Good Faith Estimates and the Impact of New Guidelines

Good Faith Estimates and the Impact of New Guidelines

 The modified version of the homebuyers Good Faith Estimate is now in effect but will the impact become negative or positive?

After home buyers have searched and found that perfect home for their family their chosen mortgage lender must provide a Good Faith Estimate that details which costs they will be responsible for paying during settlement. In the past, lenders have chosen how they organize and provide this information to the homebuyer but now the information and forms utilized have become standardized.  As of January 1st of this year the government changed the rules on what kind of information home buyers needed and when they’re given their Good Faith Estimates (or GFE).

The major change is that the Good Faith Estimates must be given to the homebuyer within three days after a loan application is made and incorporates an estimate of loan fees, title charges, reserves, and other charges so that the home buyer can shop around and make an informed choice. Now in theory, this is what the Good Faith Estimate is supposed to do.

So why the regulation of Good Faith Estimates?

The previous system of Good Faith Estimates had no way to hold lenders accountable for how accurate their “estimates” turned out to be. Many lenders simply did not provide a good estimation of settlement costs and instead used the Good Faith Estimates to low-ball other lenders in order to attract more customers. Unfortunately, due to the fact that these “estimations” weren’t rough calculations of what the actual closing costs would be but instead deliberate misrepresentations of the actual costs, many home buyers were left with hundreds or thousands extra in closing costs. Up until now lenders have not been held accountable for their unscrupulous actions and the inaccuracies of their GFEs.

As of January 1st lenders are now required to use a standardized form designed by the Department of Housing and Urban Development which requires them to provide accurate estimates of costs.

The lender-related fees must be completely accurate from GFE to closing; while the other fees that the lender has no control of must be within an additional 10% of the estimated costs or the lender has to absorb the difference. The idea is that lenders have to be upfront about their fees and must accurately disclose the other closing costs.

This new concept seems well thought out and a positive reinforcement for the homebuyer.  Many lenders feel everyone is being penalized because of  unscrupulous lenders who were low-balling clients into buying their services with inaccurate estimates? 

The goal was to have standardized, simplified forms so buyers could compare oranges to oranges with different lenders.  However, it will be interesting to see what effect the underestimating penalty will have on closing costs and interest rates.  Buyers may expect huge quotes for closing costs and interest rates.  If costs and interest rates are lowered, the lenders will not be under any obligation to lower the costs per the new Good Faith Estimate.

There are always minor scrapes and bruises when purchasing a home; that is why you must enter into this with a knowledgeable and diligent real estate agent by your side.  Make sure your Real Estate agent is knowledgeable in Home Financing.  Take it slowly and utilize your real estate agent.  Rule of Thumb:  If it is too good to be true, IT IS.