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Posts Tagged ‘Good faith estimate’

Recently during a conversation with a local Realtor, we discussed common questions and misconceptions. One question that I had never heard was in regards to closing costs.

The Realtor’s buyer had asked the Realtor what “Settlement charges” were and if they were different than “closing costs.” As a professional in the business we throw these terms around all the time and occassonally forget that these “common” terms aren’t always common to the general public.

Closing costs are the costs to close on a mortgage loan. These costs normally consist of points, fees, attorney and title charges, escrow setup and any other charge or fee that is incurred from originating (putting together) a mortgage loan. They will vary from loan to loan, so there is no way to say what each fee should be.

Settlement charges are the charges at closing that are required to settle the transaction. These normally consist of points, fees, attorney and title charges, escrow setup and any other fee that is incurred from originating a mortgage… plus any additional inspections or charges (such as home warranties) that are incurred to complete the purchase / refinance of a home.

Generally speaking, these are the same thing. Technically speaking, the difference is that closing costs for a mortgage may not require a home inspection, radon inspection, water, pest or septic inspection. However, some of these inspections are usually highly recommended for a buyer to ensure there are not inherent problems with the home they are buying.

When you get an estimate on closing costs from your lender, pay careful attention to what is there. If there are not any inspection charges noted be prepared to account for those somewhere. A home inspection may not be required to get a mortgage loan, it is recommended that you get one and it won’t be on most estimates. So if it runs you $500 for the inspection, you must be prepared for the difference. And no, that is not a lender’s responsibility to estimate inspections… they are optional.

Hope that helps clear that up for anyone confused by the two terms.

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.

According to federal guidelines, lenders are required to provide mortgage loan applicants with certain documents within 3 days of application. Some of these basic documents include a Good Faith Estimate and a Truth in Lending Statement. These forms are to disclose to the potential borrower estimated costs and rates associated with that lender’s program.

The question is, when is this required? When does an application actually become an application?

Calling a lender and giving name, address and social security number is not an application. In order for an application to be made and considered, a lender must be able to make a decision… in other words, they need all the information. Personal information like the name, address and social security number of the borrower; Financial information like work history, income documents (such as W2’s and paystubs) and bank / investment statements; credit information like a credit report or alternative credit if needed… these are just the basics. Oh.. there is one more very important item needed… a house.

If you are refinaning a mortgage and have submitted the other items needed, then this is an application. However, if you are thinking of buying a home, you will need a offer to purchase to complete your application. At this point, your lender will be required to provide you the disclosures required by law.

This being said… if you, as the borrower, would like this information earlier in the process, simply ask for it. If your lender has enough information to have a good idea as to the direction of your loan, they should be able to give something to you. If your lender does not have enough information yet, they can tell you what is still needed in order to provide this.

Beware of lenders that give Good Faith Estimates and Truth in Lending statements with limited information. Without the proper information, a lender can not give you solid information on which to base any decision. What they give you with limited information will be just as limited in its reality.

So how do you know if they are being straight with you? The bottom line is this… talk to your lender. Actually talk and feel them out. If you are not feeling secure in them after the conversation, try another lender. Even in todays world of technology, talking to someone will still tell you what you need to know… if you will listen.