A Guide To Good Faith Estimates
A Guide To Good Faith Estimates Vs. Loan Estimates
One standardized document you receive when you buy or refinance a home is the Loan Estimate. We’ll guide you through the finer points of the Loan Estimate and how it can empower you to be a more informed borrower.
What Is A Loan Estimate Or Good Faith Estimate?
A Loan Estimate, or Good Faith Estimate, is a standardized form that outlines the terms and conditions of a home loan. It was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and is issued by lenders when applying for a mortgage loan. A Loan Estimate provides borrowers with important information such as the estimated loan amount, interest rate, closing costs and other fees associated with obtaining a mortgage.
What’s The Difference Between A Loan Estimate And Good Faith Estimate?
The two terms—Loan Estimate and Good Faith Estimate—are often used interchangeably, but there is a subtle difference between them. A Loan Estimate is a form used by lenders to provide borrowers with an estimate of the costs associated with obtaining a mortgage. The Good Faith Estimate, on the other hand, is an estimate of closing costs provided by the lender prior to loan application and was used before the Loan Estimate became available in 2015.
Does Getting A Loan Estimate Mean You Are Approved?
No, getting a Loan Estimate does not mean that you are approved for a loan. The Loan Estimate is simply your lender's way of providing you with an estimate of the costs associated with obtaining a mortgage. It is important to understand that the figures provided in the Loan Estimate are just estimates and may not reflect the actual terms and conditions of the loan once it has been approved. Additionally, getting a Loan Estimate does not guarantee that you will be approved for the loan. It is simply an estimate provided by your lender to help you better understand the costs associated with obtaining a mortgage.
What Items Appear On A Loan Estimate?
The Loan Estimate is broken up into several sections that show how much the loan will cost you. The Loan Estimate is designed to be an easy read, with the most important information listed at the top. Let’s look at what the Loan Estimate covers:
The Basics
There will be a section with some basic contact information as well as information about the property you’re buying in the top left-hand corner. It’s important to make sure this matches up with the details of your transaction.
Date Issued- This will be the date your Loan Estimate became official. If there are any updates to your estimate as you go through the process, always make sure you’re looking at the most current version.
Applicants- This should be your current name and address. Make sure everything is correct to avoid having to make revisions later on.
Property- This is the address of the property the loan is for.
Sale Price- This will be included if it's a purchase transaction. Make sure it matches the amount shown in your purchase agreement.
Loan Overview
At the very top right-hand corner of the Loan Estimate, you’ll see a brief overview of your loan. This information should also match what you’ve discussed with your lender.
Loan Term- This is the amount of time over which you'll pay off your loan.
Purpose- This shows the purpose of your loan - whether it's to buy a home, refinance your mortgage, or get a home equity or construction loan.
Product- This shows the type of mortgage rate you’re getting. This may be a fixed rate, where the interest rate stays the same for the life of the loan, or an adjustable rate, where the interest rate changes at specified intervals after the initial fixed period. These are the most common options, but this section may show another type of loan product, depending on what you’re applying for.
Loan Type- This indicates the type of loan - for example, whether it's conventional or FHA.
Loan ID- The Loan ID number is the unique identification number for your Loan Estimate.
Rate Lock- This line goes over whether you locked your interest rate. If so, this tells you when the interest rate you’ve locked in will expire. A rate lock is a way of guaranteeing that your interest rate won’t change before you close your loan. If you have a rate lock on your loan, your Loan Estimate will show when it expires. If your rate expires, the rest of your loan costs can change along with your interest rate.
Loan Terms
Loan Amount- This is the amount you plan to borrow. Double-check the loan amount to be sure it’s what you had requested from your lender. Keep in mind that if you’re buying a home, the loan amount won’t necessarily equal the purchase price. If you’re putting money down, this number should be the purchase price minus your down payment and closing costs.
Interest Rate- The interest rate is the annual cost to borrow money from your lender. The rate shows the percentage of your total loan balance that you’ll pay each year. It’s paid for as part of your monthly mortgage payment.
This section also shows whether your interest rate is expected to change after closing. If it says “yes,” you’re signing up for an adjustable-rate mortgage (ARM). This section will show the highest your rate can possibly be in the event that interest rates were to rise. Make sure this section reflects what you’ve discussed with your lender.
Monthly Principal and Interest- This shows the principal and interest portion of your monthly payment. This may not reflect your complete monthly payment if your monthly payment will include mortgage insurance or escrow payments. If you have an adjustable rate, this will also change when your rate changes. Your maximum possible payment will be shown.
Prepayment Penalty- A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. Keep in mind that this doesn’t just apply to clients who come up with money to pay off their loan – it also applies to refinancing, which is a form of paying off your loan. Rocket Mortgage® doesn’t charge prepayment penalties.
Balloon Payment- A balloon mortgage is a short-term loan that includes smaller monthly payments for a set number of years followed by a large payment that covers the remainder of the principal. A balloon payment is typically due at the end of 5,7, or 10 years.
Projected Payments
Principal- Principal refers to the amount you’re planning to borrow. It’s divided into equal monthly amounts based on your loan term.
Mortgage Insurance- You may have to pay some form of mortgage insurance depending on the type of loan you’re getting and how much money you’re putting down or the amount of equity that’s left in your home. Mortgage insurance protects your lender if you stop making payments on your mortgage.
