The Good Faith Estimate (part I)

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UPDATE: This article is still good for a basic understanding. However, for an article written specifically for the new form that becomes mandatory January 1, 2010, please go to the 2010 Good Faith Estimate

I had a great rant about the limitations of the Good Faith Estimate all planned out in my head when I when I was in the very first stages of planning this blog in my head. It was the first idea I had for an essay, as it is the most commonly abused item in the whole mortgage system of ours, and abuse of the GFE (as the industry calls it) sets the stage for a significant amount of everything else that goes on.

Then California pulled the rug out from under the rant. They replaced it with a new form called the California Mortgage Loan Disclosure Statement, which we are all required to use in lieu of the Federal GFE

I've actually had some looks at abuses of the Mortgage Loan Disclosure Statement now, and they are very similar to abuses of the Good Faith Estimate. The abuses of the Federal Good Faith Estimate and the fact that pretty much all of them were actually legal had been something that took time to soak in back when I first got into the business, although a short stint with a Company Which Shall Remain Nameless was a real education. It appears that the regulations for the Good Faith Estimate part are unchanged, which translates into English as "Excrement." Furthermore, I'm certain that somewhere in Sacramento lobbyists are paying bribes campaign donations so that just this or that little detail can be changed "just a little in a way that doesn't really make a difference," and eventually the cockroaches will have even more ways to game the system.

On the other hand, the federal Good Faith Estimate is still the form in use in the other forty-nine states. On that note:

On the line above where all of this starts, there should be written a total loan amount, an interest rate, and a term (360 months for all 30 year loans, whether it is fixed for the full term or not - numbers less than 360 mean that the loan is due in full in less than 360 months. This can be one clue that they're trying to hit you with a balloon payment loan). As I have said elsewhere on this site and will continue to stress, just because a mortgage provider puts these numbers on a Good Faith Estimate does not mean that they have any intention of actually delivering them. I think bait and switch is the official company game of many providers. The Good Faith Estimate is THE most abused loan document, bar none. It's supposed to be a real estimate of what the loan is going to be like, based upon the loan officers best estimate. In practice, it's become nothing more serious than the loan provider wants it to be. In many cases with many providers, it's almost like a joke: "(giggle) and this is what we had to tell him in order to get him to sign up! (loud guffaws)" and this carries through the rest of the document as well. The relationship of the loan described on the Good Faith Estimate to the loan that is actually available and that said provider will actually deliver is completely arbitrary and up to the provider within very broad limits. Because at the end of the process, the client has very little leverage to get the provider to deliver the loan they talked about to get you to sign up. Unless, of course, you signed up for a backup loan like I keep telling you to do. Even a Loan Quote Guarantee, which most providers won't give either, isn't as good for getting what you actually want when you need it.

Now, it is also important to note that with two exceptions, all of the fees below are commonly held in abeyance until the end of the loan process, and you don't owe them if you don't end up refinancing or purchasing with that company. They can be added to your loan balance instead of being paid out of pocket. It is the biggest red flag I know of for a loan provider to ask you for money up front beyond the credit report.

The first actual line item on the Good Faith Estimate is "801 Loan Origination fee." This is an explicit fee charged by the loan provider who signs you up. It can be expressed in dollars, but it is more commonly expressed in terms of "points". One point is one percent of the final loan amount. Put another way, if you have a loan for $198,000 plus one point, the way to do the computation is $198,000 times 100, divide by 99 (100 minus the total number of points), which equals $200,000. It's probably not unethical if the loan officer uses $199,980 ($198,000 plus 1%, or $1980) on a quick calculation, just a desire to get an approximate answer quickly. It's still not mathematically correct. Now, if as is common, the loan provider only writes down 1% here rather than converting it to dollars as well, it can appear as if that loan is much cheaper at first glance or to the uninitiated than it actually is. If you've got a loan that's $200,000, leaving the estimate as one point without an explicit dollar figure is a way of making it look like the loan actually costs you about $2000 less than it will. Two points without an explicit dollar figure is twice as much (Consumers who don't understand: "The other guy wanted $5000 to do my $300,000 loan, but this guy only wants $3000 and two of these point thingies. What a great deal!" You would be amazed and dismayed how often I have to explain even to people who know what points are that $3000 plus two points on a $300,000 loan is about $9000). Nor is this figure, whether expressed as points, dollars, or both, carved into anything more than silly putty. I worked for a short time at a Company Which Shall Remain Nameless, and one of the things that got me yelled at several times, and one of the many reasons I left, was that I violated company quoting policy by actually adding in all of the little miscellaneous adds for half a point here and a quarter point there that the customer was going to get hit with at the end of the process anyway, and telling the customer about them up front. Finally, there is no reason why this line has to be nonzero in all cases, and indeed I've done more loans without than with.

