Credit Card Center Advertiser Disclosure†
09-15-2010 03:04 PM
As people applying for mortgages on or after 1/1/2010 have realized, there is a new format to your Good Faith Estimate. It is no longer itemized line by line like the old format (still contains relevant info, some of which won’t be repeated in this post), but instead several like fees are grouped together. All the same fees from the old GFE are still being charged, they are just labeled differently. The new Final HUD-1 format has changed as well, and shows even more helpful info (including a breakdown of costs and a corresponding “map” to the GFE that you were disclosed with, but this post is about the new GFE.
You can view the new GFE in it’s entirety at http://www.hud.gov/offices/hsg/ramh/res/gfeform.pdf (new Final HUD-1 at http://www.hud.gov/offices/hsg/ramh/res/hud1.pdf). The new GFE “seeks to balance the borrower’s interest in receiving an accurate GFE early in the application process to enable the borrower to shop effectively, with the lender’s interest in maintaining flexibility to address the many issues that can arise in a complex process such as loan origination”. The new GFE had been years in the making, and finally back in November of 2008 a “Final Rule” was put in writing regarding it and the effective date is any new application taken on/after 1/1/2010. That Final Rule can be found at http://www.hud.gov/offices/hsg/ramh/res/finalrule.pdf. That .pdf is 86 pages long and is the basis for understanding the nuances of the new GFE; this post is to point out what I believe consumers are most concerned with based on experiences and observation.
The new GFE (commonly called the “2010 GFE” or “New GFE”) has several advantages over the old GFE, as well as a few omissions of helpful information often on the old format GFE.
The first thing that most people notice is that it no longer calculates your “estimated funds to close” (or if you are getting cash back, your “funds to borrower”), that figure is now only represented on the “Details of Transaction” (often on) page 4 of the Uniform Residential Loan Application (URLA form 1003), it used to be both on page 4 of the 1003 as well as on the bottom of the GFE, but the new GFE is just about the terms of the new mortgage. The loan originator may also choose to provide a more detailed breakdown such as a “Funds to Close Breakdown” disclosure of some sort, but it’s always shown on page 4 of the 1003 (some software puts the Details of Transaction on page 3).
The new GFE shows some costs that may be covered by the seller, such as transfer taxes and an owners title insurance policy (which depending on the contract, may be a buyer/borrower charge). It also doesn’t show any seller closing cost credit or earnest/initial deposit credits that have already been put into escrow (which are all still listed on page 4 of the 1003). I’m sure this is part of the reason it doesn’t include the “estimated funds to close”/”funds to borrower” figure.
Secondly, it no longer has a signature/date spot for the borrower to sign. However some originators will provide an additional page called “Acknowledgement of receipt of GFE” to have something in writing from the borrower confirming they have received the GFE. That acknowledgement form isn’t required by HUD, but may be required by the originators internal compliance department.
In my opinion the best part about the new GFE is that it makes loan originators accountable for initially disclosing accurate fees, not only their fees but 3rd party fees as well.
There are charges that cannot increase, which are “Our origination charge”, “Your credit or charge (points) for the specific interest rate chosen”, “Your adjusted origination charges”… which are all lender/broker related items… and “Transfer taxes” (which often are all seller paid, but some areas have the buyer paying a portion of them too).
There are charges that in total cannot increase more than 10%, which are recording charges, appraisal fee, tax service fee, flood cert fee, mortgage insurance premium (for those loans which have an upfront mortgage insurance/guarantee/funding fee cost), and title/escrow/closing attorney charges (including owners title insurance policy).
There are charges that can change entirely (no tolerance), such as the initial deposit for your escrow account, interest per day up to when the mortgage payments start covering interest, homeowners insurance, and that’s usually it.
Another great part of the new GFE is that it shows you how long the interest rate & originator charges are good for, how long the estimate for other settlement charges is good for, how soon after you lock in your interest rate you must go to settlement within, and how many days before settlement must you lock your interest rate in for.
In another section it goes over existing staples such as loan amount, interest rate, and monthly payment (principal & interest & mortgage insurance, not taxes/insurance), but then it also adds helpful info on if the interest rate can rise (such as with an adjustable rate mortgage), if you make your payments on time can the mortgage balance increase (such as on a negatively amortized loan), if you make your payments on time can the monthly payment increase (such as with an adjustable rate mortgage), and does the loan have a prepay penalty or balloon payment, and if so, how much and when.
In another new section it also informs you if an escrow account is required.
The new GFE, like the old GFE, is required to be sent to you within 3 days of application – however HUD has clarified what constitutes an application, and it requires 6 items: the borrowers name (1), the borrowers monthly income (2), the property address* (3), the amount of the mortgage loan (4), the value of the property (5), and a credit report obtained by the loan originator (which requires a social security number) (6). When refinancing, item #3 is known, and after going through the loan application is when the 3 day clock starts ticking on when they need to send out the application & disclosures (including the GFE) - remember you do not need to receive it within 3 days, the originator just needs to send it out within 3 days.
