What Is a Good Faith Estimate (GFE)?
A good faith estimate (GFE) is a document that outlines the estimated costs and terms of a reverse mortgage loan offer, enabling borrowers to comparison shop among different lenders and choose the deal that best fits their needs.
Under the Real Estate Settlement Procedures Act (RESPA), lenders were required to provide consumers with GFEs within three days of a regular mortgage application. Since October 2015, GFEs are applicable only to individuals seeking reverse mortgages, whereas loan estimate forms are utilized for other types of home loans.
Key Takeaways
- A good faith estimate (GFE) details a fair assessment of the expected fees, costs, and terms associated with a potential mortgage.
- GFEs are now exclusively for reverse mortgages, while loan estimate forms cover other home loans.
- Borrowers must receive GFEs within three business days of their application.
- It’s beneficial to shop around and acquire multiple estimates before choosing a loan or a lender.
- The costs noted on the form are only estimates and may not always prove to be accurate.
How a Good Faith Estimate (GFE) Works
A GFE allows borrowers to compare offers from various lenders and brokers. Once the document is received, borrowers can examine the breakdowns and contract terms and then indicate if they wish to proceed with the mortgage loan from that particular financial institution.
The form is written in clear language to help consumers better understand the terms of the mortgage for which they are applying. Borrowers can shop around and acquire multiple estimates before choosing a loan or a lender.
Since October 2015, GFEs now only apply to reverse mortgages: loans that enable seniors aged 62 and older to convert their home equity into lump-sum amounts, fixed payments, or lines of credit (LOCs).
The bank or financial institution must provide the homeowner seeking a reverse mortgage with a GFE within three business days of receiving their application. This form includes a comprehensive breakdown of all costs associated with the loan, such as taxes, title charges, closing costs, and administrative fees, as well as any other terms and conditions of the loan, including policies regarding repayment.
Consumers should beware of unscrupulous lenders who may add excessive fees for administrative items such as wire transfers. The official standardized estimate forms provide information about the approximated costs of taxes and insurance and how the interest rate and payments may change in the future. Borrowers may be charged a credit report fee before receiving a GFE, but they should not incur any additional fees to acquire the document.
Limitations of a Good Faith Estimate (GFE)
The costs noted on the form are only estimates, providing a rough idea of anticipated expenses for securing the loan and expectations before and after the loan comes due. Actual costs may be higher or lower when everything is finalized.
There are legitimate reasons for discrepancies between the GFE and the actual closing costs. For example, lenders may not fully know the costs of closing services provided by third parties, representing hidden costs of homeownership.
Good Faith Estimates (GFE) vs. Loan Estimate Forms
As mentioned earlier, GFEs now apply solely to reverse mortgages. For other types of mortgages, GFEs were replaced with loan estimate forms after October 2015.
Loan estimates, similar to GFEs, are an industry standard provided to mortgage applicants within three business days. They offer a breakdown of costs, terms, and conditions, thus enabling borrowers to compare costs across lenders.
Special Considerations
Borrowers applying for home equity lines of credit (HELOCs), manufactured housing loans that are not secured by real estate, or loans through specific homebuyer assistance programs receive truth-in-lending disclosures rather than GFEs or loan estimates.
Related Terms: Loan Estimate, Home Equity, Closing Costs, Interest Rate.
References
- Consumer Financial Protection Bureau. “What Is a Good Faith Estimate (GFE)?”
- Consumer Financial Protection Bureau. "§ 1024.7 Good Faith Estimate".
