A good faith estimate (GFE) was a form used by lenders given to mortgage applicants once they applied for a new home loan. The form provided a loan estimate that included a breakdown of the mortgage payments due and the charges associated with the loan. A good faith estimate provided borrowers the chance to compare the costs of a loan between lenders in order to shop around for the best deal.
The good faith estimate is no longer used in the lending industry; since October 2015, it is known as a loan estimate form.
What Is a Loan Estimate Form?
Starting in October 2015, the loan estimate form replaced the good faith estimate used for most mortgage loans as a result of the Truth in Lending Act. A lender or mortgage broker is required to provide potential borrowers with a loan estimate within three business days of receiving a loan application. If they don't, they are in violation of the Truth in Lending Act.
Borrowers applying for a home equity line of credit (HELOC), a manufactured housing loan that is not secured, or a homebuyer assistance program loan will not receive a loan estimate form. Instead, they get a truth-in-lending disclosure.
What Is a Truth-In-Lending Disclosure?
A truth-in-lending disclosure statement gives you the costs and terms that you are required to pay for a loan. Those important terms include:
- Annual Percentage Rate is the cost of credit as a yearly rate in a percentage.
- Finance Charge is the cost, expressed as a dollar amount, of the total amount of interest and certain fees you will pay over the life of the loan if you make every payment.
- Amount Financed is the dollar amount of the credit provided to you or the amount you are borrowing.
- Sum of Payments is the total paid at the end of the loan including principal amounts plus all finance charges.
The disclosure statement will also provide you with the number of payments, the monthly payment, any late fees, and whether you can prepay on your loan without a penalty.
What Is Included in a Loan Estimate?
A loan estimate provides the overall details about your mortgage or loan. Receiving multiple loan estimates can help you shop around for the best mortgage. A mortgage borrower could save as much as $1,500, on average, from getting one extra lender quote when applying for a mortgage, and could save $3,000 or more by getting five quotes, reports Freddie Mac.
The loan estimate details provided will include:
- Loan amount
- Term length
- Total closing costs
- Interest rate
- Tax and insurance costs
- List any repayment penalties
- Origination charges
Does a Loan Estimate Hurt My Credit Score?
Receiving a loan estimate does not affect your credit scores. When you receive a loan estimate, the lender has yet to approve your application. All the loan estimate provides are the terms that the lender will offer if you move forward with the loan. If you decide to proceed, then the lender will ask you for additional financial information, which can include pulling your credit report.
In general, most credit scores are not impacted by multiple hard inquiries when shopping for loans within a short period of time, such as 30 days. These can be seen as a single hard inquiry and will have little impact on your credit scores.
How Accurate Is a Loan Estimate?
A loan estimate from a lender is typically accurate because if it is not, it could end up costing them money. Fees, especially the ones levied by the lender, will generally be correct.
In certain cases, there can be additional fees or charges that can be divided between the buyer and seller. Those fees can include loan fees, paid-in-advance fees, reserves or escrow paid to third parties, title charges, and government charges. In fact, a survey from ClosingCorp found that 58% of homebuyers received a revised estimate prior to closing on a home due to changes in initial fee estimates, which includes changed:
- Closing costs (12%)
- Insurance costs (6%)
- Taxes (5%)
- Title (4%)
- Mortgage/monthly costs (4%)
- Escrow (4%)
- Appraisal fees (3%)
- Utilities (3%)
- Brokers fees (3%)
Revised estimates often occur as a result of changes requested by the borrower. If you are shopping for a mortgage, make sure you understand each step of the process when closing a loan. Many first-time homebuyers don't understand the costs associated comes from the time to close on a mortgage.