The basic definition of GFE (Good Faith Estimate) is simply an estimate or approximate cost illustrating your monthly fees, closing rates and other settlement costs associated with a home mortgage loan. The purpose of this blog is to “expose” the Good Faith Estimate or Itemized Fee Worksheet so that you see exactly how escrow determines the “bottom line” for you the borrower. It is important to be an “educated homebuyer” and I want my clients to thoroughly understand what goes into a real estate transaction from fees, payment, funds to close, credits, and even understanding their mortgage statement that will soon arrive. Click here to view and print the “example” GFE as you read along (helpful).
For the sake of this presentation, I am using a FHA purchase in the amount of $378,000. The borrowers are getting the seller to pay their closing costs, and in this case, I asked the Realtor that negotiated on behalf of my borrowers to ask for 3.25% in seller concessions to pay for their entire closing costs. The reason why I ask my Realtors to negotiate 3.25% in closing costs, is to account for the required “Estimated Reserves/Prepaid Costs” which I will get into in a minute. For now, let’s start at the top of the GFE.
In my opinion, the most important part of the GFE is the first section, Section 800: Items Payable In Connection With the Loan. In this section, I advise my borrowers (if they are shopping around) to pay close attention to certain fees, often called “junk fees”. Personally, I am very conservative in fees, I charge a 1% loan origination fee, our bank’s processor charges $495, and our bank’s underwriting fee is $895. Other than that, there are no other fees charged here.
Moving down to section 804-817, you will see a lot of options for additional fees. The two main items that should be filled in this section should be the Appraisal Fee and Credit Report Fee. If the property requires a pest inspection or flood certification, those fees should be noted, but other than those, the rest are rarely addressed.
Jumping back up to the top right, sections 1100-1309 detail all 3rd party title and escrow related fees. These fees are typically set in advance and noted on the GFE by our loan processor Naomi calling title and escrow for their individual fees (the title and escrow companies are pre-determined and noted on the Purchase & Sale contract by the listing and selling agents).
The most complicated part of the GFE to explain are the Estimated Reserves and Pre-Paids Sections. Section 900 – Items Required By Lender To Be Paid In Advance, is broker down and explained as follows:
– (901) Interest to be paid for the remainder of the month (so closing near the end of the month will save money in pre-paid interest)
– (902) FHA Upfront Mortgage Insurance Premium (1% of the loan amount). Although this fee is identified here as a cost, it is typically financed into the loan and NOT considered a part of the borrowers total closing costs.
– (903) Homeowners insurance – FHA requires that 12 months insurance is pre-paid in advance. This money is placed into a reserve account and typically is refunded to the borrower when the home is sold, paid-off, or refinanced. The purpose of FHA requiring this money to be pre-paid is to make sure the home stays insured in the event of the borrower defaulting on the loan.
-(909) Property Tax Due At Closing – FHA requires 6 month’s worth of property taxes to be pre-paid, again, insure that in the event that the borrower defaults, that property taxes are paid during the initial foreclosure process.
Once the borrower closes on the purchase, located on the monthly statement mailed to the borrower you can find a section called “Escrow Balance” to track the taxes and insurance that was pre-paid. Like I mentioned earlier, the borrower will be refunded that “Escrow Balance” once the mortgage is refinanced or paid off.
The next section, Section 1001: Reserves Deposited With Lender is a breakdown of how the initial deposit in the escrow account is set-up for managing that the taxes and insurance is paid on a monthly basis. As you scroll down beneath to the left, you will see a section titled, “Total Estimated Monthly Payment”. Here you will see a detailed breakdown of the monthly payment, and that included taxes and insurance. In section 1001, the initial or upfront deposit of 2 months insurance and 2 months taxes is the starting point for creating a ledger to account for the monthly taxes and insurance getting paid to the insurance company (once/yr) and to the county (twice annually in Oct and April). PLEASE NOTE: The initial deposit of 2 months taxes and 2 months insurance for example can fluctuate depending on the time of the year the transaction closes (closer to or further from Oct or April).
The bottom section of the Good Faith Estimate is intended for borrower to understand exactly what their payment is going to be and exactly how much money they are going to be required to bring to closing. I make a commitment to my borrowers in that, when I quote a total monthly payment on a GFE or funds due at closing, I stand by those numbers, they are never higher than I quote.
Lastly, the final part of evaluating the Good Faith Estimate is the reconciliation of all fees and credits of the entire Good Faith, and coming up with a bottom line – “Cash from Borrower”. From the bottom line, you can work up from there to see how the credits and fees make up the total funds to close the purchase.
For more questions on Closing Costs, evaluating a Good Faith Estimate, or more information on working with me and my Team, please email me at email@example.com or message me below, and I will be happy to talk with you!