Early this year, the government issued new guidelines for the Good Faith Estimates (GFE). These guidelines are designed to protect the home buyer from shady lending practices, specifically bait and switch scenarios. As we know, with every positive action we get an equally negative reaction. In this case, you get protection at the cost of a fair bit of confusion.
The new regulations prohibit lenders from handing you a sheet that breaks down the fees they charge for processing your loan. For analytical people like myself, not being able to know exactly what I’m being charged drives me nuts.
Since I’m not alone, you’ll find lenders creativity bending the rules. Instead of handing out the old GFE and calling it what it is, they grab the white out and replace the words “Good Faith Estimate” with the words ”Fee Disclosure Sheet”. These Fee Disclosure Sheets are nothing more than the old GFE, simply disguised and renamed.
Here’s the problem when lenders bend the rules. If Lender A gives you the Fee Disclosure Sheet, Lender B might not give you their Fee Disclosure Sheet, which makes Lender A’s sheet useless because you can’t compare it to anything. Frustrated yet?
Here is a copy of the New Good Faith Estimate (GFE) if you’d like to check it out for reference as we continue on.
There are a ton of little details that go into the new GFE but for sanity reasons I’m going to skip the small stuff and focus on what’s most important for a buyer. This way you’ll know how to quickly and confidently compare loans between lenders.
1st… Ignore 80% of the GFE
Over 80% of the information on the GFE will be the same no matter what lender you chose to work with. At this point in the home buying process, you are already under contract. Which means the title company has been chosen, the closing date has been chosen, the details regarding the HOA and who’s paying what fees has already been negotiated, etc. No matter who you use, these costs have already been determined.
2nd… the 80% Causes All The Chaos
For anyone that thinks putting together a GFE is simply a matter of tossing numbers into a simple three page document, you are WRONG. The loan officer has to call the title company to get their fees, which can take 1-3 days to get. What day you close changes countless figures due to prepaid items, taxes, etc. The HOA could have any number of unknown transfer fees, working capital fees, assessments, liens, etc. Most HOA figures and information don’t come in until after the title company has asked for it which can take from 3 days to 3 weeks depending on the situation. Don’t forget, you have to buy home owner’s insurance… even you don’t know what that will cost at this point, but it will be part of the 80%
All these fees will increase or decrease with the slightest change in circumstances. If one loan officer has a different set of information or is missing any piece of the information, they can’t be competitive nor can you fairly compare them to each other. Do everyone a favor (including yourself), ignore these fees and avoid the unnecessary chaos.
Focusing on the 20%
Here is what you REALLY want to know:
- What is the lender charging me to process/underwrite the loan? (Box A + Line 3)
- What is the interest rate?
- What will the principal and interest payment be every month?
- What will the monthly mortgage insurance be?
- What will be the total monthly payment (add #3 and #4)
Here’s an excel spreadsheet for FHA loans to help you compare several loan options or lender’s GFE’s. Here is the PDF Version.
How to Properly Request Several GFE’s
Now that you know how to compare GFE’s you only have one last thing to learn…. how to properly ask for a GFE to get the best rates and minimize the headache.
- Chose your lenders
- Let them know you will be asking for GFE’s from several lenders
- Pick a day 24-48 hours in advance and have all the lenders provide you GFE’s on the same day (this ensures changes in the market won’t unfairly effect someone)
- Be ready to provide them with all the necessary documents they request immediately
- Sit back, relax and get ready to fill in the worksheet provided.
If you are going with a conventional loan, there are a handful of additional factors to consider. Here is a spreadsheet for conventional loans.
Buying down rates can be expensive and I don’t normally recommend it unless you have extra concessions from the seller that need to be spent.
Lender’s can make money several different ways depending on the loan, many of which are too complex to explain or worry about. An origination fee should not be looked at as a bad thing, instead consider it a valuable and valid option. If there is an origination fee, the rate should be lower than the loan option without an origination fee.
Lastly, you might be able to save a few bucks by going with one lender over another. But realize the process is extremely complex and will require strong communication and trust between you and your lender in order for the deal to close. Deals that fall apart as a result of poor loan officers, typically fall apart a couple days before closing. Which means once everything starts falling apart, you won’t have enough time to shift gears, get a new lender and close on your home.
Feel free to contact me with any questions or for help comparing Good Faith Estimates and/or loan options.