The next line is "802 Loan Discount". In theory, this is supposed to be used only for actual discount points charged by the lender. In practice, it is used almost interchangeably with "Loan Origination Fee" on the line above (not without some justification in fact, which is beside the point of this essay). Once again, watch out for whether the figure in points is converted into an actual dollar value. Again, there is no reason why this line has to be nonzero, and I've done more loans without than with.

"803 Appraisal Fee" in California is $350 to $450 for the average home, depending upon what that particular appraiser charges for that particular job. It is legitimate and correct to mark this as PFC (prepaid finance charge) so long as the loan officer gives you an approximate figure. Unless they have a contract with a particular appraiser, it's not under the loan officer's control. This is another place where many providers play "hide the closing costs." Quoting from one less than ethical example "Hey, I'm not the one charging it and if it makes my loan look better than the guy stupid enough to tell the client, that's not my problem." I tell people with average homes that it's likely to be about $400. The abuse that happens here is that this is one of those things that's called a "third party charge" - paid to a third party service provider. As such it is not included in total fees when calculating APR on the "Truth In Lending Statement", and will almost certainly not be included in any computation of total fees by your loan provider (Other than me, I know exactly one company that includes it). The vast majority of those billboards advertising "Total fees $X" really mean "Total fees $X plus third party fees," not to mention the fact that they're going to give you a rate which gives them either an Earth-Shatteringly Large Yield Spread or premium on the secondary market. It is not unethical for the loan provider to ask you to pay the appraiser at the time the appraisal is performed, provided the person being paid is an external appraiser .
"804 Credit Report" is usually somewhere around $20. Single Individuals buying a house on their own are cheaper than two married people, but unmarried individuals must each be run separately, and so it may be a little more than $20 if you're buying a house with your brother, parents, or whatever. It is neither unusual nor unethical for the loan provider to ask you to pay for this up front. So long as the check is written to the credit reporting service, there's nothing wrong. And there is a rule now in effect that we must have explicit written consent to run credit from every person, so don't get angry with your loan provider for following it.

"805 Lender's Inspection Fee" is charged by the lender to have one of their inspectors go out and take a look and make certain the house isn't falling down. It is common for the lender's fees to be ignored by a broker, and then you'll get another Good Faith Estimate from the lender that discloses this. On the other hand, this is not necessarily charged on every loan. Many lenders will rely upon the appraiser's work in this, and not do one of their own, particularly on refinances. Since (assuming you're sane) you're going to want a building inspection yourself in the case of a purchase, the lender may make it a condition that they get a copy. And, I will admit as a broker that although I do disclose a total of all lender's fees I know about, I don't always break them out into categories and may amalgamate them all under one category. (I can ask a lender what their fees are, and one will tell me A, B, and C adding to $750. The next one will tell me A, D, and E adding to $780. The third might tell me B, E, and F adding to $995. And so on. The brokerage I work for is approved with well over fifty lenders. I maintain that as long as I disclose the total amount, most clients don't care whether it's going to underwriting or document preparation or spa visits for the CEO. It's just not important to them where it goes. It's a fee they've got to pay to do business with that lender and get that loan. Whereas I will help them consider the total cost in comparison to the cost of other options, this total is not subject to negotiation).

