Good faith estimates are a consumer's guideline for loan costs, fees, and interest rates. They are not a specific agreement between the lender and the borrower but the final loan should be intended to come very close to the terms, costs, and rate quoted.
The actual loan specifics could vary, for good or bad, from the good faith estimate. It is the equivalent of a repair quote from an auto mechanic wherein they don’t know the true cost until they open up the motor. A new revision to the law would require the final costs to be within 10% of the estimated ones. This is not in effect yet but would provide more assurance to the borrower that they will receive what was promised.
Prospective borrowers can compare mortgage lenders based on the loan amount, term, interest rate, and fees, using the good-faith estimate as a guide. Though lenders normally do not provide this document until a customer has applied for the loan, borrowers are entitled to ask for it beforehand and should avoid any lender that refuses to comply with such a request.
While some of these costs are negotiable, charges imposed by other parties, such as appraisal and credit report costs, cannot be adjusted. Some lenders might lowball costs on the good faith estimate or add them directly to the loan amount.
Use Good Faith Estimates to Eliminate Junk FeesBorrowers should first inform their lender or broker that they're looking to minimize transaction costs. Borrowers can use the good-faith estimate to negotiate the elimination of “junk fees” such as document preparation, processing, and other fees. Furthermore, borrowers should compare the good faith estimate with the actual settlement statement, making sure to question the lender regarding any inflated fees.
You have the right to change your mind about the loan.Borrowers whose refinance will inflate the size of their loan and those using a new lender have the right of rescission, which allows them to terminate the loan within three days of closing and receive all of their money back. When threatened with cancellation, many lenders will scrap junk fees in order to close the deal. Another option is to avoid dealing with closing costs altogether and go with a “no closing cost” loan. Typically these are an eighth to a quarter percent higher in interest rates.
The Future Direction of Good Faith EstimatesHUD and other organizations are currently talking about changing the model of good faith estimates. They are considering creating a system referred to as a guaranteed mortgage package. Most experts agree that the good faith estimate was a step in the right direction but not binding enough and still allowed some predatory lending practices to take place. The only solution for a loan consumer to protest the loan is to threaten to take their business elsewhere.
The guaranteed mortgage package is a new system, which is still in the proposal phase but could be an easier way to compare mortgages. In spirit, it would provide a single mortgage fee that could be compared across the board and would be as binding to the mortgage company as a legal contact. However, the reality is that there are still several pieces to this guarantee, the interest rate, and the services outside the package and optional services. Some services are not disclosed to the borrower and therefore do not permit comparisons to other loan options. The guaranteed mortgage package is a way to consider different mortgages that should make its appearance and should be useful in the future.
For now there are still some bugs to work out on this proposal making the good faith estimate the best solution for comparing mortgage packages.