What is a Good Faith Estimate (GFE)?

The mortgage meltdown created by Wall Street's handling of the toxic subprime mortgage industry has been cathartic. New policies, including financial reform to protect consumers is underway and earlier this year mortgage reform created by the US Department of Housing and Urban Development (HUD) was put into effect. Lenders are now required to provide borrowers with a Good Faith Estimate." That change is only one to the existing system and was the first alteration to the existing policy in over 30 years.

Good Faith Estimates is one aspect of the program that have been created to protect consumers from accepting unfair mortgage terms and potentially save borrowers $700 in loan fees and costs. A Good Faith Estimate is a written estimate of the closing costs that a buyer will be responsible for. Lenders are responsible for providing the information to borrowers within three days of completing the mortgage application process.

Closing costs are part of the house purchasing transaction and lenders truly had no guidelines requiring written price quotes. Consumers therefore had difficulty gauging how much the expenses would be and all the complete terms of their potential mortgage loan. The new form requires lenders to clearly spell out the following terms for borrowers in order to simplify the task of comparison-shopping for a mortgage and the document must be issued within three days of receiving a borrower's application:

• Estimate of settlement fees (including origination fee and points charged up-front to reduce interest rate). Increases to the initial quote are limited to 10 percent.
• Initial loan amount or principal balance
• Total mortgage term reflected in years (not months)
• Monthly payment amounts
• For adjustable rate mortgage initial interest rates must be clearly denoted
• The possibility of an interest rate increases must be clearly defined
• Prepayment penalties need to be listed
• Balloon payment schedule
• If a mortgage rate adjustment needs to occur due to no fault of the lender (IE in cases of appraisal valuation) the lender must quickly inform the borrower change.

Borrowers and those who support consumer protection agree that a Good Faith Estimate is a step in the right direction, however there are Good Faith Estimate glitches that consumers need to know about. Mortgage columnist Dian Hymer warns that:

• "The GFE doesn't provide a complete and accurate account of the borrower's costs" as the space provided only allows for a lump sum to be entered.
• "Another shortcoming is in the way transfer taxes are disclosed," as all transfer taxes are merged and can create estimate problems for homebuyers.

Aside from these minor setbacks, the introduction of a Good Faith Estimate is making the task of understanding mortgage basics easier for first time homebuyers and repeat purchasers.

First time homebuyers need to remember that closing costs are part of the house purchasing transaction. Those expenses need to be added into the total amount of the mortgage loan to ensure that the purchase stays in budget.