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Good Faith Estimate

DEFINITION

Estimated closing costs for a loan that must be supplied by the lender. Lenders and other financial institutions are required to disclose all closing cost according to the RESPA act.

EXPLANATION

Lenders who sell federally backed mortgages must provide a good faith estimate (GFE). This will give a breakdown of mortgage related closing costs. As of January 1, 2010, lenders must use the new good faith estimate form.

A good faith estimate (GFE)provides an estimation of a borrower’s loan settlement costs, or the costs a borrower will pay at the closing of a mortgage loan. This document allows borrowers to easily compare various lenders’ mortgage loan costs and terms in order to select the best one.

What’s in a Good Faith Estimate

the cost of running credit

loan points

application fee

appraisal fee

attorney fees

escrow deposits

property inspection and survey fees

title search and title insurance

Good Faith Estimate Requirements

A mortgage broker supplies the prospective borrower with a copy of the appraisal, the loan application, and a copy of the credit report.

In addition to the Real Estate Settlement Procedure Act requirements, California requires lenders to provide borrowers with a mortgage loan disclosure statement. This disclosure indicates all of a mortgage’s terms, including costs, fees, rates, estimated payments, and conditions of the mortgage. A lender must get the potential borrower’s signature on the disclosure statement in order to proceed with the loan.

RESPA prevents lenders from charging borrowers for services that are not rendered. It also makes it illegal for a lender to charge for services that are completed in order to comply with the Act, such as printing out additional forms or spending time preparing documents.

All fees charged by a lender must be necessary to the loan approval process. Section 8 of RESPA outlaws kickbacks and referral fees that make the process of applying for a loan more expensive. Should a lender, broker, or other party violate this provision, they could be subject to damages of up to $10,000 and face up to one year in prison. They could also be held liable for up to three times the fee for which the prospective borrower was charged.

MLCM

The Mortgage Loan Compliance Manual, which was created by the Department of Real Estate, states that mortgage-related expenses for qualifying and obtaining a loan cannot exceed 5% of the total mortgage amount, or $390 if the amount is less than 5%. Regardless of the mortgage amount, costs of mortgages for a regulated loan cannot exceed $700. For example a loan amount of $15,000 can have maximum costs of $700, even if the broker attempts to charge 5 percent because that amount exceeds the maximum $700 cost.

Reliability

A good faith estimate will never state an individual’s yearly percentage rate. This can also be subject to change on a day to day basis, with the exception of one having to lock in their interest rate.

Simplification

Throughout the years however, the overall application process of a good faith estimate has had issues in terms of simplification. Two major pieces of information missing on a GFS include the total monthly payment nor does it state closing costs.

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