What is a Good Faith Estimate? - Definition & Components

Instructor: Racquel Fulton
A Good Faith Estimate helps borrowers make informed decisions when applying for a mortgage loan. Learn the ins and outs of a Good Faith Estimate (GFE) and how it works to bring transparency to real estate transactions.

What Is A Good Faith Estimate?

A Good Faith Estimate (GFE) is a form that explains the cost of a mortgage loan in an easy to understand, simplistic format. The GFE breaks down the terms of a loan and settlement costs. The goal of the GFE is help borrowers determine if the conditions of a loan are beneficial.

How Is a Good Faith Estimate Calculated?

Mortgage lenders consider several factors when calculating the cost of a loan to generate a GFE.

Let's follow Payton, who is shopping for a mortgage loan to purchase her first house. Payton has submitted an application to Dream Home Mortgage Company. The lender will obtain a copy of Payton's credit report to evaluate her credit worthiness. Credit worthiness is a lender's determination of a borrower's ability to repay a loan. The lender will take into consideration the loan amount that Payton has requested, appraised value of the house and her monthly income and expenses.

Credit Worthiness + Appraised Value + Income and Expenses = Good Faith Estimate

A Good Faith Estimate is generated and provided to Payton. A mortgage lender or broker is required by the Real Estate Settlement Procedure Act (RESPA) to mail Payton the GFE within three business days. If Payton applies for a loan with other mortgage companies, she will receive a GFE from each lender. The top portion of the document provides an explanation of the purpose of the document and a disclaimer on the importance of utilizing the form to shop and compare loan offers.

A Good Faith Estimate provides an overview of every fee that a borrower may have to pay in association with a mortgage loan. Let's look at each section of Payton's GFE.

Important Dates

This section displays key deadlines that affect the interest rate charged for the loan. Payton was quoted a rate of five percent. This rate will expire by a specific date if she does not finalize the loan. On Payton's GFE, the Important Dates section contains the following information:

'The interest rate for this GFE is available until 01/30/2016. After that date, the interest rate, some of your Loan Origination Charges, and the monthly payment shown below can change until you lock in your interest rate.'

This informs Payton that if she does not lock her rate in by January 30th 2016, the rate and other charges are subject to change. To lock in a rate means to secure the interest rate for the loan. A rate is usually locked in when the borrower signs a mortgage commitment. This section also includes how many days Payton has left to close the loan before the fees will change.

Summary of Loan Terms

The Summary of Loan Terms section includes an itemization of the loan amount, term, interest rate and what the monthly mortgage payment will be.

Let's look at Payton's Loan Summary:

Your initial loan balance is: $200,000
Your loan term is: 30 years
Your initial interest rate is: 5.00%
Your initial monthly amount owed for principal, interest, and any mortgage insurance is: $1073.64

The summary also lists specific fees that may increase due to certain terms and conditions, such as a balloon payment. A balloon payment is a large lump sum payment that becomes due if a mortgage loan is not repaid by a specific time. This section indicates if the loan has a prepayment penalty. A prepayment penalty is a penalty for paying a mortgage loan off early. If Payton pays her mortgage loan in full in 20 years instead of the 30 years as she agreed, the lender will charge her a predetermined amount of money for doing so.

Escrow Account Information

Escrow accounts are created to set aside money for real estate taxes, homeowners insurance and association fees. If a lender requires fees to be escrowed, it will be stated in this section.

Payton's loan does not require an escrow account. She will have to pay these bills separately.

Origination Charges

Origination fees are what lenders charge for supplying a loan.

Charges for All Other Settlement Services

There are many services needed to close a loan, such as a credit report and tax certification. This section details all other charges payable to service providers, which include, but are not limited to, the following:

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