Good Faith Estimate

The lender provided us with a Good Faith Estimate.  This is a standardized form promulgated by the US Department of Housing and Urban Development.  This is a 4 page document lenders are required to provide loan applicants. 

The purpose of this document is to give "you an estimate of your settlement charges and loan terms if you are approved for this loan."  Since all lenders provide you with this form, it makes it easier to shop for the best loan for you.*

Important Dates: The top portion of the first page contains a summary of important dates relating to your quote.  These dates include:

• The date the interest rate is available through (ours was the same day it was provided to us).  After this time, then interest rate, some of the Origination Charges, and monthly payments can change until an interest rate is locked in.
• The date the other settlement charges is available through (our was two weeks from the date the document was provided).
• The date you must go to settlement to lock in your interest rate.  Traditionally, this is 30-60 days out.  Since we are building our home, we are not able to lock in our interest rate yet.
• The number of days you must lock in your interest rate before settlement.  (15 days for us).

Summary of your loan: Next is the most important part of the document: the summary of the loans.  This section attempts to cut through all the fluff and provide you will the core numbers. 

The FHA limits the amount that can be borrowed based on where the property is located. In Texas the limit ranges from $271,050 to $288,750 and corresponds with the cost of housing in each county.  The limit in Travis County is $288,750.

The loan terms is the length of time you will have to pay off the loan.  Traditional terms are 15, 20, 30, or possibly even 40 years.  However, 30 years is the standard.  The longer terms result in lower monthly payments.  However, the borrower will end up paying more interest than they would with a shorter term loan with the same interest rate.

The initial monthly amount owed, it what you can expect to pay each month.  This number includes principal, interest and mortgage insurance.  However, don't be fooled.  This number does not include taxes, HOAs, or escrow payments the lender may require.

Then there are a series of yes and no questions. These questions outline what will happen in the future.  (1) Can you interest rate rise? Currently, interest rates are historically low, so if your interest rate can rise (you have an adjustable rate mortgage (ARM)), then it will. (2) Even if you make payments on time, can your loan balance rise?  (3) Even if you make payments on time, can your month amount owed for principal, interset and any mortgage insurance rise? (4) Does your loan have a prepayment penalty? The advantage to paying off your loan early is that you are paying less interest.  But, if there is a penalty for prepayment, you may be worse off if you try to pay it off early.  (5) Does your loan have a balloon payment?  A balloon payment is a large lump sum due at the end of the loan -- yuck!

Escrow Account Information:  An escrow account is an account held by a neutral third party.  For mortgages, an escrow account is typically used to hold funds for paying property taxes or other property-related charges.  This gives the lender some assurance that the property taxes on the property will be paid.  If you have an escrow account (and most likely you do), you will be required to pay additional money each month which is held in escrow.

Summary of your Settlement Charges:  At the very bottom of the first page, there is a summary of your settlement charges.  Adjusted Origination Charges + All Other Settlement Services = Total Settlement Charges.  These charges are broken down on page 2 as follows:

Adjusted Origination Charges:  This is the cost of getting the loan, plus any points you may choose to purchase (see below).

• Loan Company's origination charge:  this is the charge for doing the work to get the loan for the borrower.
• Points for a specific interest rate:  There are two types of points you can purchase: Discount Points and Origination Points
• Discount Points reduces your interest rate.  Typically, you pay 1% of the total loan in exchange for a .25% lower interest rate.  So, if the loan amount is $1,000, then one point would cost $1,000.  This translates into lower monthly payments., but higher settlement costs. Also, depending on the length of time you intend to live in the house, you may actually spend more money when you purchase points.  If you wanted to reduce a 5.25% loan to a 5.00% on a $100,000 fixed rate loan, then it would take you 63 months (5.4 years) to break even.  Your monthly payments would decrease by $15.28 per month.  So if you are only planning on living in the house for 5.4 years, you should not buy the points.  However, if you plan on living in the house longer than 5.4 years, the points are worthwhile. Here is a quick and dirty calculator as well as one that is more detailed.  Discount points are also tax deductible.
• Origination Points reduce the amount of cash required at closing, but it increases your interest rate.  This rate is not set in stone and is negotiable.  Origination points are not tax deductible.

Charges for All Other Settlement Services: These are charges (both required and optional) associated with purchasing your home. Some of these charges will ultimately be paid by the seller, but that generally depends on the terms of your contract.

• Required Services Loan Company Selects:  These are charges that you must purchase to complete the settlement and you do not get to choose who provides them.  I have listed the prices we are being charged for your information:
• Appraisal: $400.00
• Credit Report: $60.00
• Flood Certification: $15.00
• Up-Front Mortgage Insurance: $6,496.85  (this is charged unless you put down 20%)
• Tax Services Fee: $120.00
• Survey: $385.00
• Final Inspection: $100.00
• Title Services and Lender's Title Insurance: $793.00
• Owner's Title Insurance (optional): $2,034.59
• Required Services that you can shop for:  Pest Inspection
• Government Recording Charges: $124.00
• Transfer taxes: $0
• Initial Deposit in Escrow Account: $1,742.31
• Daily interest charges: $40.4445 for 10 days = $404.44 (this is the daily interest rate for our loan from the day of our settlement until the first day of the next month or the first day of our normal mortgage payment cycle)
• Homeowner's Insurance: we are currently price shopping, but the price quotes range from $450 to $1,067)

Charges that can change:  Until you lock in your loan, some, but not all, of your settlement charges can change.  Here is the breakdown:

Tradeoff Table and Shopping Cart:  At the bottom of the third page there is a tradeoff table that outlines the same loan with either lower settlement charges or the same loan with a lower interest rates (due to points).  Additionally, there is a blank for you to write in for a side-by-side comparison to compare GFEs from different loan originators.

* We have only applied for a loan from one lender.  In our contract with the builder, the builder agreed to pay our closing costs, up to 4% of our purchase price, if we used the lender they have partnered with.  Typically, the buyer's closing costs are approximately 4% of the purchase price, but everything, and I mean everything, is negotiable.  Our builder typically agrees to pay closing costs up to 2% of the purchase price.  However, since they could not guarantee the house would be completed in time for use to get the $8,000 first time home buyer tax credit, we negotiated an additional 2%.