Good Faith Estimate

The Good Faith Estimate (or GFE) is an estimate of all fees associated with the loan for which you apply.  This disclosure should be provided to you by your mortgage broker within three days of the actual application.  Keep in mind that the Good Faith Estimate is just that—an estimate—and can be misquoted, depending on the level of integrity held by your mortgage provider.  When consumers complain about a “bait and switch” issue in the mortgage industry, it is ordinarily associated between the initial GFE and the final GFE.  When choosing your mortgage provider you should understand the costs associated with this estimate; it will be the one disclosure that will gradually reveal all of the costs, which will help avoid any surprises for you at the closing. 

The Good Faith Estimate can be compared to a receipt that will list any services performed on your loan as well as the costs associated with these services.  Though the services are all listed individually, line by line, they are characterized into three major sections: Closing Costs, Prepaid Items, and Title fees.

Closing costs are itemized on the good faith estimate and are easily recognizable.  These costs will typically appear before any Prepaid Items or Title Fees are disclosed.  Some of the most commonly recognized closing costs include—but are not limited to—Origination fee, Discount points, Credit Report, Processing fee, Underwriting fee, Tax Service fee, Wire fee and Appraisal fee.   

Every line item on the Good Faith Estimate has a designated number assignment coupled to the cost.  These number assignments are universal and will be identical from one mortgage provider to the other.  The number assignments will also coordinate with the Final Settlement Statement given to you at closing.  I will often refer to the Final Settlement Statement as the Final Good Faith Estimate because of these similarities.

Let’s now go ahead and analyze each line item, which will be divided into the three primary groups found on the Good Faith Estimates: Closing Costs, Prepaid Items, and Title Fees.

1. 801.      Loan Origination fee:

This is the primary fee paid to the mortgage originator for the services they have rendered on your loan.  It is one of the ways we are able to be paid for the efforts we put forth on your loan.  The fee will range anywhere from .00% to 2.5% of the loan amount.  Although the fee can vary in range most mortgage providers will charge a 1% Loan Origination Fee.

1. 802.      Loan Discount fee:

The Loan Discount fee should be used to pay the lender directly for the cost of the rate you have received.  When you are asked to pay points to buy down the rate, the fee for buying your rate down will normally be presented as the Loan Discount fee

1. 803.      Appraisal fee:

This third party fee will go directly to the appraiser for the service they perform in this real estate transaction.  The Appraiser will view the property and provide a detailed report on the value of your property, which is to be used by you and the lender.  This fee ranges from state to state; here in Colorado the fee will range between $350 and $450, depending on what is charged by the appraiser you opt to use.

1. 804.       Credit Report fee:

The Credit Report fee will satisfy all of the charges related to your Credit Report.  The standard fee for pulling a credit report will fluctuate, but should not exceed $50.  The Credit Report fee will also cover any credit services rendered on your loan, such as Credit rescore, Credit Supplements, or Credit Verifications. 

1. 805.      Lender’s Inspection Fee:

This is a fee that the lender will charge in order to review an appraisal already completed on the property.  This fee rarely emerges on the initial Good Faith Estimate, but if you live in an area where home values have been in decline, you may be expected to pay a Lender’s Inspection Fee.  If the lender requires an inspection to be completed on the appraisal then you can anticipate the fee to range between $100 and $250.

1. 808.      Mortgage Broker fee:

The Mortgage Broker Fee is another fee that can be paid to the mortgage originator as a compensation for your mortgage loan.  The fee will normally range between .25% and 2.0% of the loan amount.  Most brokers will use the mortgage broker fee as a secondary fee for loans that place a cap on the loan origination fee, such as FHA loans.  The fee may also be applied to higher risk loans that require more work and attention, but it should always be negotiated by you and your mortgage provider.

1. 809.      Tax Related Service Fee:

This is another third party fee charged by the lender for handling tax-related matters.  It is a small fee, but is paid directly to the lender who provides you with the loan proceeds.  This fee will typically range from $60 to $90.

1. 810.      Processing Fee:

A Processing Fee is ordinarily charged by the mortgage originator’s office for the work involved with processing your loan application file for the lender.  This fee can be rather complicated, as it is a source of income to the office that is handling your mortgage needs.  This fee is intended to cover procedures such as the collection of your application, running of credit, automated approvals, preparations of documentation, ordering services, coordinating title, and other administration activities expedited at the mortgage originator’s office.  The fee helps offset the wages that are paid to the processors and the administration staff.  The fee for processing your file should range between $300 and $600. 

1. 811.      The Underwriting Fee:

This is a third party fee paid directly to the lender in order to approve and fund your loan in full.  Basically, it is the fee the lender charges as a result of their coordinated efforts to guarantee that the loan is acceptable to be sold to the secondary market.  An underwriter will usually sign off on all conditions required in order for your loan file to be eligible for sale and trade on the Mortgage Backed Securities market.  This fee will range between $450 and $1200, depending on the level of risk associated on your loan, as well as the lender responsible for underwriting your file.