* The requirement of a property address makes it difficult to get a GFE for purchase transactions when there hasn’t already been a property identified/under contract. Since no address is available, instead the borrower who is seeking estimates for a purchase of an unknown property will be given an “Initial Fees Estimate” which looks identical to the old format GFE (see the link at the beginning of this post) except for it won’t say “GFE” on it, it’ll say “Initial Fees Estimate” instead. Keep in mind this Initial Fees Estimate is non-binding, however loan officer who is of good character should make that Initial Fees Estimate as close to as accurate as possible.
09-15-2010 03:05 PM
I’ll go over the “Important dates” in more detail. #1 is the date that the interest rate is & originator charges are good for, if the interest rate isn’t locked it’ll say “N/A” since interest rates have the potential to change at the drop of a hat, if the interest rate is locked this will be the day the interest rate lock expires. #2 is the date that all other settlement charges are good for, which has to be at least 10 business days from the date of the GFE. #3 is how many calendar days after locking in the interest rate you must go to settlement (this is the amount of days your interest rate is locked in for). #4 how many calendar days before settlement must you lock the interest rate in (often 3-7 days).
So if your interest rate is locked at the time of application, you should likely only ever receive 1 disclosed GFE for the entire process… but if you are floating your interest rate at application, and then choose to lock it in later, you should get a new GFE with the locked in interest rate terms, within 3 days of locking the interest rate in.
Summary of your loan and Escrow account information is pretty clear & self-explanatory.
Summary of your settlement charges is the total of all settlement charges, including lender/broker/title/escrow/closing attorney/title insurance/transfer taxes, etc.
09-15-2010 03:11 PM
The first part is the most complicated I’d say, as previously on GFE’s this section was broken down into individual underwriting, processing, funding, doc prep, origination points etc. Now it’s just “Our origination charge” (#1). So if your loan amount is $100,000 and are paying a 1% origination fee, an $800 underwriting fee, a $500 processing fee… then the total would be $2,300 in “Our origination charge”. However if you are also paying a 1% discount point to get the rate listed on page 1 of the GFE, then section #2 would appear as below, bringing the total of Section #1 & #2, “Your Adjusted Origination Charges” to be $3,300. This is called “Block A” and corresponds to Block A on the first page of the GFE.
This section A has created a big change for mortgage brokers (but not lenders). Now mortgage brokers must credit all “yield spread premium” to the borrower. Yield spread premium (YSP) is a commission that is paid to them from the lender they are brokering it to, the higher the interest rate, the more the YSP, at lower rates the lender will charge the broker, which the broker would typically pass on to the borrower as a “discount charge”. In Section #2 the 2nd box would be checked, and an amount (the amount of the YSP) would appear there. In order for mortgage brokers to make that yield spread premium back, they need to charge the borrower for it, and this is done by increasing Section #1 “Our origination charge” by the same amount of as in #2. This ends up being a wash, as the “Your Adjusted Origination Charges” would show the math, such as:
For the same exact loan, but going through a lender, it would look like:
Both Adjusted Origination Charges are the same.
Lenders do not need to do this because they are making the mortgage with their own money (banking), and even though there is a commission paid to the loan originator, it is internal and could be based on several factors… but when you obtaining a brokered loan, the entire amount the mortgage broker is making is disclosed. Most brokers have been disclosing their compensation for quite some time now, but only with the new GFE has it become mandatory.
At closing the figures in section 1 & 2 cannot increase from the GFE except for in 1 situation – a “changed circumstance”.
Now there are circumstances which the “our origination charges” can change, these are aptly named “changed circumstances” – these include but are limited to: loan amount & home value change, floating the interest rate to locking in the interest rate, interest rate lock extension, loan program (FHA to conventional etc) or loan term change (15-year to 30-year, etc), adding/removing a borrower, escrow waiver charge (in most states lenders charge a slightly higher rate or “escrow waiver” fee if you do not set up an escrow account), “Act of God, War, Disaster or Emergency”, or if additional services are requested that couldn’t reasonably be foreseen when the initial application was taken (such as an appraisal review, a 2nd appraisal, an attorney trust review fee, etc.).
The next sections I’ll go over are 3 through 11.
#3 are items that the originator selects, such as the appraisal, flood certificate provider, and credit report.
#4 is the total of all escrow/title/closing attorney charges, except for the owners title policy.
#5 is that owners title policy.
#6 are required services you can shop for such as pest inspections, home inspections, etc… this section is commonly blank.
#7 are government document recording charges, for the deed, mortgage, etc.
At closing, sections 3-7 collectively cannot increase more than 10% than the GFE.
#8 are the state/county/city transfer taxes that the seller and/or the buyer pays. At closing this cannot increase from the GFE.
#9 is the estimate for how much would be needed as the initial deposit into the escrow account (if required), #10 is the daily interest charged until the mortgage payment starts covering interest, and #11 is the annual premium for the homeowners insurance.
Block B is totaled at the bottom, and then Blocks A + B are added up, again matching the 1st page of the GFE.
09-15-2010 03:11 PM
The information on page 3 helps you understand and evaluate the numbers from pages 1 & 2. It also has a “tradeoff table”, which currently isn’t required for a loan originator to lay out 3 different options (although it appears in April of 2011 this may become a requirement), but you may ask for it to be.
09-16-2010 10:11 AM
Thank you, Shane, for this update.
I've locked this thread and floated it to the top of the board for everyone to see. If anyone has questions about his/her own GFE, please start a new thread so that specific answers to your questions can be provided.