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About 4 months ago, my wife and I made an offer on our first home. The house was in a short sale situation, meaning it was a near foreclosure. The seller was motivated to sell, but ultimately, the lender holding the loan had to approve the deal because the sale price would not cover the loan balance.

Luckily for us, the lender was Countrywide/Bank of America, who has become world renown for the number of foreclosures they have on their books. So after we made our offer, we had a long wait ahead of us. But now that we’ve finally made it, I wanted to commemorate the moment with a week of fff posts, all about mortgages.

That being said, Welcome to Mortgage Week! This week, we will handle all things mortgage. We will also tackle some common mortgage questions. To accomplish this, we are going to tinker with some new technology, so bear with me.

Tomorrow, we will be looking at the mortgage calculator. After our brief tutorial, you will be a mortgage calculator super hero. So stay tuned!

Yesterday, we discussed a few new rule changes that effect Good Faith Estimates (GFE). I then realized, we haven’t discussed GFE’s on fff before. Until now…

So what is a Good Faith Estimate?

In short, a GFE is a list of fees due at the time of closing on a real estate loan. The GFE includes the types of fees and the estimated cost of each fee. These fees comprise your ‘closing costs’ and typically range between 3%-5% of the sale price.. The Federal Real Estate Settlement Procedures Act requires your lender to provide you with this estimate within three days of applying for a loan (it simply has to be mailed by day 3).

What fees should we expect to find on the Good Faith Estimate?

There are two types of fees you will find on your GFE. The first type concerns ‘Origination’. These fees are tied to the cost of producing your loan – assessing your ability to borrow and the banks ability to end to you. They include things such as: discount, property appraisal, credit report, lender inspection, mortgage insurance application, mortgage broker fee, application, rate lock, processing, underwriting, and wire transfer.

The second type of fees are relating to ‘closing’ your loan. In other words, they are related to the new ownership. Some examples: title search, title examination, document prep, notary, attorney, title insurance, recording the property, city/county taxes, transfer taxes, survey, pest inspection, condo application, and any prepaid requirements (interest & taxes).

Please note that some of these fees are controlled by the lender and others are not. The fees are are not lender-controlled are set by third party resources. For example, the lender does not conduct property appraisals. They contract with a real estate appraiser. The appraiser sets his fee and it is passed through the lender to the borrower. A savy consumer would ask to see the appraiser’s invoice from the lender. The reason being, some lenders will inflate the cost before passing it to you, the borrower.

In the sake of frugality, pay special attention to negotiable services such as settlement fees, closing fees, appraisal fees, title search fees, title examination fees, document preparation fees, notary fees, and homeowners insurance. You *can* shop around for these services. The lender only makes these decisions by default. You can request other service providers. For more information about saving money on closing costs, visit our previous post.

What is the latest news on GFE’s?

Prior to 2010, the banks have rested heavily upon the fact that the GFE is merely an estimate. Often times, the quoted fees would vary significantly prior to closing (in the lender’s favor, of course). As expected, borrowers wouldn’t know this until they show up for closing. At that point, the lenders knew it was too late to call the whole thing off on account of a few hundred dollars. But now. thanks to new rules placed upon lenders, there is increased accountability. Lenders are limited in their ability to change estimated fees.

How do GFE’s effect your home loan shopping process?

In the end, a savy shopper would follow the basic rules of consumerism. Shop around. Get at least 3 prices. Be skeptical. Ask lots of questions.

photo | PinkMoose

There is nothing like buying a home, to have you shelling out money in a million different directions. For years, one of the biggest potential ‘gotcha’ has been closing costs:

Plenty of home buyers have found themselves at the closing table, ready to sign the myriad documents that will officially make them new homeowners–only to get nasty sticker shock. What was originally supposed to cost them, say, $2,500 in closing costs, has turned into $3,000.

The Good Faith Estimate, a tally of the fees associated with a mortgage loan due at closing, is exactly that – an estimate. Often these costs, which are provided by mortgage brokers and lenders to borrowers within three days of getting a loan application, escalate by closing time.

But on Jan. 1, new federal rules adopted by the Department of Housing and Urban Development took effect, mandating the use of a redesigned, simplified Good Faith Estimate form. The idea behind the revision: to avoid those closing-table surprises.

The new rules require lenders to use a standardize form for their good faith estimate. It also puts limitations on how much these ‘estimates’ can waiver:

1. Fees that cannot change from the original GFE to final settlement. These include the lender’s origination and underwriting charges, and the credit or “points” based on the specific interest rate chosen.

2. Fees that can increase up to 10% at settlement. These include services required and recommended by the lender. If the borrower selects a third-party provider (for title services, title insurance and recording charges) from the lender’s approved list, the fees cannot increase by more than 10% from the upfront estimate to the final.

3. Fees that can change without limit. These include charges from service providers (for title insurance) chosen by the borrower, but not recommended by the lender. This category also includes things like daily interest charges, homeowner’s insurance, as well as flood and pest insurance, if necessary. It encourages borrowers to do their own shopping. “It prevents the worst abuses of price escalation on third-party charges for service providers selected by the lender,” says Guttentag.

The new rule hasn’t been adopted without any criticism. One main cause of concern still deals with lenders gouging consumers. Although lenders can not substantially change the fees quoted in the good faith estimate at the time of closing, lenders can still quote inflated fees in the initial good faith estimate. The best protection from this gouging is to shop around. Compare good faith estimates from various financial institutions.

Remember, even if you have banked at the same bank for 40 years, they might not have you best interests in mind. By shopping around, you could literally save yourself thousands of dollars. And remember to check out “How to Save Thousands in Closing Costs“.

Article | New Rules Help Borrowers at Closing at SmartMoney.com
Photo | Mike Licht, NotionsCapital.com