1. 812.      Wire Transfer Fee:

The Wire Transfer Fee is a third party fee paid directly to the lender for wiring your funds to the title company.  Any wire transfer sent in the U.S. that exceeds $100,000 will be monitored by a government entity, to verify its validity.  This will be a minor fee and should range anywhere from $50 to $90.

This concludes the first major section of the Good Faith Estimate. We have covered the majority of your basic closing costs.  You should be very cautious of any other fees that may be applied in this section.   When other fees are applied that have not been referenced and explained in our closing cost fee definitions, then it is best to assume that these are “Junk Fees.”  Here is a sampling of the most commonly used “Junk Fees”:

1. 813.      Administration fee:

This is a fee charged by the Mortgage Originator for the purpose of generating additional income for their selves.

1. 814.      Application fee:

This is a fee charged by the Mortgage Originator to generate additional income for their selves.

1. 815.      Warehouse fee:

 This is a fee charged by the Mortgage Originator to generate additional income for their selves.

1. 816.      Amortization fee:

 This is a fee charged by the Mortgage Originator to generate additional income for their selves.

1. 817.      Affiliated Consulting fee:

 This is a fee charged by the Mortgage Originator to generate additional income for their selves.

1. 818.      Endorsement fee:

 This is a fee charged by the Mortgage Originator to generate additional income for their selves.

1. 819.      Express Mail fee:

 This is a fee charged by the Mortgage Originator to generate additional income for their selves.

1. 820.      Miscellaneous fee:

This is a fee charged by the Mortgage Originator to generate additional income for their selves.

The next major section listed on the Good Faith Estimate deals with any transaction costs, which will need to be collected upfront.  These transaction costs are known as Prepaid Items.  Prepaid Items are disclosed separately from the actual Closing Costs because these items are not included in the cost of obtaining a loan.  Rather, these Prepaid Items are costs associated with owning the home and the financing tied to the home.  You should find Prepaid Days interest, Taxes, Insurance, and any other Local or State Property obligations listed in the Prepaid Costs section of your Good Faith estimate.

Your Prepaid Items will also include your escrow balance, which is an account set up by the lender to pay your future taxes and insurance.  A new Escrow account must be established on all transactions and will be collected in the Prepaid Items section on your Good Faith Estimate.

Let’s now define each individual line item as they appear on the Good Faith Estimate: 

1. 901.      Prepaid Daily interest charge:

This item will appear as a per-day charge and will vary, depending on what day of the month you close your loan.  The per-day charge may seem a bit complicated, but it does not have to be.  Simply put, it is the number of days between the day you close and the last day of the month.  For example, if you close on the 15^th and there are 30 days in that month you will be charged 15 days interest.  This fee will cover the amount of time you live in the residence before your first billing period commences.  Your first billing period will traditionally start on the first day of the following month, therefore this upfront charge will cover the partial month you reside in the property before your official monthly billing statements begin.

1. 902.      Mortgage Insurance Premium:

A Mortgage Insurance Premium can be collected as an upfront fee to be paid directly to a Mortgage Insurance company.  This fee is used to help protect the lender in the event of a mortgage default.  These premiums are normally collected on any loan which results in a Loan-to-Value ratio higher than 80%.  Upfront Mortgage Insurance is most commonly collected on FHA loans.  The Upfront Mortgage Insurance premium collected for FHA loans ranges from 1.5% to 1.75%, depending on the Loan-to-Value ratio for the new loan.

1. 903.      12 Months Hazard Insurance Premium:

This fee will only be charged on purchase transactions or on refinances when your yearly homeowner’s insurance premium is up for renewal.  The total amount collected will depend upon the annual premium charged by your homeowner’s insurance provider, and will be paid directly to them.  This fee will vary, depending on your selection of a homeowner’s insurance provider.

1. 904.      VA Funding Fee:

VA provides lenders with a guarantee on any loan offered to VA eligible applicants.  In order to fund the VA guarantee, VA will charge a fee to all borrowers, depending on the frequency that they have used their VA eligibility.  The VA funding fee will typically be .5% on any refinances.  VA purchase transaction will require a VA funding fee ranging from 2.15% to 3.3%, depending on whether it is a first time use or a subsequent use of their VA benefit.

1. 1001.       Hazard Insurance Premium reserves

Homeowner insurance premiums are due once a year; therefore, the time when your insurance is next due will dictate the amount of reserve cushion collected in this section.  Your standard Hazard Insurance reserve estimates, for a refinance, will be approximately six months.  On purchase transaction the lender will require at least two months set aside for your reserve account.

1. 1002.       Mortgage Insurance Premium reserves

You will rarely see this collected in connection with your loan; however, if it is required it normally helps offset any loan programs that require a yearly Mortgage Insurance Premium.  I can’t recall the last time this was used or even required, but if the program warrants it, then it will be collected.