"808 Mortgage Broker Fee" (there is no line 806 or 807 on the form). This is another fee potentially charged by a brokerage. Just because it's not, or listed as zero, here doesn't necessarily mean you're not going to end up paying it. One trick I've seen is leaving it blank at the beginning, then at the end it's "We charged that based on how difficult your loan was. You don't expect us to work for free, do you?" Trust me, they're not working for free, although I don't think you need an astronomical level of trust for you to believe this. Nobody ever plans to do a mortgage for free.

"809 Tax Related Service Fee" I've never had to include it as a separate line item even if present. It's usually amalgamated and lumped in with something else, if it's applicable.

"810 Processing Fee" This is what they pay to the nice person who processes your loan and coordinates your transaction while the loan officer is off doing loan officer things. This varies, but I'd be very suspicious of anything less than $300. I know brokers that say to charge $600 when they pay the processor $300. My attitude towards that is that at least they're telling you, the consumer, about it up front. Better that than being told $300 and hit for $600 at the end. The processor knows what they make. The broker knows what he pays the processor. Don't worry if the processor gets the whole thing. It's not your concern, and it's not really negotiable, and whereas you have the option of going elsewhere, the elsewhere you go has the option of lying to get you to sign up.

"811 Underwriting fee" is charged by the bank to pay their underwriters. It's also a good category for brokers who hate pointless detail to lump all of a lender's fees together in. If it is broken out, as a direct lender should do, be suspicious of anything less than three to four hundred dollars - typical actual underwriter's fees. But just because he's showing $995 here where everyone else is showing $400 doesn't mean he's overpriced. Just to mention it, if you are doing a first and second mortgage simultaneously with the same lender, the lender's fees will go up by about $500 to cover the second. If the second is being done with a different company, they're probably going to charge a whole other set of lenders fees.

"812 Wire transfer fee" is charged by the escrow/title company to wire the money into your account for immediate availability. Otherwise, it's going to be a few days before the check clears. If it isn't something advantageous to you, don't get it. Most of the time it probably isn't necessary, but considering daily interest on typical amounts of real estate transactions, it may be a good investment. Last time I had this done for a client it was a little under $25. The lenders fees I've talked about elsewhere usually include a charge for wire transfer between them and escrow or title, but this doesn't cover sending it on to you.

Below this are several blank lines. An ethical loan provider will use them to disclose that he's getting a rebate from the bank (assuming he's getting such a rebate) or tell you that the price quoted includes a rebate to you from them reducing the price, if such is the case. (Most of the loans I have done tend to have this feature. You'll find out why in a different essay). Just because provider A is getting a bigger rebate does not mean provider B has a better loan. It happens quite often that one broker shops a better lender or works a little harder. A 5.5 % loan with $3500 in total closing costs is a better loan than the same loan type with the same terms at 6% with $5000 in total closing costs, even if the broker in the first case is getting paid $10,000 more by the lender, to pick an extreme figure. Now it's unlikely that there's that much of a difference in broker compensation when the one is delivering a better loan, and if there is that much of a difference I'd bet millions to milliamps that the loan terms are different. But the point is for you, the consumer, to look hard at the actual terms of the loan involved - that's what's important to you. There was just a study upon the effects of disclosed compensation released a few months ago about how most people would just choose the loan where the broker made less money, or where a loan provider's compensation wasn't disclosed, rather than the loan that's actually better for them. If we weren't all adults here, I might need to make the point that if the loans are otherwise the same, the broker in the first case earned every penny of his extra pay by finding you a better loan on the same terms and qualifying you for it. But we are all adults here, so you know that.

There also may be other fees listed here. I've only done significant business in three states, but there really is no need for anything else that I've seen. Additional fees in this area usually amount to a "Loan Officer's Latte Fee", or a "This is going to make me miss my surfing!" fee. If they actually list them (most won't), at least they're telling you up front instead of keeping it a deep dark secret that the consumer has no way of knowing about. Every once in a while, I'll see somebody write something like "Amalgamation of lenders fees" rather than using line 805, 811, or 1105 to cover it.

Finally, some states require a survey if none has been done for a certain period of time, usually ten years. This will cost $300 to $400 if required, possibly more. These requirements are the same in each given state no matter who the lender is. It's rarely the case that one lender will require it where the state will not. As a disclaimer, I haven't worked much in any of these states.

