Appendix B: Good Faith Estimate

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1 Appendix B: Good Faith Estimate

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5 Good Faith Estimate The Real Estate Settlement Procedures Act, commonly referred to as RESPA, requires that within three business days of receipt of the loan application, the mortgage loan originator must provide the applicant with a Good Faith Estimate. The specific provisions of RESPA will be addressed in detail in Section V of this course. This discussion will focus on how to fill out the Good Faith Estimate (the GFE ). The purpose of the GFE is to allow consumers to better shop for settlement services. These settlement services include (among others) such items as: Loan origination fees; Mortgage brokerage fees or commissions; Attorney fees Recording and document fees; Settlement agent fees Title related fees (title search, title insurance); Any required flood insurance; and Inspection and appraisal fees. For many years, mortgage loan originators used a one-page Good Faith Estimate form. Due to revisions to RESPA, any GFE provided on or after January 1, 2010 must use the revised three-page Good Faith Estimate form. It would be a good idea to review this form before proceeding any further in this discussion. It is attached as an appendix to the printed version of this course, or you can access it online at: You might want to print it out so that you can refer to it. The Good Faith Estimate will be completed based on the information included in the loan application. When the loan application is completed during a face-to-face interview, if the MLO has access to a computer and the required software, the GFE is usually provided at some point after the application is completed but before the meeting is concluded. In all other cases, the GFE must be sent no later than the third business day after receipt of the application. The GFE can be filled out by hand or by computer printout. The GFE begins as follows:

6 The MLO should complete the information above. Notice that the box on the left is for information about the MLO and the box on the right is for information about the applicant. Also, notice that the property address in the box on the right is for the address of the property being financed. In a purchase transaction, that would not be the borrower s current address. The next portion of the GFE explains the purpose of the form and the fact that it will allow the borrower to shop for settlement services. It refers to the Department of Housing and Urban Development (HUD) Special Information Booklet which is also required by RESPA and to the HUD webpage that gives the consumer more information about RESPA. The next portion of the GFE lists some important dates associated with the loan: The boxes in this section are completed as follows: 1. Enter the date through which the interest rate on this loan will be valid. If necessary, you can also add a specific time on that date when the interest rate will no longer be valid.

7 2. Enter the date through which the settlement cost estimates that will follow are valid. This date must be at least 10 business days after the date of the GFE. 3. Enter the period of time for which the interest rate will be locked, if the borrower will be locking the rate. The loan settlement must occur within that period of time after the rate is locked for the borrower to be assured of receiving that interest rate. 4. The box should show when the rate must be locked prior to the settlement, if this loan has such a requirement.

8 The next section of the GFE provides the borrower with a summary of the costs of the loan for which the borrower applied. This section of the form requires the mortgage loan originator to enter the following information: The initial loan amount; The loan term (in years); The initial interest rate; The initial monthly payment, considering only principal, interest and mortgage insurance costs. (Notice that it does not include property taxes or hazard insurance. Also, if the loan is at least initially interest-only, no amortization of the principal would be included in that payment.) Whether the interest rate can rise, and if so to what maximum interest rate and when the first adjustment will occur. Whether the loan balance can actually increase, even if payments are made on time (this would be negative amortization) and to what maximum (usually this will be either 110% or 125% of the initial loan amount); If the monthly payment can rise, it should be noted when the first adjustment will occur and what the maximum monthly payment would be after the first adjustment and over the life of the loan (this calculation again would not include any property tax or hazard insurance costs); Whether the loan includes a prepayment penalty, and if so, to what maximum amount; and Whether the loan includes a balloon payment, and if so, the maximum amount and due date of that balloon payment.

9 The next section of the GFE form deals with escrow account requirements: The mortgage loan originator would enter the initial monthly payment in the box at the end of the first paragraph of this section of the form. (It would be the same number as was entered on the fourth line of the previous section that disclosed the initial monthly payment.) Then the originator would check the appropriate box stating either No, you do not have an escrow account. You must pay these charges directly when due. ; or Yes, you have an escrow account. It may or may not cover all of these charges. Ask us. The mortgage loan originator should be prepared to answer any questions regarding cases where the escrow account (for property taxes, hazard insurance, homeowners association dues and the like) might not cover all such costs. It sometimes has to do with issues particular to the borrower s state of residence and how property taxes are adjusted or with mid-year revisions in these costs. At the bottom of the first page, there is a summary of the settlement charges. This information will be taken from the data on page 2 of the form. Page 2 of the form consists primarily of a discussion of 11 categories of settlement costs. You should pay particular attention to the error tolerances for the items on this page. The first part of this page deals with adjusted origination charges.