1. 1003.       School Tax Reserves:

School Tax Reserves are quite rare and will only be collected if the school district deems it necessary.  Some school districts require school taxes to be paid in connection to property taxes, and can be included in your monthly escrow account.  If needed, a reserve amount will be collected and then paid out on your escrow once a year, as it becomes due. 

1. 1004.       Taxes and Assessment Reserves

Taxes are collected in the same capacity as Hazard insurance and are included in most financing options.  Whenever you are looking to gauge what your payments on a home loan are, you should include Principle, Interest, Taxes, and Insurance (also known as PITI).  This is the “T” in PITI.  Taxes are collected twice a year and will be paid out by your escrow account.  When you enter into a new home loan a new reserve amount is set up for your Taxes.  Taxes are tentatively due in April and again in July.  Therefore, if you are planning to refinance the amount set aside for your taxes will depend upon the month in which you are to be refinanced.  The closer you are to one of these due dates for taxes the more there will be collected.  Purchase transactions, on the other hand, generally only require two month reserves.

1. 1005.       Flood Insurance Reserves

Flood insurance Reserves are used to absorb premiums associated with Flood insurance.  The amount collected for escrows on Flood Insurance depends upon the renewal date of your Flood Insurance Policy, but it is normal for you to see six months estimated on your Good Faith Estimate.  Purchase transactions will collect the standard two month reserve requirement.

The last major section of the Good Faith Estimate will include your Title Fees.  Title fees are fees charged by the title company for the purpose of closing and ensuring that all title related matters are resolved in order to protect the interests of the new lien holders.  Title Fees can differ, depending on the title company assigned to your transaction.  Your Good Faith Estimate will include an estimate of the fees commonly charged by title companies for your transaction, but because of their diversity, there will likely be considerable latitude in probability for error.  Here are some of the fees we have come up with: 

1. 1101.       Closing/Escrow Fee:

The Closing Fee is the fee charged by title companies to conference with you in order to finalize your transaction, through dates and signatures on all appropriate loan documents.  In essence, it is a portion of the compensation received by the title company, for the closing of your loan.  This fee will range between $175 and $350.

1. 1105.       Documentation Preparation Fee:

Doc. Prep. Fee is another fee assessed by the title company in connection to their total compensation.  This fee is regularly charged to cover the administrative tasks performed by the title company in preparation of your loan documentation, so that the loan will be ready to close.  Overall, Doc. Prep. Fees will range between $100 and $300.

1. 1106.       Notary Fees

Notary Fees are paid to the title company as an additional administration fee for any notary work compulsory for the documentation submitted to the lender.  Most Title Companies will have an employee who is qualified to notarize its documentation and is therefore utilized as another allowable compensation fee that is paid directly to the title company.  The fee should not exceed $100.

1. 1107.       Attorney Fees

Some states (such as New York) require an attorney to negotiate and handle any contract administration.  Real Estate transactions require a contract to conclude the transactions and will thus rely upon the services of an attorney to handle the administration of that contract.  This is where an Attorney Fee will be charged.  These fees can be as high as $2000, but are state specific, and if listed on your Good Faith Estimate then its validity should be confirmed.

1. 1108.       Title Insurance fee:

Title Insurance fees are mandatory by law and will be charged on every real estate transaction.  The Title Insurance fee insures protection to the lender, that no other outstanding liens appear on the deed and that they will have 1^st or 2^nd lien position, depending on what type of loan you have.  This fee can deviate from one Title Company to the other.    

1. 1109.       Real Estate Closing fee

The Real Estate closing fee will normally be identical to the Closing/Escrow Fee.  Unlike the first Closing Fee, which provided compensation for coordinating your loan paperwork, the Real Estate closing fee is compensation sought by the title company for their involvement with coordinating the real estate paperwork.  It is true that they will charge a fee for your loan and fee for your purchase paperwork, and this fee will range between $175 and $350.

1. 1201.       Recording Fees

A recording fee is levied by the title company to offset the charges paid to the county clerk’s office for recording the deed of trust and note.  The county clerk will charge the title company for every page recorded.  Your Good Faith Estimate should list this fee from $125 to $195.

The title company may have some supplementary charges that will appear on the settlement statement, but the costs of those additional charges are minimal.  Examples of these charges can include—but are not limited to—form fees, Improvement Land Certificate, Courier Fee, and Stamps fees.  I will usually estimate the total combined fees for these items at around $95.

The Good Faith Estimate is quite possibly one of the most recognizable forms in a real estate financing transaction.  This form is used to compare products and lenders, to help determine those who might provide the best value for your needs.  What is vital for you to remember is that these figures are estimates, approximations, and will not be the exact figures at the time of closing.  However, your mortgage originator should be able to determine the closest possible figures.  I always say that if you are surprised by the figures at closing, then we have not done our job.  Working with the right people will ensure that you are getting the best deal, and knowing what the total costs should be will serve as protection for you, particularly in situations where you have not yet developed a complete relationship of trust while working together with the mortgage originator.