It is required by law that anytime you apply for a mortgage loan you be given a Good Faith Estimate (GFE) by the mortgage specialist from whom you are applying for financing. In its simplest terms, a GFE is usually an itemized list or breakdown of all of the estimated charges and fees that will be required for you to pay at closing before your loan can fund. Sometimes lenders will give you an abridged or "simplified" GFE that shows the end result but not how those numbers were derived. Ask for an itemized GFE, like the example (click on "My Share" document to download and print) here so you can see exactly why you are being charged that $500 for a miscellaneous fee. In either case, GFEs can be sobering to say the least, but they do not have to be confusing.
Any mortgage specialist who is an advocate for the buyer or home owner will take the time to explain the GFE in detail, but it is common for consumers to forget most of what was explained once back home. And, unfortunately, there are some unscrupulous people in every industry so it may be beneficial to have a guide map on how to read this intimidating document so you will know what questions to ask and possibly how to save yourself a little bit of money in the process. So grab your GFE or click and download this sample and follow along.
VERY TOP LEFT - lists all qualifying buyers (applicants) who are applying for the loan, followed by the property address being purchased or refinanced, and the lender that the GFE was prepared by.
VERY TOP RIGHT - the application number is the loan number assigned by the lender that will be used to track your loan through its underwriting process, followed by the date of the preparation of the GFE and the type of loan program this particular GFE represents.
Read the paragraph that follows the very top items and you will get a reminder that these are yet again estimated charges from the various entities that service your loan. Do understand that they should be fairly accurate and within a hundred dollars or so. If your fees change throughout the process, which can happen for various reasons like a rate change before locking or a change in the closing date, to name a few, then your lender should reissue you a new and updated GFE to reflect the new costs so you are not negatively surprised at the closing table.
Directly below this paragraph, and before the itemizations start, you will see a listing of: loan amount, interest rate, and term. Double check these numbers to make sure that these figures match those discussed with your mortgage specialist before continuing on to the individual line numbers because they do affect the fees.
800s: All of the fees in the 800 section relate to the fees charged by your mortgage specialist, mortgage broker, and/or lending agency. They are as follows:
801 - Loan Origination Fee: often times this will show a percentage and then a dollar amount in the far right column. A standard fee is 1% of the total loan amount which is listed above. Generally, this fee may be written off on taxes. Consult your tax adviser for details.
802 - Loan Discount: this is not to be confused with a "buy down". A loan discount is paying money up front (at closing) to permanently discount your rate. Your loan officer can give you details as to how much it will cost to permanently discount your rate further. Depending upon the cost, you may end up saving thousands over the life of the loan by asking this simple question. Generally, this fee may also be written off on taxes. Consult your tax advisor for details.
803 - Appraisal Fee: this is the fee that is charged to appraise the home being purchased or refinanced. If you will pay the appraiser before closing then this fee should have parentheses around the number and a check should appear in the farthest right column under POC, meaning "paid outside of closing". Make sure not to pay for it twice, and make sure you get a copy of your appraisal report as you are entitled to it by law.
804 - Credit Report: this fee was charged by your mortgage specialist at the time your credit was pulled. Again, if you paid for the charge already then the number should appear in parentheses and a check should be in the POC column. Also, you are entitled to a copy of your scores from this credit pull. Make sure to get your copy.
805 - Lender's Inspection Fee: this is a fee that a lender charges if an inspection of the home is required by them.
808 - Mortgage Broker Fee: this is typically a standard, flat fee that is charged by the broker of the mortgage company for liability and generally servicing.
809 - Tax Related Service Fee: if tax is required to be charged in the state or city in which the loan is originated then the fee is listed here. This is not typical, however.
810 - Processing Fee: a processor is someone who is either contracted or hired by the broker to do just what the name implies, process your loan. They are basically the glorified babysitter that faxes required paperwork, makes phone calls, and cracks a whip when other agencies that need to supply information to get your loan closed aren't doing their job.
811 - Underwriting Fee: an underwriter is actually the person or persons within the lending agency itself that goes over your loan file with a fine-toothed comb to ensure that all guidelines are being met and all required paperwork has been submitted. The lending agency sets this fee.
812 - Wire Transfer Fee: this fee is charged to cover the wired monies between the title company and the brokerage.
1100s: All fees within the 1100s are charged by the title company overseeing the funding and recording of your loan. They are supposed to be uniform within each state but you may find some discrepancies.
1101 - Closing or Escrow Fee: this is simply the fee the title company charges to host the closing of your loan.
1105 - Document Preparation Fee: if you have ever closed on a loan before you know the sheer magnitude of paperwork involved. Generally, the lender electronically transfers all documents required for signing in the loan package and the title company is responsible for printing out those documents, ensuring they are all accounted for, and arranging them in proper order after signing to send back to the lender for funding. If even one page is wrong, the loan will not close.
1106 - Notary Fees: sometimes the title company charges for those loan papers in which a notary signature and stamp is required.
1107 - Attorney Fees: if an attorney is involved in the real estate purchase or refinance then these fees are listed here, collected at closing and then the title company cuts the check to the attorney's office.
1108 - Title Insurance: depending upon the type of home owner's or hazard insurance policy you choose, this fee can vary but is based upon loan amount of your home.
1109 etc. - All other fees usually deal with wire, electronic, or overnight fees that are required to finalize the funding of your loan.
