Good Faith Estimate

good faith estimate expression

A lot of buyers are completely shocked when they receive their good faith estimate (GFE) from their lender in escrow. That is because the GFE greatly exaggerates the buyer’s closing costs. It is not uncommon to see a GFE with three times the amount of the actual closing costs. Why does this happen?

The government made The Good Faith Estimate mandatory after the mortgage meltdown in 2007 because they thought that lenders were taking advantage of consumers by making them overpay for a mortgage. The Good Faith Estimate discloses to the buyer all of the costs upfront.

GFE1

GFE page 1

GFE page 2

GFE page 2

 

 

The problem with the GFE in practice I find, is that the GFE isn’t very useful because it has exaggerated costs. Lenders inflate the costs a little bit because they can’t charge anything more than what is on the GFE which puts them in a bind because they don’t know all the transaction costs yet, so they give themselves a little padding. In addition to this, don’t ask me why this is a rule also, but a lot of seller side closing costs are put on the GFE that make it appear like the buyer will be paying those when they are not.

With the Good Faith Estimate above is from a transaction I recently did. Compare the GFE with the HUD1 in this transaction and you can see how dramatic the difference was:

Item GFE HUD1
Origination Charge $1,575 $1,575
Credit Report $75 $60.59
Appraisal Fee $750 $500
Flood Cert. $19.5 $19.5
Tax Service $85 $85
HOA Cert $450 (seller) $0
Lenders title insurance + escrow $4,300 $790
ESCROW   $1856
Owners Title Insurance $2600 (seller) $0
Pest Inspection $150 (seller) $0
Government Recording Charges $150 $100
Transfer Taxs $2912 (seller) $0
Daily Interest Charges $657 (16 days at $41 per day if closing date is X) $123 (3 days)
Homeowners Insurnace $639.96 $639.96
TOTAL $14,364 $5,748

The GFE in this transaction overstated buyer’s actual closing costs by $8,616!

The HUD1 Prepared by escrow has the accurate numbers for closing costs and should the document you reference to find your true cost. At the very least, when you get a GFE you can talk to your lender about it. 

 

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