So when we look at this section, we are left with midpoint fees of $400 for the appraisal, $20 for the credit report, about $800 between line 805 and 811 and miscellaneous other lender imposed fees, and $500 for processing. Believable total, thus far, $1720, plus the amount for any points you pay, less any rebate to you. $2220 or so if you're doing a simultaneous first and second, $2500 or more if you are getting a first and second from different lenders.

The next section is title fees. These are the fees you are charged by the title company for doing the work necessary and writing appropriate policies of title insurance upon the transaction. Title insurance is a part of every real estate transaction in California, although I am given to understand there are still states where it isn't necessarily so. And even in California, if you're silly enough to buy the property for cash and insist that you don't want any kind of coverage in case it turns out later that the seller didn't really own it, or in case what you think you see is not necessarily what you got, it is possible to do a transaction without title insurance. Otherwise, when you buy the property, the seller should, as a condition of the sale, buy you an owner's policy of title insurance. When you get a loan on the property or refinance that loan, the lender will require you to buy them a lender's policy of title insurance. In California, average transactions may be a little larger than many other states, so I'm going to use a property with a purchase price of $300,000 and a loan of $270,000 for examples. It's large for many other states, but smallish for California, and here in San Diego right now it's a decent to middling two bedroom condo of about 900 square feet where the prospective buyer actually has a 10% down payment, which is unusual. Good agents and loan officers do these in their sleep. (And I'm well aware that in the vast majority of cases, I can save my clients a lot of money by splitting these into a first and a second. Work with me here for the sake of simplification. And I'm also aware that the same thing can be over $1,000,000 in certain areas of Manhattan).

"1101 Closing or Escrow Fee" depends upon the company and type of escrow. Many loan officers will write PFC, but ethical ones should tell you what it costs. Middle of the road is $450 for a refinance, the same plus $1 per thousand dollars of purchase price, divided by two for a purchase, because it is split two ways between buyer and seller. Like the appraiser's fee, attorneys fees, and title insurance, this is a third party fee that is excluded from the calculation of APR, and it's not under the lender's control unless there's a contract. Still they should let you know how much it's going to be, as it's not like there's any possibility of you not having to pay either an attorney or an escrow company, and many will pretend it doesn't exist or try not to give you a dollar value, as $X plus unknown escrow charges sounds cheaper than $X plus 450 for refinances or $X plus $375 for a purchase

"1105 Document Preparation Fee" somewhere between $100 and $200 in most cases, this covers the cost of generating the mortgage documents. Will be covered in total lender's fees if that's accounted for elsewhere. Grant Deeds, etcetera usually prepared by the title company for the process will be extra, usually about $50 per document.

"1106 Notary Fees" $100 to $150 is reasonable, and about the range of what the various mobile notary services charge. Even if your loan officer agrees to act as notary, this is likely to be charged. You may or may not be able to save yourself money by taking it somewhere yourself as state laws are different, but if you do, you're going to have to cover it out of pocket, and you're going to have to deal with the issue of the notary's business hours, taking time off work, everybody who's party to the loan being there to sign, etcetera.

"1107 Attorney Fees" Some states require the use of actual attorneys to do the escrow function. Lenders should not charge you both this and escrow. On the other hand, attorneys are more expensive. I haven't done any actual work in these states but from what I can tell $800 is about average. Disclaimer: the company I was working for at the time may have had a contract for reduced rates to which I wasn't privy. Like appraiser fees, escrow fees and title fees, this is a third party fee excluded from APR calculation, and can be marked PFC, but the loan officer should give an known dollar value, as the company should have a contract with the attorney's office. Once again, unethical providers will try to keep a dollar value from finding its way onto the paper because it looks cheaper that way.

