Good Faith Estimate 2010: An Improvement?

Tuesday, February 16, 2010

The New Good Faith Estimate: Is it Easier to Understand?

Over the past year the Federal Government has made some sweeping changes to the way mortgage loans are originated, how appraisals are ordered and how and what is disclosed to the consumer. The change I want to address here is a change in what’s known as the Good Faith Estimate (GFE). The GFE has always given potential borrower four bits of crucial information when shopping for a loan:
1) The terms of the loan – Loan amount, interest rate and number of years to repay
2) The total costs of obtaining the loan broken down by mortgage costs and prepaid taxes, insurance and interest
3) The total cash needed to close including closing costs, prepaid items and down payment
4) The total monthly house payment including all taxes and insurance
Here is the old form Good Faith Estimate which covered all of the important information on one page – pretty efficient and I’d say, easy to understand.

← Here is Page 1 of the new GFE. The new form is 3 pages long. It does a good job of giving you the basic loan terms.
It loses ground on the monthly payment as it only shows the principal and interest payment on the loan and does not tell a borrower what the total monthly cost of the home is including taxes and insurance. This is a very important number!

At the bottom it gives you “Total Estimated Settlement Charges”, however, this figure includes things that, in Michigan, a home buyer generally does not pay for, and as a result, overstates the settlement costs (in my example the costs are overstated by $2,796 – quite a large amount!)

←This is the Page 2 of the new Good Faith Estimate. This page is right on the money except for two items:

1) HUD has stated that the cost of Owners Title Policy should be listed regardless of who pays for it. Why, I ask? If the buyer is not paying for it, it should not be included in the settlement charges to the buyer.
2) Transfer Tax also must be included in the buyer’s settlement charges. In Michigan, the seller pays the transfer tax (in 99 out of 100 cases).

So, when you get to the buyers total Settlement Charges they are overstated, as I mentioned above, by $2,796! Maybe it’s just me, but, shouldn’t we stick to telling the buyer specifically what they have to pay for? Why not include the seller’s real estate commission here too?

←Finally, Page 3 of the new form. This page summarizes the loan terms, loan payment and total estimated settlement charges. It also gives the buyer a table where they can write in offers from different lenders so they can make comparisons. This page could be pretty handy. I like it.

It also lets the borrower know that the Lender is required to honor their stated Origination Charges and that other specific settlement costs cannot change by more than 10% at closing. I actually love this because it keeps unscrupulous loan officers from quoting low costs and then increasing them at the last minute due to some contrived change in the borrower’s circumstances. Page 3 is a hit and the rules that go with it are great too.

In the final analysis, the New Good Faith Estimate should not include closing costs that the buyer does not pay. It should include the total payment including property taxes and insurance so a borrower can evaluate if they can afford the home. It also should tell a borrower what their total cash to close is including only their closing costs, all property taxes and insurance and the down payment so they are prepared for what they will be required to pay. My question – Why change a 1 page form, which has all of the necessary information on it, into a 3 page document which does NOT give complete and accurate figures to a borrower? Answer – Who knows? Your Federal Government in action. See you next time . .


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