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Frequently Asked Questions (FAQs)

Federal and State Disclosures

Loan Programs

UP2 The Good Faith Estimate

Since the enactment of the Real Estate Settlement Procedures Act in 1974, mortgage lenders and brokers have been required to provide a Good Faith Estimate of Settlement Charges (known simply as the “Good Faith Estimate” or “GFE”) within three business days of receiving an application for certain mortgage loans secured by one to four family dwellings.  The GFE provides details about the loan terms and estimated settlement charges in a proposed mortgage loan transaction.

After 35 years with no significant changes, the format of the form changed significantly in January of 2010.  The new form consolidates all of the anticipated settlement charges in a loan transaction secured by a one to four family dwelling into eleven numbered lines of charges and provides other important dates and information as well.

The law establishing the new format also set into place certain safeguards designed that prohibit or place limits on the ability of mortgage loan originators from increasing fees and charges previously disclosed on a prior GFE at the time of closing.

For example, once an originator has disclosed the amount of Origination Charges (which includes all compensation received by the originator in the transaction) at Line 1 of the GFE, the originator cannot increase that compensation absent a change in circumstance authorizing that change under the Act.

Click here to see an example form of the Good Faith Estimate from the HUD website.

To fully understand the GFE it is important to understand the relationship between rates and price (discount points or premium credits).  You can read more about that here.

A brief description of the types of items included on the various lines of the GFE are summarized here.

Important Dates

The Important Dates section on page 1 of a GFE provides the following important dates:

1. The date after which the interest rate shown on the GFE can change.  Until you have signed a lock agreement this date will typically be the same date as the date on which the GFE is prepared.  After executing a lock agreement this date will show the date through which the rate and the “discount points” or “premium credit” shown at Line 2 are guaranteed by the lender (provided your application is approved and there is no “change in circumstance”).

2. The date after which the originator can change the estimate of settlement charges on Lines 3 through 11.

Summary of the Loan

The loan summary section sets forth the terms of the proposed loan and certain important facts related to the proposed loan (e.g. whether there is a pre-payment penalty).

Escrow Account Information

This section shows the amount of the principal and interest payment on the proposed loan and states whether the estimated charges are for a transaction with or without an escrow/impound account for the payment of taxes and insurance.

 Page 2 of the GFE provides the estimate of the various settlement charges for the proposed loan transaction.

LINES 1 THROUGH 3 (LOAN CHARGES)

Line 1 – Origination Charge – This line shows the amount of the compensation received by a loan originator in a transaction.  Well … it shows some of the compensation. At most rate options there are “service release premiums” and “yield spread premiums” being earned by the lender.  Most lenders “pocket” this premium that is earned in the transaction and under current law they are not required to disclose this additional compensation.

Line 2 - Discount Points (charged to you) or Premium Credits (paid to you) - Sometimes, at a particular low interest rate, you will be charged discount points.  Those discount points would be shown at Line 2 of the GFE.  However, as indicated above, there are often hidden “premiums” that are earned by the Lender in a transaction.  If all or a portion of those “premiums” are passed on to you as a Credit, the amount of that CREDIT is shown here has a negative number.

BLOCK A – Block A shows the “Net” or “Adjusted Origination Charges”.  Block A is the combination of the Origination Charge plus the Discount Points or the Origination Charge minus the Credit paid to you.  If the Credit paid to you at Line 2 exceeds the Origination Charge at Line 1, the “net” cost to you might be negative.  In that event,  there will be credit shown at BLOCK A which can be used to offset other third party charges in the transaction (those listed at Lines 3 through 11).

Line 3 - Charges for services provided by Third Parties (other than the Mortgage Loan Originator or Lender) that are selected by the Lender – There are certain charges for services provided by third parties that the Lender will select and those charges are listed in the Line 3 section.  This typically includes the cost of a credit report, the appraisal report, the tax service fee and flood certification fee (if applicable) and the amount of any mortgage insurance premiums paid at closing.

TIP! Since the amounts listed at BLOCK A and Line 3 are the only charges over which the loan originator or lender has control, these two lines are the ONLY lines a borrower should consider when shopping for the best rate and lowest costs at a particular interest rate since all of the remaining charges at Lines 4 through 11 are typically charges from a source that the borrower selects or that will at the time of closing be the same for each lender since they include charges over which the lender has no control (e.g. property taxes and insurance premiums).

GFE-Block-A

LINES 4 THROUGH 8 (Title Related Charges and Recording Fees)

Line 4 - Title Services and Lender Title Policy Premium – The charges for the various services provided by the settlement agent and the premium charged on the “lender’s” or “mortgagee’s” title insurance policy is shown at Line 4.  If you select the title company this amount can change at closing.

Line 5 - Owner’s Title Policy Premium – The estimated amount of the premium charged on the “owner’s” title policy is shown at Line 5.   There typically is no owner’s title policy issued in a refinance transaction and the premium on this Line is often paid by the Seller.  Even if paid by the Seller the premium for the OTP will be listed here.  The seller’s payment of this item will be reflected in a credit shown on the HUD-1 Settlement Statement at closing.

Line 6 - Other Charges paid to Third Parties you can select -  Items paid to third party service providers (e.g. Surveyors) will be listed at this line on the GFE.

Line 7 -  An estimate for the amount charged for the recording of legal documents will be shown at this line.

Line 8 - Transfer Taxes – If transfer taxes are charged by a government entity they will be listed at this line.

LINES 9 THROUGH 11 (Pre-Paids)

Line 9 - Escrow/Impound Account Deposit – If you are required to have an escrow/impound account for the payment of property taxes and insurance or elect to have such an account you will be required to put an initial deposit into that account at the time of closing.  The estimated amount of that deposit is shown at Line 9.

Line 10 - Prepaid Interest (Daily interest charges) – Depending on what day of the month you close you will be required to pre-pay some interest at closing for the number of days remaining after the loan funds through the end of the month as the interest for those days will not be included in the initial loan payment.  If, for example, you close on June 16th you would pay 15 days of daily interest charges on the new loan (from 06/16 through 06/30).

Line 11 - Homeowner’s Insurance – On all conventional and government mortgage loans you are required to pre-pay one year of homeowner’s (hazard) insurance at closing. The premium for that policy is shown at this line.

TIP! The amount placed into the escrow/impound account will depend on the month during which the transaction closes and on the anticipated due date of the items paid from the account (taxes and insurance).  On a purchase transaction the impact of the amount shown at this line will be reduced by a proration credit you will receive at the time of closing from the seller for the seller’s “share” of the property taxes from January 1st through the date of closing. On a refinance transaction the impact of the amount shown at this line will be reduced by the refund (after closing) you will receive from your existing mortgage loan servicer if you have an escrow/impound account on that loan.