BEWARE of the BAD Good Faith Estimate
The Good Faith Estimate Explained
| Understanding the NEW versus old Good Faith Estimate Form

Smart people know to shop a couple of different Mortgage Companies for the best interest rate and closing cost combination.

Shopping Estimates:

  1. Contact a couple of mortgage lenders and brokers
  2. Inquire about interest rates and programs. Ask the question "What is your interest rate for a 30-yr fixed?"
  3. Get a quote. Have it E-Mailed to you
  4. Go with the best deal.

Comparing the results:
You are refinancing a $200,000 30-yr fixed mortgage. We'll assume you have good credit and qualify for the loan. You've shopped 4 lenders, and here are the results:

Lender Contacted on Interest Rate Closing Costs
A Monday 5.250% $6000
B Monday 4.875% $8500
C Wednesday 5.500% $3800
D Friday 5.125% $6300
Which Lender offer did you take? A, B, C, or D

You feel great... You've shopped, compared, and apparently saved a lot of money on your home mortgage. Most smart people would have picked Lender D. Who did you pick?

CONGRATULATIONS - You just got screwed. You just paid more for your loan than you needed to. 

How did this happen? Easy! Shopping for a mortgage is complex at best -- even for the savvy previous homeowner. Daily rate changes, time sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest purchase any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who 'helps' in your transaction, and the obscure differences between 'rates' and 'fees.' It's no mystery that many buyers settle for a mortgage that exceeds their monetary means out of sheer exasperation!

Analysis of the different Good Faith Estimates:
A Contacted on Monday. The Loan Officer asked all the right question, and did a good analysis of your overall financial situation. Got accurate information, including escrow information for taxes and insurance. They offer a written satisfaction guarantee, and are a local company. At closing, your estimate matches perfectly to the final numbers.
B Contacted on Monday. Internet web site. You didn't actually talk with anyone. You used their online system to generate a estimate. Their system is actually giving you a rate bought down with discount points. Do you want to pay points? Their estimate is calculating incorrect tax and insurance numbers. You like the rate, but not the costs.  At closing, the numbers that can change on the new good faith estimate do, and by a lot.
C Contacted on Wednesday. The company is offering a "No Cost", or "No Lender Fee" refinance. They also under estimate you tax and insurance escrows. You like the low closing costs, but don't like the higher interest rate. You are smart enough to calculate how much more you will pay in excess interest over the years, and it is a lot more than you ever saved in closing costs. At closing, the numbers that can change on the new good faith estimate do, and by a lot.
D Contacted on Friday. The Loan Officer asked all the right question, and did a good analysis of your overall financial situation. Got accurate information, including escrow information for taxes and insurance. They offer a written satisfaction guarantee, and are a local company.  At closing, your estimate matches perfectly to the final numbers.

Minnesota Mortgage ApplicationI'm Confused. How did I get screwed?
In this example, clearly Lender A and Lender D are the good mortgage company choice. Lender D has a better interest rate, and his costs are only slightly higher, so you choose Lender D.

Why is this still the wrong choice? Because you compared estimates from different days. Interest rates can change daily, sometimes hourly. While Lender D looked good, you contacted him on Friday, and maybe rates dropped all week long. If you had contacted Lender A again on Friday, his rate would now have been 5.00%.

Wow, this is more complicated that I thought?
it is. That is why we suggest you stop shopping mortgage lenders solely by comparing Good Faith Estimates, and start shopping for a good mortgage lender. If you are working with a highly trained, dedicated Loan Officer who works at a great mortgage company, you don't have to worry about their estimate. Get more information on
how to shop mortgage companies.

Understanding The New Good Faith Estimate (GFE)

The Good Faith Estimate (GFE)
Since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD has actually changed the mandated disclosure form of the key loan terms and closing costs consumers pay when they buy or refinance their home. As of January 1, 2010, HUD will require, for the first time ever, that every lender and mortgage brokers provide consumers with a standard
Good Faith Estimate (GFE). For the longest time, there was no standardization in good faith estimates presented by Lenders when a loan application is made by a borrower. No standardization here means some lenders disclose a variety of information on the previous GFE while others do not disclose at all. In efforts to facilitate a better shopping experience for the consumers, HUD requires all lenders use the new standardized format for Good Faith Estimates effective January 1 2010.