"1108 Title Insurance: Like Appraisal, Escrow, and Attorney's Fees, this is a third party charge, and as such is excludable from the calculation of APR. A dishonest loan officer will mark it PFC without telling you how much, as once again, $X plus unknown title fees sounds cheaper than actually adding the title charges from the rate book to the paper. In the case of a purchase, the seller should purchase an owner's policy for the buyer, and the buyer's lender will require the buyer to purchase a lender's policy of title insurance, which should be heavily discounted because it's the same title search under slightly different rules of relevance. In the case of a refinance, the lender will require the borrower to purchase this. I took an average of the costs to the nearest dollar between several rate books, but they companies are really pretty comparable in most cases. If the property had a policy of title insurance issued on it within five years (the vast majority of properties qualify, as only about three percent of all mortgages are older than that), the owner's policy will cost the seller about $1004 base rate, and the concurrent lender's policy will cost the purchaser $453 (remember, this is a $270,000 loan on a $300,000 property). In the case of a refinance, the lender's policy would cost $823.

So adding this section up at the mid points, in the case of a refinance you have $450 or $800 (depending upon your state), plus $150 plus $125 plus $823, totaling $1548 or $1898, depending upon your state. In the case of a purchase, you're talking about $375 or $800 (again depending upon your state) plus $200 (somebody is going to have to do a Grant Deed) plus $125 plus $453 (remember, the seller usually pays for owner's policy of title insurance, and we're talking about a Good Faith Estimate for a loan, which the seller doesn't need unless he's buying another property) totaling $1153 or $1578, depending upon your state.

I'm going to lump two sections into one here.

"1200 Recording Fees" charged by the county recorder. Should be the same for every lender. In San Diego County it's currently $75.

"1202 City /County Tax Stamps" Some city and county governments have an intangibles tax on mortgages.

"1203 State Tax/Stamps" Some states have an intangibles tax on mortgages, computed based upon the dollar amount of the loan. Usually it's the states without state income tax. If your state charges this (California doesn't), it will be the same no matter your lender. If one company gives you an estimate that's different from everybody else, that's a matter for investigation.

"1302 Pest Inspection" On refinances, if something raises a red flag with the lender, they will require a pest inspection. There may also be areas of the country where it is required of every loan, but I've never heard of one. On a purchase, you're going to want a pest inspection anyway, and around here it's usually paid for by the seller. There is potential for abuse (somebody charges you $200 and orders a $100 inspection), but it's relatively small potatoes, and most just won't bother when it's so much easier to hide big ticket scams elsewhere. Order it yourself from an approved vendor if you're concerned.

So the section total is $75.

Below these sections is a line "Estimated Closing Costs". This really is the total of all the closing costs associated with the loan. I keep telling you that the numbers which go onto this sheet may be fictional or incomplete, but if they are actually complete and correct then the number here on this line is the most important one on the whole sheet. This is the total of the costs you're really paying to get your loan. Some call it the "total of non-recurring closing costs." If you pay attention to nothing else on this sheet, (begin Groucho Marx accent) chances are that you're being taken for a ride (end Groucho accent). But this is the most important single number. Adding the midpoint estimates from the sections we come up with $1720 if you're getting one loan on a refinance so $1548 or $1898 (depending upon your state) plus $63 plus any charges for points. Using consistent assumptions, this makes for a total for a refinance $3331 if you live in an escrow state, $3681 if you live in a state where they require lawyers to get involved. The totals for a purchase under these assumptions is $2936 or $3361. None of these numbers account for points you're paying or rebate you're getting, of course.

Just to make an important point again, this sounds like a lot more than $1658 plus third party fees, doesn't it? If offered the choice between buying one item for $3331 and buying the same item for $1658 plus third party fees, most people think the second choice sounds cheaper. However, as I've just demonstrated these are exactly the same given comparable assumptions. And there's a lot of leeway in those third party fees for junk fees if your loan provider wants to make use of them to pad their own pocket, not to mention they could trivially be much higher if your loan provider doesn't choose third party providers wisely. Insist upon actual numbers.

(continued in Part II)

Original here


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(Also edited for California at Dan Melson's San Diego Real Estate and Mortgage Website

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About this Entry

This page contains a single entry by Dan Melson published on April 19, 2008 7:00 AM.

Links and Minifeatures 2008 04 17 Thursday was the previous entry in this blog.

The Good Faith Estimate (Part II) is the next entry in this blog.

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