The new GFE
In October of 2015, a new Good Faith Estimate (GFE) was introduced to make closing costs and loan terms easier to understand for borrowers. This new document, also referred to as the Loan Estimate, replaces the previously used GFE and Truth In Lending (TILA) statements.
A Change in Rules for Closing Cost Disclosures
Rules around this new estimate and the related HUD-1 closing document, including how much time a borrower has for review, and how far in advance of a closing it needs to be made available, resulted in many lenders changing their promised closing timeframes. Closings that previously occurred in 2 – 3 weeks, now take 4 – 6 weeks, and the lenders usually blame the new GFE on this change. In fact, both the lenders and the borrowers now need to have time to review (or have professional legal support review) the documents to make certain that all related costs and loan terms are completely documented and disclosed. This ensures that the loan terms the borrower has agreed to, are the terms that show in the paperwork. In this way, the borrower is not surprised at the closing with a sudden increase in closing costs, and will not have to wait until the morning of a closing to know how much money they will need to purchase their home.
What Is Included in Closing Costs?
Closing costs include a number of items that are directly related to the loan, the home you are buying, and the legal work done to prepare all the documentation needed to legally bind a borrower to repay the loan being given. Items can include:
- Origination Fees
- Application Fees
- Points
- Attorney fees
- Title Insurance
- Inspection Fees
- Appraisal Fees
- Transfer taxes
- Your initial deposit
- Any remaining deposit
What Are Prepaids?
Prepaids are amounts that are being paid up front to get you started with your new home. Also referred to as escrows, they’re the funds set up in advance so that when bills come in, the lender will be able to pay them. Specifically, escrow prepaids are established for taxes and insurance if the lender is requiring those be paid with your mortgage loan. For higher LTV loans this is a common requirement. But if you like to pay your own bills and don’t want the lender holding on to your money, you can ask to waive escrow. If you are making a sizable down payment this may be allowed. In all cases, prepaid interest will be listed on your GFE and HUD-1. Since you usually close ahead of a loan payment being made, you have to pay “prepaid interest” to bring you up to the next reasonable mortgage payment, for example. This is usually outlined as a number of days of prepaid interest. It may be estimated with your GFE, but on the HUD-1 provided at your closing, you will see the actual amount of interest you are paying in advance. Other items that are prepaid can include:
- Taxes
- Insurance
- Homeowner Association Fees
- Private Mortgage Insurance
Other items that can appear on a HUD-1 but not usually on the GFE include amounts being credited between the buyer and the seller for work needing to be done, furniture or other items being included in the sale, credits for work a buyer has done to the property (in the case of a rent-to-own arrangement), etc.
HUD provides an actual copy of a GFE which you can use to walk through all the costs involved in a home closing, and from which to develop questions for your lender before you meet with them. Mortgage closing paperwork can be very overwhelming, so having a chance to review it ahead of time will give you plenty of opportunity to ask questions and get comfortable with what you’ll be signing at your closing.
Don’t Overlook the Expiration Dates
Good Faith Estimate documents have an expiration date. Watch for the expiration date of the estimate itself, and the disclosed expiration of any rate you may have locked in. Make certain to be aware of those dates, and get your paperwork in to your lender as quickly as possible. If you run past the expiration date you could lose your rate, and the estimated costs of your closing could change.
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