Understanding a Good Faith Estimate

Getting educated about the home buying process should be the first step when determining to buy a home.

But thoroughly understanding the many aspects of financing a home can be helpful when a lender discusses the loan application.

The most important part of a loan application is understanding the loan program and the interest rate which will be financing a property.

A lender or mortgage broker should breakdown the amortization schedule as well as the fees associated with the loan, these fees are known as “closing costs.”

The Good Faith Estimate (GFE) is the overall breakdown of the fees, these fees vary from lender to lender but are a standard in the mortgage industry.

All mortgage brokers charge an origination fee; this fee is usually no more than one percent of the total amount of the loan.

The origination fee is where the lender or the broker makes his share of the loan for the work involved.

After this fee, the lender or broker has no control over the costs which will be associated with the loan, and only has the ability to genuinely estimate the costs which follow.

The appraisal fee can either be added into the loan or the lender can accept it up front to guarantee the funding of an order just in case the appraisal falls short of what is needed to finance the home.

The processing fee, underwriting fee, wire transfer fee, and credit report are fees which involve the approval process of the loan such as reviewing the file, writing conditions, and pulling credit from a credit bureau.

Furthermore, title is determined by the seller’s real estate agent for a purchase (if you are refinancing a current loan the borrower or the mortgage broker can determine where title goes).  

Other title fees include the closing fee, title insurance, and sometimes smaller fees such as notary fees and document preparation. All of these fees vary but are standard in the GFE.

A home buyer should not be startled by the costs of a GFE, but should understand that the home buying process involves the work of others to ensure the protection of the home buyer.

After title, there are recording fees with the county and state which are a one-time fee.

Moreover, there are other items that are required to be paid in advance to ensure the lender which will be servicing the loan that the borrower will pay back the mortgage.

These funds include interest from the closing date to the beginning or end of the month from which the home owner occupies the property, pre-paid hazard insurance (only if there is no HOA) and pre-paid taxes.

Most importantly, after reviewing the GFE the lender has three days to disclose this document to the borrower, and the lender must disclose yield spread too. Yield spread is paid to the broker for selling the lender’s interest rates.

Closing costs will always be associated with buying a home and will always need to be paid in full regardless of the acquisition of the property.

In any case, it is important to understand the costs involved with the loan stated in the GFE, and most importantly why these costs have to be paid.

Visit our financing page to learn more about your Colorado Home Loan.