When you’re approved for a home loan by banks or mortgage companies, the lender should also give you a good faith estimate. This pleasantly-named document is actually a detailed estimate of all the charges, interest and payments you’ll face if you buy the house. It also itemizes the cost of the loan, including how much cash you’ll be expected to bring to the closing. The estimate may or may not be different from your closing documents, but you’ll have a pretty close approximation to the final loan documents.
The good faith estimate concept was a hallmark of the Real Estate Settlement Procedures Act of 2010. The whole act was meant to simplify the blizzard of paperwork and details that normally face a home buyer. It was originally one page long, but it was expanded to three pages by 2012. All lenders are supposed to give you this document so you can compare apples to apples when you shop for a mortgage.
A quote written on an informal worksheet or sent from an online lender doesn’t have to coincide with your final closing costs. In contrast, a GFE, which appears on an official Department of Housing and Urban Development form, has to reflect the true final costs. The transfer taxes, the interest rate (if it's locked) and the origination fee must be accurate. You could see differences in the quotes you got from providers the bank didn’t choose, like insurance or title companies.
It stands to reason the lender may need to change some things before your closing day arrives. The cost of your homeowner’s insurance, changes in your credit score, and escrow requirements can affect the bank’s loan agreement. By law, the lender must tell you about these changes through updated copies of the good faith estimate. If you get to the closing table and find that new changes have been made that you’ve never seen, you can refuse to sign the documents.
The GFE is not a binding agreement and lenders can’t force you to make a commitment to use them in exchange for the estimates. You might be asked to pay a small fee to cover things like running your credit before you get the final estimate. Credit reports cost anywhere from $8 to $20, so the lender’s fee could range from $20 to $50 depending on if they charge you for the time it takes to run a report. To make sure you receive the federally approved document, and not a low-ball quote meant to hook you into a contract, always ask for the good faith estimate by name.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."