1200s: this section covers the fees charged by the government agencies that are involved with your loan closing, such as the county recorder's office. They are as follows:
1201 - Recording Fee: a fee for recording your loan in lien position. Usually a refinance costs more.
1202 - City/County Tax Stamps: not common, but self-explanatory.
1203 - State Tax Stamps: same as above.
1300s: Any additional settlement charges are listed in this section. For example, if you required that a home inspection be done then the fees would be listed here. What is important to notice is at the bottom of this section on the right it reads, "Estimated Closing Costs." It is a summary of all of the previous charges and fees listed above it. Sometimes when you ask a mortgage specialist what closing costs are going to be they will give you this number, when you are really asking, "What will I have to bring to the table." They are two entirely different numbers so make sure to clarify what you mean.
900s: This section lists all items required to be paid to the lender in advance.
901 - Interest: unlike renting an apartment where you pay for rent at the beginning of the month for the month you are going to be living there, when you own a home you are actually paying for the month you just lived there. Because of this, when you close on your loan you still have to pay the interest on that loan for the time you are in the home before your first payment is due. Therefore, this charge is the interest portion of your payment for the number of days from the funding date to the end of the month from the day you close. For instance: if you close on the 14th day of November, the loan typically will not fund until the 15th so you would be required to pay interest on the loan from November 15th - 30th, or 16 days. Your first mortgage payment most likely won't be due until January 1st, at which time you will make the payment for the month you just lived there - December.
902 - Mortgage Insurance Premium: if you are required to pay a mortgage insurance premium, it will be listed here. Many times, this premium is rolled into the loan, increasing the loan amount and all subsequent fees that are based off of the loan amount. If you can pay it out of pocket, then you will save yourself a bit of money now and in the long run.
903 - Hazard Insurance Premium: the owner of your home owner's or hazard insurance policy generally requires a year's worth of premiums be paid in advance when you are buying or refinancing your home. This premium is listed here.
905 - VA Funding Fee: if the loan you were getting is a VA Loan then the corresponding fee is listed here.
1000s: The fees in this section are called "reserves" and are collected in advance in an escrow account as a cushion by the lender and paid out to the corresponding agencies.
1001 - Hazard Insurance Premiums: I know what you are thinking..."I just paid 12 months worth of premium to my insurance company up on line 903 so why do I have to pay another 3-4 months here?" Good question. Although you are paying 12 months to the hazard insurance company, the lender also requires a cushion called "escrow" so you get to pay another 3-4 months. If your policy adjusts and your payment goes up or down you will either be reimbursed the overage amount or you may see your monthly mortgage payment go up by the difference. Such adjustments occur annually.
1002 - Mortgage Insurance Premium Reserves: depending upon the type of loan you are getting you may have to include MI reserves here, as well.
1003 - School Taxes: some districts require a school tax to be collected up front, but for most people this is collected through property taxes.
1004 - Taxes and Assessment Reserves: depending upon the time of year you are closing your loan and when your county collects property taxes, the number of months you are required to pay varies. For example - if you live in a county that property taxes are due in November then buying or refinancing a house in February will require fewer months than in September. Generally, the closer you get to the due date for property taxes when purchasing or refinancing your home, the higher the tax reserves you will be required to pay at closing.
1005 - Flood Insurance Reserves: flood insurance should only be required if you live in a flood plain, and the fee would be listed here.
At the bottom of this last section is the title, "Total Estimated Settlement Charges." If you follow the line over to the far right you will see a line above it that reads, "Estimated Prepaid Items/Reserves." The number listed to the right of it is the total of all the numbers in the previous two sections for the 900s and 1000s. You take this Estimated Prepaid Items/Reserves number and add it to the Estimated Closing Costs number listed at the bottom of section 1300 to get the Total Estimated Settlement Charges. The fees are broken down in this way because if you are lucky enough to get the seller to contribute to your closing costs (usually up to 6% is allowed) you may only be able to apply them to the actual Closing Cost portion and not to the Reserves portion. This will depend upon the type of loan you have. Be sure to check with your mortgage specialist to make sure that all of the money that is being contributed by the seller in paid closing costs is being used, otherwise you are paying too much for your house as the extra will go right back to the seller.
The bottom portion of the GFE is the summary of your loan numbers. From top to bottom it reads as follows:
Purchase Price/Payoff: this is the contract price of the home you are buying or the total amount owed your previous lender if you are refinancing.
Loan Amount: from the Purchase Price you subtract what the actual loan amount is, which you can find at the top of the GFE.
Estimated Closing Costs: then you add back in the Estimated Closing Costs from the bottom of section 1300.
Estimated Prepaid Items/Reserves: and you also add in this total from the applicable line at the bottom of section 1100.
Amount Paid by Seller: now you subtract out the contracted amount the seller agrees to pay in closing cost contributions, if any.
Total Estimated Funds Needed to Close: then, at the far bottom all of these additions and subtractions will show you the total amount of money you need to bring to the table at closing.
On the far right of this last section you will also see that it breaks down what your total monthly payment will be and how much of the total is being assigned to principal, escrows, etc. The very bottom of the page is for your signature and the date. Please note that signing the GFE does not lock you into your loan or guarantee you the numbers on the page. It simply is a requirement to ensure the mortgage specialist is in compliance by showing you your estimated costs.
Knowing what to expect and what questions to ask makes all the difference in the quality of your loan and what you pay overall. Don't be afraid to ask questions, after all, it will be your loan and you will be the one paying on it.