This new estimate form is dramatically different than the current form, and will surely cause confusion and trouble with consumers used to reading the old form.

Print out and look at the differences. There is sure to be a steep learning curve for both customers and lenders alike.
View New and Old Good Faith Estimate
(Abode Acrobat Reader Required)

At first glance, the new standardized format of the Good Faith Estimate would appear easy to read, understand and digest by the average borrower. But not so quick... The new Good Faith Estimate form no longer gives a line by line detailed breakdown of your closing costs, rather it lists all the loan charges on the top, then title and escrow (settlement) charges, then government charges, then calculations for impounds for taxes and insurance. At the bottom it gives a summary of charges, prepaid items, etc. 
The NEW Good Faith Estimate is NOT an estimate of the total amount the borrower will need at closing. It only discloses the costs associated with getting the loan, whether the costs are paid by the consumer, lender, or some other third party. Consumers will now need to use the Details of Transaction section on the actual application (form 1003) or some other form from the lender to determine what they need at closing.

On the negative side, unlike the old estimate form, the new one does NOT give customers a bottom line - "cash to close" total. It does NOT list down payment, does not subtract any seller paid closing costs, does not properly factor in MIP (mortgage insurance premium) on FHA Loans or VA Loans (which is rolled into the loan amount), earnest money paid, or display if you are paying any discount points. All you get is one BIG number!

WHAT? The bottom line is what customers need to know. Without this very important information being on the standard form, lenders will now have to come up with their own "cash to close" disclosure form. This puts us right back to having no standardization??

LENDERS WON'T GIVE YOU AN ESTIMATE. Because the new estimate rules require the document to be binding, you are sure to end up giving a non-standard form to help you shop initail loans interest rate and closing cost numbers, and only giving you the mandated form later when the new compliance rules force tell lenders

While the governments attempt is honorable, this new form is actually LESS transparent to consumer. It will HINDER, not improve shopping. A BIG COMPONENT of the new GFE is a section of fees that can NOT change after the estimate is issued. There are many variables that could truly change the lenders costs after application. Without being able to adjust for these unknown items after issuing the estimate, lenders will surely now be forced to provide unsupported estimates listing OVER statements of costs to compensate for possible changes.

This new estimate form will also cause many customers to have an increased focus on APR. APR is almost completely useless as a shopping tool. Be sure to read my article "Choosing your loan with "APR" CAN COST YOU MONEY"

On the positive side, the new GFE now shows items which CAN NOT CHANGE after getting the estimate. This will ELIMINATE the low ball quotes many mortgage brokers used to fool customers. It shows the items that are allowed to change just a little, and the items which can change a lot (escrows).

The new Good Faith estimate - Page 1 

The new Good Faith estimate - Page 2

 The new Good Faith estimate - Page 3

The New Good Faith estimate Explained

Let's explain the top half of Page 1 of the new Good Faith Estimate (GFE) form.
Name, address, etc of both the lender and the customer. It also asks for a Property Address. The property address is important. There are different requirements if you don't have an actual property address. Obviously refinance transaction will have an address right away. If you are buying a home, you may or may not have an actual property address at the time the estimate is provided.

The "Important Dates" Section

Line 1: Lenders MUST list a date and time the estimate is valid. This is a stupid requirement, as lender will simply put the same date they are issuing the estimate UNLESS the interest rate is LOCKED at the same time. This is because interest rates change daily, and sometimes hourly. No one can guarantee what rates will be tomorrow.
Line 2: This lists how long the estimate COSTS are valid for. The costs must be valid for at least 10 days.
Line 3: How long is the rate lock valid.
Line 4: Because it take time to collect documents, get appraisals, then Underwrite and prepare your final documents, the lender will require you to LOCK your interest rate a set number of days BEFORE the scheduled closing. We anticipate most lenders will put about 14 days on this line.

