Understanding the Good Faith Estimate

During the home buying process, one of the most important steps is to determine how to actually pay for the home.  In my opinion, the average person does not have enough money to buy a home outright (even with the deeply discounted prices in the current housing market).  In most cases, a loan is required in order to purchase a home.  

As most seasoned bargain hunters know, it is important to shop around to get the best possible price/terms for whatever product one is trying to purchase.  This same principle should be applied to obtain the best possible loan.  To make it easier for this process, banks that offer you the loan are required by the Federal Real Estate Settlement Procedures Act to provide a Good Faith Estimate within three days of receiving the loan application.

Good Faith Estimate:  An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.  (Reference)

Below is a list of the different items along with an explanation of each item included in this estimate:

800 ITEMS PAYABLE IN CONNECTION WITH LOAN:

• 801 - Loan Origination Fee

This fee is a charge for originating or creating the loan

• 802 - Loan Discount

This is an upfront charge paid to the lender to get a lower mortgage rate – the same as “buying the rate down”

• 803 - Appraisal Fee

This is the cost of the independent appraisal. It is usually paid by the buyer.

• 804 - Credit Report

This is the cost of the credit report

• 805 - Lender's Inspection Fee

This is the lender’s cost of inspecting a property – some may double check the appraisal provided by an independent appraiser

• 808 - Mortgage Broker Fee

This is the upfront charge that a mortgage broker charges. Brokers can also earn a “rebate” from the lender which is not listed here

• 809 - Tax Related Service Fee

Lender fee, usually small, for handling tax related matters

• 810 - Processing Fee

This is the charge for processing the loan – collecting your application, running credit, collecting pay stubs, bank statements, ordering appraisal, title, etc.

• 811 - Underwriting Fee

This is the cost of the loan underwriter (approver)

• 812 - Wire Transfer Fee

This is the cost of wiring the money around, which is usually done by escrow.

900 ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE

• 901 - Interest for days X $ per day

This is your prepaid interest for your mortgage loan.

• 902 - Mortgage Insurance Premium

This is the prepaid mortgage insurance premium, if you have one. This is the insurance premium some lenders charge for loans with little equity.

• 903 - Hazard Insurance Premium

This is your home’s hazard insurance being prepaid.

• 905 - VA Funding Fee

This is the Veterans Administration funding fee, which is something you will not incur unless you go through a VA program.

1000 RESERVES DEPOSITED WITH LENDER

• 1001 - Hazard Insurance Premiums # months @ $ per month

This is any prepayment of your future hazard insurance expense

• 1002 - Mortgage Ins. Premium Reserves months @ $ per month

This is any prepayment of your future mortgage insurance expense

• 1003 - School Tax months @ $ per month

This is any prepayment of your future school tax expense

• 1004 - Taxes and Assessment Reserves months @ $ per month

This is any prepayment of your future tax expenses, such as property taxes

• 1005 - Flood Insurance Reserves months @ $ per month months

This is any prepayment of your future flood insurance expense

1100 TITLE CHARGES

• 1101 - Closing or Escrow Fee

This is the cost of escrow. This is the service of a neutral party that actually handles the money between all the different parties in a real estate transaction, including: the lender, the buyer, the seller, the agents, notary, etc. This is often done by the “Title Company” – a related entity in the same office that provides title insurance

• 1105 - Document Preparation Fee

This is the charge for preparing the loan documents. Lenders often email the loan documents to the escrow company, which in turn prints them out and reviews them before signing

• 1106 - Notary Fees

This is the cost of the notary. This is to have all of the legal documents surrounding this transaction notarized

• 1107 - Attorney Fees

Any legal charges

• 1108 - Title Insurance

This is the cost of insuring the title of the property. If there is a question about title (who really owned the property), after the transaction is done then this insurance protects the lender from future problems

1200 GOVERNMENT RECORDING & TRANSFER CHARGES

• 1201 - Recording Fees

This is the cost of updating relevant government records

• 1202 - City/County Tax/Stamps

Unavoidable government charge

• 1203 - State Tax/Stamps

Unavoidable government charge

1300 ADDITIONAL SETTLEMENT CHARGES

• 1302 - Pest Inspection

This is the cost of the pest inspector. Their purpose is to document the state of the property that the lender is making the loan on.

Information above taken directly from the following wikipedia article.

All information above was republished under the terms of the GNU Free Documentation License.

The list above contains general items that most Good Faith Estimates contain, however, some items are particular to the lender who is providing the loan.  Below are a things to watch that can vary from loan to loan:

1. Loan Discount
• Some mortgage brokers may try to offer you a very interest low rate for the purchase of your home, however, they will offer you this rate by placing the cost to reduce the interest rate directly into your closing costs.
• This is beneficial to you if you have your closing posts being paid by the seller, else this cost will come directly out of your pockets as you will be paying for this up front rather than over the life of the loan.
2. Seller contribution for closing costs
• A mortgage broker may recommend for the buyer to roll up the closing costs into the price of the loan and have the seller pay for the closing costs.  The caveats to this is to know that the seller is only allowed to pay up to 3% closing costs for a conventional primary residence FHA home loan.  The maximum a seller can contribute for an FHA investor loan is 2%.
3. Loan Application Fee
• The loan application fee is typically required up front by the mortgage broker in order to process the loan.  This item is usually listed on the Good Faith Estimate however the buyer should receive a credit for this charge during closing since it is paid up front.

To get an idea of what a Good Faith Estimate typically looks like, go to the following example.

I have always expressed the importance of educating yourself and planning for obtaining your goals.  Now I am hoping that this article has equipped you a little better to understand the beginning steps for the loan acquisition process to purchase a home.  If you have any comments, send an email to jtorian@pamplonafinance.com or leave them in the comments below.

Stay Disciplined!