10 Block #1 requires the mortgage loan originator to list the loan origination fee. Other than fees for specific interest rates (that will be listed in Block #2), there can be no other fees for making the loan, such as application fees, processing fees or underwriting fees. Block 1 has no error tolerance, which means that this amount cannot be changed. Block #2 includes three checkboxes, only one of which must be checked. If there is no separate fee associated with the quoted interest rate, the first box would be checked and in the column on the right side a figure of $0 should be entered. The second checkbox is checked if there is a yield spread premium, where the borrower is accepting a higher interest rate on the loan in return for reduced closing costs on the loan. When this second checkbox is used, the amount of the credit should be entered in the appropriate box along with the interest rate. The amount of the credit would be entered in the column on the right as a negative number (which reduces the settlement costs). The third checkbox is checked if discount points are being charged to reduce the interest rate on the loan. The amount charged is entered in the appropriate box, along with the interest rate in its appropriate box. The amount of the charge would be entered in the column on the right side as a positive number (which increases the settlement costs). Loans are sometimes referred to as no-cost. If that term only applies to the loan origination fee, then the lender could check the first checkbox in Block #2. If the term no-cost refers to all settlement charges, then the second checkbox should be selected and the credit should equal the total of all charges listed subsequently. It should be noted that the Department of Housing and Urban Development (HUD) takes the position that there cannot be both a yield spread premium and discount points in the same transaction. That effectively means that one cannot check both the second and third boxes in this Block.

11 Block #3 appears as follows: Block #3 lists services that are selected for the applicant by the mortgage loan originator. Examples of this would include credit reports, appraisals, flood checks, tax services and any upfront mortgage insurance fees. (It would not include title fees and title insurance, as that is dealt with in the following box.) The individual fees would be entered in the space provided on the left side and the total would be entered into the box on the right. Items in this block have a 10% error tolerance, meaning they can change, but by no more than 10%. Block #4 deals with title services and title insurance, and appears as follows: The total fees for these services, which would include the costs of the settlement agent, title searches and reports and a lender s title insurance policy, if any. Block #5 deals with the owner s policy of title insurance: In the case of a refinancing loan, this would likely not be necessary (if a policy had been obtained when the home was first purchased) and the words not applicable or the abbreviation N/A could be entered in the box at the right. Otherwise, the estimated cost of title insurance should be entered in the box to the right. Block #6 deals with services that are required by the lender, but for which the borrower can shop. It appears as follows:

12 This section could include things like termite reports, home inspections and any property surveys required by the lender. The MLO would list the individual requirements in the lines at the bottom of the left side, along with the estimated charges, and then enter the total charges in the box at the right. Block #7 deals with government recording charges and is somewhat self-explanatory. Block #8 deals with transfer taxes and is also self-explanatory. Block #9 deals with the initial deposit to the escrow account: The boxes should only be checked if the escrow account will cover all property taxes and insurance. If only some taxes and/or some insurance costs are covered, then the other box should be checked and the specific items covered would be entered in the appropriate space. That space could also be used to list things like homeowners association dues, if appropriate. Block #10 deals with daily interest charges:

13 Mortgage loans are structured so that interest is paid in arrears. Mortgage payments are typically due on the first of each month, and that payment would cover the interest for the preceding month, plus some principal reduction amount. When a home is purchased or refinanced, the borrower will have to prepay the interest from the settlement date to the end of that month. The appropriate information should be entered in the boxes on the left and the amount should be entered in the box on the right. The calculation for this prepaid interest is covered in Section III Chapter 9.

14 Box 11 deals with homeowners insurance: This section of the form covers homeowners insurance and any other insurance requirements, such as flood insurance. If the homeowners insurance is covered by the escrow account, the initial deposit towards the homeowners insurance would have already been included in Block #9. The last lines at the bottom of page 2 allow space to include the subtotal of Blocks 3 through 11, and then the total settlement costs. That information will transferred to the bottom of page 1 as well. The third (and last) page of the Good Faith Estimate gives the Instructions for the form and are intended to assist the borrower in using the information disclosed in the form itself. The first part of these instructions appear as follows:

15 RESPA applies error tolerances to the settlement charges disclosed in the Good Faith Estimate. Some have an error tolerance of 0% and are listed in the box on the left which is labeled These charges cannot increase at settlement. Other charges are limited to an error tolerance of up to 10% and are listed in the center box under the label The total of these charges can increase up to 10% at settlement. The final category is those charges which can change and are not subject to the error tolerances. These are listed in the box on the right under the label These charges can change at settlement. The only exception to these rules regarding error tolerances deal with changed circumstances, which RESPA defines as: 1. Acts of God, war, disaster, or other emergency; 2. Information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided, which information may include information about the credit quality of the borrower, the amount of the loan, the estimated value of the property, or any other information that was used in providing the GFE; 3. New information particular to the borrower or transaction that was not relied on in providing the GFE; 4. Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. Many borrowers are not aware of the fact that there is a trade-off between interest rates and settlement costs. In general, one can get lower interest rates in return for higher settlement costs, or get lower settlement costs at the expense of higher interest rates. A yield spread premium (a higher interest rate than prevailing market rates) can serve to lower the settlement costs. Discount points (fees paid upfront to lower the interest rates) can serve to lower the interest rate of the loan. The importance of these trade-offs varies with each borrower. Some are struggling to put up the down payment and pay the settlement costs, but can handle the monthly payments. These borrowers might opt for the higher rates and lower settlement costs. Others have the funds for the down payment and the settlement costs, but are having trouble qualifying for the loan and therefore might opt for the higher settlement costs and the lower interest rates. Lenders are encouraged to illustrate these trade-offs by the next section of page 3 of the Good Faith Estimate:

16 The final section of the GFE lists a shopping cart. This is a space where the borrower can assemble information provided by several different lenders, so that the settlement costs and loan provisions can be compared. This final part of the form appears as follows: Notice also that at the very bottom of the form is a disclosure that while the lender may sell the loan in the secondary market, that would not change any of the provisions of the loan and would not affect the settlement costs.