On page 1 at the top of the GFE, lenders provide basic information including their name, contact information, the borrower’s name, and property address. The next section of the GFE contains the basic information of the mortgage including loan amount, years, interest rate, and loan type.
The next section of the GFE states the sum of a borrower’s Principal & Interest portion of the monthly payment, and total number of payments to pay off the loan
TIP: The GFE is a vehicle for consumers to compare mortgage loans only. All consumers should note that the GFE does not state the property purchase price, only the total loan amount. The GFE focuses on loans and was designed specifically to help borrowers compare lenders and other closing costs, as well as simplify and make consistent all terms used for various fees.
TIP: The Taxes and Insurance are no longer estimated for GFE. As a result the new GFE does not state the sum of a borrower’s principal, interest, taxes and insurance, known as PITI. This is an important difference. In the past many GFEs provided the final PITI amount.
On page 2 of the GFE, the section at the top of the page covers a lender’s origination charge as well as any adjustment required for the specific interest rate chosen by the borrower.
TIP: One of the most important GFE charges to watch is the Origination charges, which can vary widely from lender to lender, and can be a considerable source of savings for the consumer willing to shop around.
The first section is “origination charge.” In the past, origination charges were typically a percentage of the loan amount and other fees associated with the mortgage were itemized. Now, all fees the lender is charging the borrower are bundled into this one section. This one charge could include processing fees, application fees, administration fees, underwriting, document preparation, wiring of funds, lender inspection, and other miscellaneous fees.
TIP: After new laws Lenders can only be paid once on a loan from a consumer, and all fees must be contained in the one origination charge. In the past, lenders were paid several different times on same loan, which was confusing to consumers
The second section provides either the credit or charge for the interest rate the borrower is receiving. At any given time, there is a specific rate lenders set as a base rate. The base rate is available to qualified borrowers. If a borrower wants to receive this base rate, the amount in section 2 will be $0. Any cost to receive the base rate must be included in the first section.
However, if a borrower wants to lower their interest rate, they can pay what are known as “points.” One point represents 1% of the loan amount. The payment of “points” will result in a reduced interest rate. However, a one-point payment will not automatically result in a 1% reduction of interest rate. In fact, most of the time, the reduction will be considerably less. The cost of interest rate reductions varies from lender to lender.
TIP: The decision to pay “points” to reduce your interest rate must be carefully considered. It can often take years for the monthly savings obtained through a reduced interest rate to cover the cost of the rate buy down.
The new GFE provides consumers with an excellent tool to compare interest rates offered by the same lender. On the third page of the GFE, there is a table that enables consumers to conduct a basic cost/benefit analysis for the decision to use the base rate, or pay for a lower interest rate.
Regardless of a borrower’s decision to remain at the base rate or change it, the “Our origination fee” section of the GFE falls into the “0% Tolerance” category. That means that if the corresponding section on the HUD-1 is higher than the GFE, the lender is responsible for covering the difference.
TIP: New laws are enforcing now more than ever that any GFE rates, or quotes must be accurate, and there is now ability to enforce lenders covering their mistakes for consumers.
On page 2 of the new GFE, consumers will find a section titled “Your Charges for All Other Settlement Services.” This section, shown below, includes all of the fees typically charged at the settlement of a real estate transaction.
Each line item in this section is totaled and presented in line B at the bottom of the table, “Your Charges for All Other Settlement Services.”
TIP: Settlement charges are one of the most widely varying costs for consumers. Consumers should be aware of local pricing standards for Settlement services and not pay lender mandated rates that are much higher than the local area standards. The consumer has the right to choose settlement providers, and lenders may not mandate usage of particular companies.
TIP: Settlement Services and Title Services are often the same provider in many states.
What a Lender Selects (Line 3) vs. What a Borrower Can Shop For (Line 6)
TIP: Services, vendors, and charges to the borrower will vary by lender.
The first section (Line 3) in this block is titled “Required services that we select.” The “we” in this sentence is referring to the lender. Services that the lender selects may include credit reports, appraisals, and mortgage insurance. In the event consumers elect to go with a given lender, they are required to use the vendors selected by the lender for the services listed in this section. Line 3 of the GFE is subject to the “10% Tolerance” level.