The summary of the loan is displayed on the 1st page with answers about the loan such as:

(1) Can your interest rate rise? (Indicates if it is an adjustable rate mortgage)
(2) Even if you make payments on time, can the loan balance rise? (Indicates if it is a negative amortization loan)
(3) Even if you make payments on time, can your monthly amount rise? (Indicates if the account is escrowed or not)
(4) Does the loan have a pre-payment penalty?
(5) Does the loan have a balloon payment?

The new Good Faith Estimate - Explained


Lenders are held to a higher standard of accountability with the use of the standardized Good Faith Estimate. "Good faith" in the past will now be more of certainty, especially when it comes to the Lender charges. HUD requires that Lenders be sure to know how much they intend to charge their borrowers based on the information the borrowers provided.

The new Good Faith Estimate also utilize the Lump & Dump concept whereby HUD feels that the borrowers have been provided too much information in the previous good faith estimates. Items "A" on Page 2 of the GFE includes all origination charges. These items are no longer broken down into Loan Origination Fee, Processing Fees, Tax Service Fee, Funding, Doc Prep Fees, Broker Fees, Underwriting Fees, etc.

Line 2 of "A" shows if you are paying discount points to lower your interest rate, or if you are paying a much higher interest rate to offset (or lower) your actual closing costs. According to HUD, only section "A" is what the consumers should care about.

Section "A" of the Good Faith Estimate must be the same at closing (on the HUD-1 Settlement Statement). There is Zero Tolerance for any differences if the terms and conditions of the loan are the same. Should there be a difference, HUD considers this Breached Tolerance and this breach will be cured with a credit at the closing or a check to the borrower within 30 days of closing.

This brings Lenders to more accountability towards the accuracy of their good faith estimates to their clients, and should eliminate the BIG problem of under quoting may lenders used to capture your business.

Other considerations could be expected should there be changed circumstances on these No Tolerance items above (ie. Lender charges). A changed circumstance may include a new property address, new information not known by the Lender, or other information found not to be accurate initially.

There are other charges associated in purchasing the property. Appraisal, title services, etc. These items are found as part of "B" on page 2.

The similar lump & dump concept for Title charges in Section 3, 4, 5 and 6. These charges can deviate up to 10% on the HUD-1 statement - assuming that the borrowers services are initially identified by the Lender. The total of these charges of page 2 on the GFE constitutes the "B" total.

Along with the "A" total and "B" total, these costs add up to make the Total Estimated Settlement/ Closing Costs. However, this is NOT to be confused with Cash Needed for Settlement. Items A and B DOES NOT account for Seller's concessions (seller paid closing costs), property tax and Home Owner Association prorations, etc. Also note that nowhere on this new form does it actually provide you with those numbers. Your lender will provide that information on their own forms.

Page 3 of the Good Faith Estimate is also known as the "finishing touches" for the loan. It gives borrowers instructions on what cannot be increased at settlement, what may increase up to 10%, and what could potentially subject to change.

Finally, there is also a tradeoff table for borrowers to see the various choices as provided by the same lender. Same loan with lower closing costs, or the same same loan with a lower interest rate.

Last but not least, the new Good Faith Estimate also provides a section to allow borrowers to compare various loan offers in the Shopping Chart section. CAUTION: This section can be very misleading and actually CAUSE HARM to homeowners. Rates change everyday, sometimes hourly. Unless you get all your quotes on the same day within just a few hours, this section is meaningless. Be sure to read our section of shopping Good Faith Estimates.

All lenders have about the exact same costs for doing your loan - NO ONE can do your loan significantly cheaper than anyone else can. Anyone more than just a couple of hundred dollars cheaper than everyone else, or with a rate more than just a 1/4% lower on an estimate is something you should investigate further.

