good, though, if you don't understand what's on it.

Purpose

What this GFE is for: to set out the loan's terms and estimate the closing costs you'll pay if the lender approves your loan.

Shopping for your loan

Here, you're advised that you can use GFEs to compare loans and find the one that works best for you.

Important dates

Your GFE doesn't last indefinitely, so pay attention to this section, because it lists expiration and other important dates:

• When the quoted interest rate expires. After the date listed here, the interest rate and other charges may change until you lock in the rate.
• When the other quoted closing costs expire
• If you lock in your rate, how long the rate lock lasts
• The number of days before closing at which you must lock in your rate

To make sure that you get the rate listed on your GFE, lock in that rate as soon as possible.

Summary of your loan

Here's the meat and potatoes of your loan, the basics spelled out clearly for you. Read it carefully, paying attention to the following:

• Your initial loan amount. This is how much you're borrowing.
• The term of your loan. This states how many years you have to payback the loan.
• Your initial interest rate. This line says "initial" even for fixed-rate loans. A couple of lines later, the form spells out whether the interest rate is fixed or adjustable.
• Your initial monthly payment, including principal, interest, and mortgage insurance (if required). Again, this line talks about "initial" payments for all loans; the next line identifies whether your loan is fixed-rate or an ARM.
• Can your interest rate rise? If No is checked, you have a fixed-rate loan. If Yes is checked, the lender must specify the highest possible interest rate and the date of the first rate change.
• Can your loan balance rise? If No is checked, your monthly payments will chip away at the loan's balance. If Yes, your loan is subject to negative amortization and the lender must specify how high the balance can get - it may be as high as 125% of the amount you originally borrowed, so pay attention to any number that appears here.
• Can your monthly amount for principal, interest, and mortgage insurance rise? Again, fixed-rate loans will have No checked here. If your loan is an ARM, you'll see a checkmark in the Yes box and a dollar amount for how much your monthly principal and interest payments can rise - both for the first adjustment period and if interest rates hit the maximum allowed by your loan.
• Prepayment penalty. If your lender doesn't impose one, you'll see the No box checked. If there is a penalty, Yes is checked and you'll see the maximum amount it would cost you to pay off the loan early.
• Balloon payment. If you take out a balloon loan, which becomes due in full after a certain period of time, this section tells you how much you have to pay and when it's due.

The information in this section should match what's on your Truth-in-Lending statement. Compare them to make sure, and ask about any discrepancies.

Escrow account information

As you saw in Chapter 1, PITI - your monthly payment - stands for principal, interest, taxes, and insurance. All lenders collect principal, interest, and any required PMI via your monthly payments. Some lenders leave property taxes and other insurance up to you. Many lenders, however, want to protect their financial interest in your home by making sure that your tax and insurance payments stay up to date. These lenders estimate what your annual tax and insurance charges will be and collect 1/12 of these charges with your monthly payment. That money goes into an escrow account; when the charges are due, the lender pays them on your behalf from that escrow account.

This section of the GFE tells you whether or not this lender requires you to pay taxes and insurance fees into escrow. If so, you get an estimate of how much tax and interest payments will add to your monthly principal and interest payments for the first year of your loan.

Understanding your estimated settlement charges

At the bottom of page 1, you see an overview of what your closing costs will be:

• A: Origination charges. This amount shows the administrative fees your lender charges for making the loan.
• B: All other settlement services. This amount is an estimate of the charges and fees due at the closing that don't go to the lender.

Page 2 breaks down these amounts, so you can see exactly what goes into them. For the origination fees, which cannot change at the closing, the lender spells out these charges:

• Origination charge. This gives the dollar amount that the lender charges to make your loan.
• Adjustments. This section details how origination charges affect your interest rate. You may be paying a slightly higher interest rate and lower up-front closing costs or higher closing costs to get a lower rate.

