This measure was taken to try to make the document easier to understand for the average customer and also to make it much more binding on the person providing the estimate. I am not sure if it is necessarily easier to understand but it certainly does protect the borrower and is a great step against predatory lending.
For those of you who are not familiar with mortgage lending, the Good Faith Estimate is a very important document that is disclosed within three days of the initial application. The purpose of the Good Faith Estimate is to provide an accurate measure of final closing costs and out of pocket expenses for the borrowers. A good loan officer will check the fees of the lender, the fees of the title company involved and also take into account escrows for taxes and insurance and transfer fees of the state in which the subject property is located. A good loan officer should be able to come within $200 of the final number. A bad loan officer in the past would employ selective memory by leaving a few fees off to make his estimate appear less expensive then the next guys.
The new Good Faith Estimate for 2010 is better because the customer is protected against a really bad estimate because of tolerance thresholds placed on the lender/broker. For example, lender fees must be 100% correct or quoted higher than necessary or the originator absorbs the difference. Third party fees have a tolerance of 10%. State transfer fees need to be exact. There is tolerance for differences in taxes and insurance but that is understandable because those numbers are determined after the customer makes a decision on which insurance policy they are going to go with.
When it comes time for closing, borrowers will now sign the new HUD closing statement which is compared directly against the New Good Faith Estimate they were provided. Closing agents will simply do the math to see if there are any discrepancies and then the loan officer will write the check if there is a major difference.
Under the new rules, a typical Good Faith Estimate is good for about 10 days then it expires. If the loan is locked, then it is good for the duration of the lock. Also the originator is not required to provide the estimate unless the customer fulfills all of the requirements of a real deal. The customer will need to provide: name, gross monthly income, social security, number (to obtain a credit report), property address, loan amount sought and estimate of value. So in other words if you are searching for a home and have not found it yet, you will receive an initial disclosure form rather than a good faith estimate.
The initial disclosure form looks a lot like the old good faith estimate but is not nearly as binding. In all fairness to the loan officer, it does take a lot of time to track down each fee on a file with 100% certainty. Also, if a customer wants to play games by getting five good faith estimates, they will have their credit pulled five times now which probably isn’t smart. If a customer is just shopping for the sake of shopping, the initial disclosure form should suffice until they step up to the plate and decide which lender they want to work with and make a commitment.
Written by Preston Ware
First South Mortgage
Email is email@example.com.