The Good Faith Estimate is only one part of your shopping equation. Picking the lender solely by the lowest rate or closing cost on your estimate can be a very costly mistake! A great rate on the wrong product is never a great deal.

Learn about our Lowest Rate, Lowest Cost COMBINATION Guarantee!

The OLD Good Faith Estimate

The OLD Good Faith Estimate form

The use of this new estimate form is MANDATORY and must be provided to customers:

  • Within 3 days of loan application.
    A loan application is deemed taken by a lender with the borrowers' names, social security numbers, incomes, estimate purchase value, loan amount, other information deemed necessary by lender and property address. This form must only be utilized if there is a specific property address.
    While home buyers have used the GFE to shop for lenders, they really can no longer do that. Without a property address, the lenders will come up with "preliminary" estimate forms, and only issue real Good Faith Estimates when compliance requires.
  • Without 10 days of GFE issuance.
    The GFE will be good for 10 days after the borrower receives it. The borrower MUST express an intent to proceed with the terms and conditions of the loan based on the GFE provided within 10 days business. After 10 business days, the lender is no longer bound by the issued GFE.

This is HUD's effort in facilitating consumer comparison shopping of Lenders. It is not the most perfect version out there but it is a much simpler method for an average consumer to understand. What this new GFE does not address is it does not specify the loan product (FHA, Conventional, VA, etc.) and it also does not inform the borrower the actual monthly payments in Principal, Interest, Property Taxes and Home Insurance (PITI). It only addresses the Principal, Interest and Mortgage Insurance (if applicable).  The lender will furnish that information on other documents.


By following these rules, you should always be able to make the correct apples-to-apples comparison:

  1. Always use a local lender, but never one with just one office (this automatically reduces your chances of being misled by about 90%). We have five offices in the metro area.

  2. Make sure you are dealing with a local lender who understands local closings. Internet Mortgage Companies are notorious for screwing up loans, under-estimating Good Faith Estimates, and giving misleading interest rate quotes. Although you may have found us on the Internet - We are NOT an Internet Mortgage Company! We are a Minnesota Based Direct Mortgage lender doing loans primarily in Minneapolis and St Paul Metro area with a web site.

  3. A couple hundred dollar difference in bottom line fees on an estimate is meaningless because of the variations in how lenders calculate costs. All estimates within a couple hundred dollars either way should be considered equal.

  4. Don't fall for "we don't charge for" statements. Nothing is free, and YOU always pay.

  5. Closing Costs / Lender Fee's. - Don't be fooled. DON'T call and ask "what is your interest rate?" Instead, TELL all the lenders you are shopping with what rate YOU want, then ask for a quote based on that rate. By asking in this manner, you eliminate 90% of the misleading games some lenders play in attempting to make their offer sound than everyone else.    

  6. NEVER pay anything right up-front. You may be asked to pay a credit report fee up-front. This is OK. You may be asked to pay the appraisal fee in the beginning. This is also OK, as long as it is AFTER they have your full application, and AFTER you have seen the Good Faith Estimate. NEVER pay non-refundable applications fees.

  7. Ask the lender for a WRITTEN "Good Faith Estimate (GFE)" of settlement charges to verify if they are willing to put their pricing claims in writing.

  8. COMPLETELY IGNORE any interest rate or closing cost estimate you see online. They are never EVER accurate. You must speak to someone!

  9. NEVER use an unknown lender who solicited you through the mail, or called you on the phone. These are by far the worst rip off, misleading, overcharging, predatory lenders that exist!

  10. Call or fax us with the other company's estimate. I will be happy to help you review them. If it is a GOOD, Good Faith Estimate - I'll be the first to tell you!

Mortgages Unlimited Minnesota
33 Wentworth Ave E, St Paul, MN 55118
(651) 552-3681

Member, Minnesota Mortgage Association

Search for homes for sale - for free

Mortgages Unlimited, Inc. NMLS # 225504. Joe Metzler NMLS # 274132