What Is a Good Faith Estimate?

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Generations of mortgage applicants used a document known as a good faith estimate to understand and compare home-loan lending terms, until a 2015 update to the Truth in Lending Act replaced the good faith estimate with a new form called a loan estimate. (The revision also created a new form called a good faith estimate, which is used in the reverse mortgage industry, but not in connection with standard home loans.)

How Does a Loan Estimate Work?

Within three business days of receiving your loan application, each lender or mortgage broker must provide you with a loan estimate form. They may charge you a modest fee (around $20) to cover the cost of checking your credit report and credit score as part of the process.

To obtain a loan estimate, you must provide the lender with the following information:

  • Full name
  • Annual income
  • Social Security number (so the lender can pull a credit report)
  • Address of the property you want to buy
  • Estimated value of the property (use the listed asking price or adjust as advised by a real estate professional)
  • Amount you want to borrow (the property value minus the amount you're prepared to make as a down payment)

Details in every loan estimate include:

  • Loan amount
  • Term length
  • Interest rate (If the loan has a variable rate, it will also include when the rate will reset, and how it relates to a published market rate.)
  • Monthly payment amount, including applicable property taxes and insurance costs
  • Closing costs
  • Prepayment penalties (if any) and fees charged in case of late payments
  • Origination fees, and whether they must be paid in full at closing or will be rolled into the monthly payments
  • Loan Estimate document. The forms share a common three-page format designed to simplify comparison of estimates from different lenders

Multiple loan estimates can help you shop for the best mortgage deal. Freddie Mac estimates the average American borrower could save as much as $1,500 over the life of the loan by getting just one extra loan estimate when applying for a mortgage; getting five additional estimates could save you $3,000 or more.

Because the lender runs a credit check before providing a loan estimate, getting one causes a hard inquiry to appear on your credit report. This can cause a small drop in your credit scores, but there's no need to worry about multiple inquiries causing cumulative damage to your scores: The FICO and VantageScore® credit scoring systems both are designed to accommodate rate shopping, and they treat multiple inquiries for similar loan amounts as one event, as long as they take place within a few weeks of each other.

How Accurate Is a Loan Estimate?

Loan estimates are just that—estimates, not guaranteed quotes. Lenders will provide more reliable quotes if you respond to a loan estimate with notice of intent to proceed with a formal loan application. If you agree to move forward, the lender typically requests additional financial information, including information on your debts and documents that can verify the income you claimed when seeking the loan estimate. Many lenders also require you to pay an application fee of several hundred dollars when you begin the formal application process.

Lenders recognize it's to their advantage to make loan estimates as accurate as they can be, since inaccurate estimates can cause potential customers to go elsewhere. For that reason, estimates of fees the lender itself assesses are typically quite accurate, but other charges cited in loan estimates may be less so. These include costs that are sometimes split between the buyer and seller but may be assumed in full by one or the other as part of sales negotiations.

Many homebuyers received revised loan estimates prior to closing on their homes due to changes in initial cost estimates, such as taxes, closing costs or insurance costs. Revised estimates often occur as a result of delays or changes requested by borrowers. If you are shopping for a mortgage, make sure you understand and approve each step of the process to help avoid such changes. Also understand that interest rates, market prices and even taxes and fees can change over time, and that delays can affect them.

What Is a Truth in Lending Disclosure?

Along with the good faith estimate, the 2015 Truth in Lending Act update replaced another longstanding mortgage information document, the truth in lending disclosure, which helped explain loan details and costs.

If, instead of a standard home purchase mortgage, you apply for a home equity line of credit (HELOC), a manufactured housing loan that is not secured, or a homebuyer assistance program loan, you will still receive a truth in lending disclosure instead of a loan estimate.

What Is a Closing Disclosure?

A closing disclosure is a standardized form your lender must provide you at least three business days before you close on a mortgage loan, summarizing the final terms of the loan. You'll have been approved for the loan at that point, so all terms will be firm—no more estimates. Comparing the five-page closing disclosure to the lender's loan estimate may reveal changes in fees, taxes and other terms. It's wise to study these adjustments carefully and to be sure you are comfortable with all of them before you sign your closing documents. If you have concerns, consult the lender and your attorney or real estate professional.