Estimated Escrow- Estimated escrow is an important part of your Loan Estimate. It’s a set amount of money you’ll pay each month to cover items like homeowners insurance, property taxes, and other fees. The lender will collect these funds each month and put them in a separate account called an escrow account. They’ll then use the funds in this account to pay your bills on time.
Costs At Closing
This section details all of the fees and expenses associated with closing on a loan. This includes items such as appraisal fees, taxes, title insurance, attorney fees and other expenses required to finalize the loan. The total amount of these fees will vary depending on the location of the property and other factors. You will want to pay attention to the "Estimated Cash to Close" number as it will be the amount you'll need to cut a check for at closing.
Loan Costs
Origination Charges- These are fees charged by a lender for originating, or processing, a loan. These charges may include things like application fees, commitment fees, underwriting fees, and document preparation fees. The amount of origination charges can vary depending on the type of loan and the particular lender's policies.
Points- Points on a loan are fees charged by the lender for the loan. They are paid up front, and can be either one-time or recurring. Each “point” is equal to 1% of the loan amount. Points are primarily used to buy down the interest rate, which can lower your monthly payments.
Application Fee- An application fee is a fee charged by the lender when an individual applies for a loan. These fees can vary depending on the type of loan and the lender. Generally, application fees are not refundable and will be due up front.
Processing Fee- A processing fee is a fee charged by the lender to cover the costs associated with processing the loan. This includes things like reviewing credit reports, pulling title documents, and verifying income. The amount of this fee can vary based on the type of loan and lender policies.
Underwriting Fee- An underwriting fee is a fee charged by the lender for underwriting, or approving, the loan. This fee can vary depending on the type of loan and the lender. Generally, underwriting fees are due up front and are not refundable.
Services You Cannot Shop For
Services you cannot shop for are those that are required to be included in the loan, but are not available from other vendors. These services may include things like title insurance, credit report, appraisal fees and other services that must be provided by the lender. The cost of these services is typically included.
Services You Can Shop For
Services you can shop for are those services that can be provided by any vendor or provider. These services may include things like property surveys, pest inspections, and home inspections. You can shop around to find the best prices on these services and usually negotiate a better rate than what is offered in the loan estimate.
Prepaids- Prepaids are fees that must be paid in advance and at closing. They include items such as taxes, insurance, and interest that have been collected in an escrow account. The amount of prepaids can vary depending on the loan type and when the loan closes.
Other Costs
The Loan Estimate also covers taxes and other government fees, any prepaid items, the initial escrow payment at closing and other costs. These are all added together at the bottom of the “Other Costs” section.
Taxes and Other Government Fees- Taxes and other government fees are an important element of the loan closing process. These fees can vary depending on the type of loan, location of the property and other factors. These fees typically include taxes, recording fees and transfer taxes.
Other- The Other Costs section of the Loan Estimate form includes any other costs that must be paid at closing. These costs may include items such as attorneys’ fees, document preparation fees, mortgage insurance premiums and other costs associated with the loan.
Adjustable Interest Rate (AIR) Table-An Adjustable Interest Rate (AIR) Table is a tool used to help borrowers understand and compare the costs of adjustable rate loans. It shows the initial interest rate, the adjustment period and any caps that are in place. It also includes a chart showing how the interest rate and payments may change over the life of the loan.
This information can be used to help borrowers compare different adjustable rate loans and make an informed decision. It’s important to understand the terms and conditions of the loan before signing any documents.
Lender Information
The lender information section of a loan estimate is an important part of understanding the loan's terms and conditions. It includes information such as the lender 's name, address, phone number, and other contact information.
It also includes details about the type of loan being offered as well as any other special features or benefits that may be available. It's important to read through this section carefully and ask questions if anything is unclear.
Comparisons
Comparisons are an important tool when deciding on a loan. By comparing different loans, you can weigh the pros and cons of each option to see which one is best for your financial situation. The Loan Estimate form includes a section that compares the features of two or more loans side-by-side. This can help you make an informed decision about which loan is right for you.
Confirm Receipt
Applicants and co-applicants sign and date this section of the Loan Estimate. By signing, you only agree that you have received and understand the form. You don't have to accept the loan.
How Long Is A Loan Estimate Good For?
A loan estimate is generally valid for a period of 10 days from the date it is issued. This gives borrowers time to review and compare different loan options. It's important to remember that the estimated costs and terms on the Loan Estimate are subject to change if any information is inaccurate or changes during the loan process.
What Is A Closing Disclosure?
A Closing Disclosure is a five-page form that provides the final details about your mortgage loan and closing costs. It replaces the Truth in Lending Act disclosure and the HUD-1 Settlement Statement, which were previously used for this purpose. The Closing Disclosure includes information such as loan terms, monthly payments, interest rates, estimated closing costs and other fees associated with your loan. This document must be provided to you at least three business days before you close on the loan so that you have time to review it thoroughly and make sure everything is accurate.
Conclusion
Deciding on the best loan for your needs can be a difficult and confusing process. By understanding the different sections and components of the Loan Estimate form, you can compare loans side-by-side and make an informed decision. This will help you save money and get the best loan for your financial situation. Good luck!