The rest of page 2 explains other required settlement charges and estimates how much these will cost you at closing. Some of these charges may vary from what's estimated here (you'll find out which ones in a minute). Here's how these charges break down:

• Required services that we select. These charges may include an appraisal fee, credit check fee, and other services that the lender needs to process your loan. The lender lists the service and how much it costs.
• Title services and lender's title insurance. Here the lender estimates the cost of the title search and the lender's title insurance policy you must buy.
• Owner's title insurance. It's up to you whether you want to buy title insurance to protect yourself if someone challenges the title after closing.
• Required services that you can shop for. The lender may require certain services, such as a home inspection, but not dictate who must perform that service. Such services are outlined here, along with an estimated cost for each.
• Government recording charges. The government charges a fee to record documents related to your home purchase.
• Transfer taxes. These state and local taxes vary widely; this line tells you how much you'll pay in your area.
• Initial deposit for your escrow account. If the lender collects money for taxes and insurance and holds the funds in escrow, this section tells you how much and what it's for.
• Daily interest charges. You start owing the bank interest from the moment you sign the loan documents - that means each day between the day you close and the day your first payment is due. The lender calculates the total of these daily interest charges based on an estimated closing date. (If the closing date changes, so will the amount.)
• Homeowner's insurance. Here, the lender lists the kinds of homeowner's insurance you must get (hazard, flood, and earthquake insurance, for example) and estimates its cost.

Understanding which charges can change at settlement

At the top of page 3, the GFE makes clear which settlement charges may increase between now and the closing and which must stay the same, as you see noted on this form:

• Charges that may not increase. Fixed charges include the lender's origination fee listed on page 2, the number of points you agree to pay (after you lock in your rate), the adjusted origination charges at the bottom of page 1 (after you lock in your rate), and transfer taxes.
• Charges that may increase by a maximum of 10 percent. If you use any service that the lender requires or identifies, you won't pay more than 10 percent above the amount estimated. (This keeps lenders from underestimating third-party charges from providers they require or recommend.) Government recording charges are also limited to no more than a 10 percent increase above the lender's estimate.
• Charges that may change. Some charges are beyond the lender's ability to estimate. If you use a third-party service, such as a home inspector, that you shopped for and choose yourself - without any input from the lender - the charge for that service may be higher than what the lender thinks it should cost. Homeowner's insurance rates and your initial escrow deposit (if required) are other charges that may be higher than the lender's best guess. Finally, the lender bases the estimate of the daily interest charge on a hypothetical closing date - you may end up closing on a different date, which will increase or decrease that daily interest charge, depending on whether it's closer to or further away from the date of your first scheduled payment.

Using the tradeoff table

One question that makes homebuyers scratch their heads is, "Should I pay points to get a lower interest rate, or should I go for lower closing costs?" To help you see the difference between paying points to get a lower interest rate (which means higher up-front closing costs) and minimizing closing costs with a higher interest rate (which means you spread out the higher rate over the life of the loan, paying more interest in the long run), your GFE includes a tradeoff table. It gives you three versions of the loan side by side, so you can compare interest rates, monthly principal and interest payments, and total closing costs for three variations of the loan:

• The loan as quoted in this GFE
• The loan with a higher interest rate and lower closing costs
• The loan with higher closing costs (discount points) and a lower interest rate

The table is well-named. It clearly shows the tradeoff you make when:

• You opt for a lower interest rate by prepaying some interest at the closing.
• You opt for a higher interest rate to minimize closing costs.

Putting the amounts side by side lets you see what you'll pay in one lump sum up front and then each month thereafter. Using this table and know-ing how long you plan to stay in your house, you can decide between the three options.

If you choose an ARM, the tradeoff table shows only your interest rate and monthly payments for the initial, fixed-rate period of the loan. It cannot predict what your rate or monthly payments will be when your rate adjusts in the future.

Using the shopping chart

You may request GFEs from several lenders to compare the loans they offer. If you do, the shopping chart, which appears on page 3 of the GFE, lets you lay out the main points of each loan for an easy, at-a-glance compari-son. Here's what the shopping chart might look like if you're in the market for a fixed-rate, 30-year loan of $250,000:

As you compare loans, you may notice that Loan 4 costs $56.70 less a month than Loan 1, but it requires an extra $825 at closing. If you have the $825, it would take about 15 months for the lower monthly payments of Loan 4 to recoup that up-front investment. After those 15 months, Loan 4 would be cheaper thanks to the lower interest rate. If you don't have that extra money now, one of the other options might look more attractive.

The point of the shopping chart is to let you compare different loans to see which best meets your needs. Only you can balance affordable payments with affordable closing costs to choose the loan that's right for you.

If your loan is sold in the future

The last section of your GFE is a notification that the lender may sell your loan after closing. (If that happens, the company that buys your loan cannot change its terms.)

Keep your GFE and bring it with you to the closing. If there are any discrepancies between it and the HUD-1 form that shows your final closing costs, you'll have the GFE right there to help you set things right.