TIP: The 10% tolerance does not apply to any item in Line 6 in which the consumer chooses his or her own vendor.
Further down, Line 6 is a section titled “Required services that you can shop for.” This section could include services such as pest inspection and survey. Lenders are required to provide potential borrowers with a list of providers for each service that borrowers can shop for. The list must contain at least one provider for each service. If the borrower selects a vendor from the lender provided list, this box is subject to the “10% Tolerance” level. However, borrowers are in no way bound to select vendors from the lender provided list.
Although borrowers are entitled to select their own title service provider, HUD states specifically that title service is not to be included in the section “Required services that you can shop for.” Instead, title services and title insurance have their own dedicated sections.
Two sections dedicated to title services and insurance are sandwiched between the sections “Required services that we select” and “Required services that you can shop for.” As mentioned before, consumers can shop for these services. Line 4 and Line 5 of the GFE are subject to the “10% Tolerance” level only in the event the borrower uses the lender-recommended title provider. However, borrowers have the opportunity to select their own title provider who often times may be priced lower than the lender-recommended insurance company.
The section titled “Title services and lender’s title insurance” encompasses a number of fees, including settlement fees, title abstract/search fees, and deed preparation fees. These fees can vary widely across title companies. In addition to numerous closing costs, this section also includes the cost of a lender’s title insurance policy.
TIP: Many title companies will provide consumers with an itemized quote, breaking down all of the fees in the “Title services and lender’s title insurance” box.
TIP: Settlement Services and Title Services are often the same provider in many states.
HUD decided to include lender’s title insurance in this section because virtually all lenders require borrowers to purchase a lender’s title insurance policy. Owner’s policies are completely optional, but are commonly purchased due to their added benefit. An owner’s policy protects the owner of the property against claims against the title the same way a lender’s policy protects the lender. In many states, consumers save considerable money by purchasing owner’s and lender’s policies simultaneously.
TIP: When an owner’s policy and lender’s policy are purchased simultaneously on the same property, the lender’s policy is often sold at a significant discount. Each state has differing rate regulations that bring together all costs of settlement and title insurance.
Lenders require borrowers to obtain a homeowner’s insurance policy. Banks need to know that the value of the property is protected in the event of a fire, flood, hurricane, etc. A homeowner’s insurance policy will cover the cost of damage to your home if the root cause of the damage is covered in the policy.
TIP: Consumers should shop for homeowner’s insurance. The savings gained can grow significantly over the years the property is owned.
The type of policy a homeowner needs is very specific to the geographic area in which the property resides. Lenders will usually inform buyers of the types of coverage required. Also, purchasers should research any additional risks their property may have, and protect themselves against loss.
The last few items of the “Your Charges for all Other Settlement Services” section cover taxes, escrow accounts, and interest charges.
Line 7 is “Government recording charges.” These charges fall in the “10% Tolerance” box. This is a service for which you cannot shop. Various government entities set these fees and all people are obligated to pay them. This box has a tolerance associated with it because lenders have the experience and knowledge to provide consumers with an accurate estimate of these costs.
Line 8 is “Transfer taxes.” This box is subject to “0% Tolerance.” The “0% Tolerance” is used because transfer taxes are precise and lenders can easily calculate the exact tax that will be charged. Any difference between the amount on the GFE and the actual transfer tax on the HUD-1 must be covered by the lender.
Line 9 is “Initial deposit for your escrow account.” Some lenders require borrowers to establish an escrow account for property taxes and homeowners insurance. Every month, a portion of the payment a borrower makes to the lender is deposited in this escrow account. When property taxes or insurance premiums are due, the lender uses the funds in the escrow account to pay the amount due. All excess funds, due to overpayment and interest, are eventually returned to the borrower. The purpose of the initial deposit into the escrow account is to cover any time between the last collection of property tax and the date of the settlement.
Line 10 is “Daily interest charge.” This represents the interest charged between the settlement date and the date the mortgage amortization begins(typically the start of the following month).
On the last page of the GFE, consumers can find this “Shopping Chart.” This allows consumers to do a side-by-side comparison of the different loans they have shopped for and the settlement charges associated with each loan. Armed with this information, consumers will be more informed than they have ever been, and can feel confident that the loan they have chosen is the right one for them.