Prior to October 2015, a Good Faith Estimate (GFE) was a standard form that mortgage brokers and lenders were required to provide to consumers. When homebuyers applied for a new mortgage loan, they received an estimate from the lender that included the amount of the mortgage payments plus any associated loan charges.
Since October 2015, the Loan Estimate form has replaced the GFE for most mortgages.
While the Loan Estimate serves the same purpose as a GFE, it adheres to Consumer Finance Protection Bureau (CFPB) guidelines with the intent of reducing consumer confusion.
What Is the Purpose of a Good Faith Estimate?
The original purpose of the Good Faith Estimate was to provide transparency in real estate transactions. Transparency was much needed due to predatory and misleading agents and actors involved in real estate transactions.
The GFE also aimed to set an interest rate and to help borrowers avoid overpaying for a loan. Receiving a detailed Good Faith Estimate allowed borrowers to see all the loan costs upfront which instilled consumer confidence and reduced instances of fraud.
The Good Faith Estimate was replaced by the Loan Estimate form, which follows slightly different guidelines but is still intended to inform and protect consumers.
Loan Estimates: The New GFE
The Loan Estimate form replaced both the Good Faith Estimate and the truth in lending (TIL) disclosure as part of the Truth in Lending Act (TILA). The form combines loan terms from the TIL with closing cost details of the GFE. The form is simplified to three pages, which is two pages less than the GFE/TIL combination applicants used to receive.
The Truth in Lending Act requires brokers and lenders to provide applicants with a Loan Estimate within three business days of receiving the application. It’s important to note that potential borrowers may not receive a Loan Estimate form when applying for a home equity line of credit (HELOC), which is an unsecured housing loan, or a homebuyer assistance program loan. Instead, borrowers may be given a Truth-in-Lending disclosure.
The Department of Housing and Urban Development (HUD) outlines the criteria that constitute a complete loan application and the new Loan Estimate must include the following details:
- Borrower’s name, income and social security number
- Property address
- Property value
- Loan amount
- Loan term
- Interest rate
- Tax and insurance costs
- Total closing costs
- Loan origination fees
- Repayment penalties if applicable
How to Request a Loan Estimate
Reach out to several lenders you may be considering and request a Loan Estimate. You do not need written documentation at this stage. You will usually only need to provide six pieces of information:
- Your name
- Income
- Social Security Number
- Address of the home you want to buy
- Documentation of the home’s estimated value (usually the sale price)
- Amount needed to borrow (home price minus down payment)
To better compare lenders, ask for the same loan features you want so that you can compare apples to apples. For instance, you may ask for the same loan type, rate type (fixed/adjustable), loan term, down payment, amount/loan amount, points/credits and rate lock period.
Your Loan Estimate will only be as accurate as the information you share and the extent to which you share it. In other words, give each lender a complete picture of your financial situation so they can use that information to better construct an estimate.
For example, share anything unusual about your circumstances such as if you are self-employed or have irregular sources of income. Also, provide information about any taxes and dues for the home you want to purchase.
Getting multiple Loan Estimates from various lenders may help you find the best mortgage loan. In fact, Freddie Mac reports that getting just one extra Loan Estimate could save you $1,500 over the life of the loan and five quotes could save $3,000. Note that estimates could call for a hard inquiry on your credit, impacting your score.
What Is Included in Loan Estimates and Closing Disclosure
The Loan Estimate includes all the items mentioned above while also adding a Closing Disclosure as well.
The Closing Disclosure form is five pages that detail important information about the mortgage loan you choose. The form includes your loan terms, monthly payment projections, as well as fees and other closing costs needed to obtain your mortgage loan.
Lenders must provide you with the Closing Disclosure a minimum of three business days before you close on your mortgage loan. This period is meant to give you time to compare the final terms and closing fees with those forecasted in the lender’s Loan Estimate you previously received. You can use the three-day window to raise questions or concerns with your lender before signing for the loan.
How to Read the Loan Estimate Form?
The Loan Estimate is divided into three sections that deliver clear explanations of the costs associated with a mortgage loan.
- First section: Loan term information.
It lists the loan amount, interest rates and the monthly payment plus mortgage insurance and interest (PMI).
Next to each item is a box indicating yes or no as to whether the amount can rise after closing. The section also reveals whether or not prepayment penalties or balloon payments apply to the loan.
- Second section: Payment-related figures and facts.
Projected payments as well as how much the payments will be when PMI is no longer required. You should be able to see estimates of taxes, insurance and assessments.
- Third section: Closing costs.
This part of the document shows a total of all closing costs and a breakdown of the origination charges. It shows what you can shop around to reduce your closing costs and what you cannot shop for.
You’ll find details of other costs such as prepaid homeowner’s insurance and property taxes. Finally, the form gives you important information about the “estimated cash to close,” which is the combination of the closing costs and the down payment.
Do Lending Estimates Hurt Your Credit Score?
Generally, receiving multiple Loan Estimate forms shouldn’t hurt your credit as long as you get them all within a short time window, such as 30 or 45 days. Multiple mortgage credit inquiries within a short period of time may be seen as a single inquiry, and should not impact your credit scores greatly.
Remember, the lender does not approve your loan when they send you the Loan Estimate. They merely provide you with the terms you will receive if you proceed with the loan. If you do formally apply for a mortgage loan, the lender will require additional financial information from you at that time, and another credit pull will likely be necessary.
The Bottom Line
The Good Faith Estimate was a letter that lenders gave to potential borrowers in an effort to be transparent about the terms of home financing. The successor to the GFE, the Loan Estimate, also aims to be transparent while simplifying the process.
With a quick look at your Loan Estimate form, you should be able to assess the terms of your loan, including if your interest rate is locked or adjustable and whether or not you’ll have to pay for private mortgage insurance.
The information is laid out in an easy to understand format. You can download and view both the Good Faith Estimate and the current Loan Estimate form at the CFPB website.
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