New Rules for Good Faith Estimates on Mortgage Loans

On January 1, 2010, some new rules will go into effect that are designed to make Good Faith Estimates more accurate, and to help borrowers in their mortgage shopping efforts. Here’s what you need to know about it.

What is a Good Faith Estimate, Anyway?

When you apply for a mortgage loan, the lender is required to give you an estimate of all fees and costs associated with the loan. Collectively, these are referred to as closing costs. Current laws require lenders to provide this information — known as the Good Faith Estimate — within three days of your loan application. It’s a disclosure item that helps you prepare for closing by saving up enough money.

They are Not Always Faithful

In the past, Good Faith Estimates have been known to be inaccurate. It’s fairly common for the amount quoted in the GFE to be less than the actual closing costs incurred by the borrower. The federal government is supposed to regulate this kind of thing, but for a long time they haven’t done a very good job at it. The Real Estate Settlement Procedures Act, or RESPA, dictates what lenders are supposed to tell borrowers, and when they are supposed to tell them. But for many years, consumer advocates have complained about the lax standards and enforcement of the RESPA laws.

Starting in January of 2010, some new rules may increase the accuracy of the Good Faith Estimates issued by mortgage lenders. Among other things, the new rules will require lenders to use a standardized form to list the closing costs associated with a particular loan. There are some other new disclosure requirements as well, but I won’t venture too far into the weeds. You can always look it up if you want the finer details.

What It Means to Home Buyers

So what does all of this mean to you, as a home buyer? Well, it means that if you apply for a mortgage loan after January 1, 2010, your Good Faith Estimate may be more accurate than those given in the past. But I would venture a guess there will still be a discrepancy between the estimated closing costs listed in the GFE and the actual costs you have to pay on closing day.

My advice is to save as much money as possible for your closing costs and other home-buying expenses. That way, you won’t be cash-strapped after you close on the home. If the Good Faith Estimate says you’ll need $2,200 on closing day, plan for it to be $2,500 or higher. Better safe than shocked. Like I said, the new rules going into effect in January 2010 could make GFEs more accurate. But until the results are in, I would still expect a discrepancy.

When you get closer to your actual closing day, you should keep your eye out for what’s referred to as a HUD-1 settlement statement. This is another requirement that mortgage lenders must meet. You should receive this document 1 to 3 days before closing, and it will include the total amount of fees and costs to be paid on closing day. Based on this amount, you would go and get a cashier’s check to take with you.

Related articles:
How to file a mortgage complaint against a lender
How much of a home loan can I afford?
GFE update by the Daily Housing News

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