The GFE has been replaced by the Loan Estimate, and the HUD-1 by the Closing Disclosure. If you purchased a home after October 3, 2015, you should have received these documents. The new document is very similar to the original. Let’s look at what they cover.
The Purpose of a Good Faith Estimate
In 1974, Congress passed the Real Estate Settlement Procedures Act (RESPA) with the intent of protecting consumers by requiring the disclosure of all costs associated with a real estate purchase or loan transactions. In 1992, Housing and Urban Development (HUD) went a step further by issuing Regulation X, which required a more detailed disclosure about any affiliated business arrangements (AfBA) that might exist between parties involved with a real estate purchase. The GFE helped borrowers avoid overpaying for a loan and set an interest rate. It was also designed to provide more transparency in real estate transactions. This was critical because too many homebuyers were being preyed upon by unscrupulous realtors and others involved in the sale of real estate. This reduced unknown costs for homebuyers, gave them confidence that they were not being taken advantage of, and reduced instances of fraud.
The Loan Estimate
Lenders are required to issue the loan estimate within three days of a home loan application. If a loan originator does not provide a loan estimate within three business days of receiving a completed loan application, that lender is in violation of current regulations. HUD provides specific criteria for what constitutes a complete loan application. It should include:
The borrower’s name, income, and Social Security numberThe property addressThe estimated value of the propertyThe loan amountAnything else the lender deems necessary or that was agreed upon with the buyer
The loan estimate is standardized and lists services for which you are allowed to shop. You may not be able to shop for an appraisal fee or a credit report fee, but you could be able to shop for a land survey and title insurance. Lenders will vary in their requirements. All lenders must provide consumers with the exact same document. Loan charges, third-party fees, and other costs must be displayed uniformly. The older GFE had no such uniformity requirements. The loan estimate encourages consumers to shop by issuing a standardized loan estimate in a specific time frame. Furthermore, HUD states that prior to the issuance of a loan estimate, lenders can only charge potential borrowers a fee to cover the expense of a credit report. The relatively low cost of credit reports ($15–$30) results in a consumer’s ability to comparison shop among many lenders at a minimal cost. Some experts suggest that borrowers compare the rates and fees they will be charged by asking for a loan estimate from several lenders.
The Closing Disclosure
Lenders are held accountable for their quotes. Each section in the GFE used to directly correspond to a section of the HUD-1, which you would receive upon closing. This was a standardized document that listed every expense involved in a real estate or refinancing transaction. The HUD-1 has been replaced by the Closing Disclosure, which designates fee tolerance levels. What this means is that a fee cannot increase from the loan estimate more than the tolerance level set for that particular fee category, unless there is a permitted triggering event. There are three different tolerance categories to be aware of—0%, 10%, and no tolerance.
The zero-tolerance category includes fees for the services for the creditor, broker, or any business affiliates of anyone involved in the process. These fees cannot change. The 10%-tolerance category allows for a 10% variance of recording fees, title documents, and services for which the buyer has to shop from an approved list, such as a home inspector. The no-limit-tolerance category allows for unlimited changes in fees for services not required by the creditor or not on the creditor’s approved list, such as a septic inspection or a property survey. This category also includes prepaid interest and any property taxes and insurance paid into escrow.
The Bottom Line
The Loan Estimate improves on the older Good Faith Estimate by enabling homebuyers to compare loan options and ensure their final loan fees conform closely to their original quote. Both of these documents were designed to hold realtors, brokers, and lenders accountable and provide greater transparency for the consumer.
