GOOD FAITH ESTIMATE – CHANGES COMING JAN 1 2010!

Effective January 1, 2010, there will not only be the traditional New Year’s festivities and good luck dinners, there will also be a new Good Faith Estimate coming your way!  Whether you are a buyer or a seller, there will be changes that will impact you.  This blog will not go over the minutiae of what is contained in the new Good Faith Estimate – rather, click here to find a great 49 page booklet put out by HUD that goes into the entire homebuying process, including details about the new Good Faith Estimate. 

First of all, you may be asking, just what is a Good Faith Estimate (GFE)?  This is normally a document that you would get from a lender in which you would be told what your closing costs would be, your payment would be and how much cash you would have to bring to the closing table.  In the past, this was a document that many buyers would get from lenders they were considering, as a way to compare one lender to another.   This document was suppose to be an accurate accounting of what the buyer was to bring to the closing table.  But as many of us who have worked with buyers over the years know, this was not always the case.  Sometimes, a buyer would use an out of area lender who was not familiar with the Richmond VA closing costs or the lender would try to get the loan by quoting costs that were way too low.  Unfortunately, it was only at the closing table that the buyer ends up with a big surprise!  And by that time, it’s too late for the buyer to make any decisions and may end up scrambling to bring the extra cash to the closing!

Beginning in January, the document that is titled “Good Faith Estimate” will not be issued until 3 days after the buyer has made loan application and a property has already been identified.  This means that lenders will need to come up with some form that can be used for the buyers to be able to shop for the best loan for them.  This means that the look and the information can be quite different from lender to lender.  So this may or may not be a good thing for the buyers out there.  So what are some of the changes to the new GFE?

• First, you will be given certain timeframes in the new GFE.  This means that you will know how good the interest rate you were quoted is good for, how long you have before you need to lock in the rate, how long you have to go to settlement, etc.
• Second, the lender has to give the buyer an estimate of the settlement charges and there will be more accountability on the part of the lender to have correct figures here.  In the past, a lender could put together the Good Faith Estimate and try to become the lowest lender out there by leaving off some closing costs or purposely keeping the costs too low.  Now, the GFE has certain charges on there that cannot change at all, and others that can only increase no more than 10%!  If the costs that are in these 2 categories are not accurately reflected in the settlement statement at closing, then lender may have to reimburse the difference to you.
• Third, the GFE now gives you the details of your loan.  Now the buyer can actually take the GFE to closing with them and know that the loan amount & terms that are on the documents they are signing at closing match up to what they locked into at the time of loan application.  Additionally, the GFE will now let the buyer know if the lender is requiring an escrow for taxes and insurance.

So are these changes good or bad?  As with any of the other changes we have had in 2009 and 2010, there is good and bad with the changes to the GFE, and much of this will be a learning curve as lenders and attorneys and Realtors all become familiar with how the new GFE looks and how all of this will impact both the sellers and buyers of real estate next year.

• I think one of the good benefits of the new GFE is that this will be standardized and should, theoretically, be easier to understand on the part of the buyers.  I have worked with many buyers over the years who have gone with lenders that are not in the Richmond area and have given a good faith estimate of the costs, much of which has changed, or the costs were understated on the estimate, so that when the buyer got to the closing table, they were unpleasantly surprised!

• Since the GFE can’t be issued until the buyer has decided on a property, they need to know which lender they will use at the time of the contract.  Once the buyer has made loan application, the lender has 3 days to produce the GFE, which will include the settlement costs.  However, the GFE needs to be kept open for 10 business days so that the buyer can shop around certain settlement costs that are on the lender’s GFE.  If the buyer chooses to go with the providers that are on their recommended list, then the lender will be held to the tolerances that are dictated on the GFE (cannot change, can increase by only 10% or can increase at settlement); if the buyer chooses some provider other than the ones on the lender’s list, then the lender will not be held to those standards. 

• This means that at the time you write up your contract, you should already know who it is that you want to use as a lender and you should also know who you will want to use to do your settlement, since some of the costs that are to be shown on the new GFE are for settlement and title insurance, etc.  The lender must now call your chosen settlement agent in order to get those costs so that they can be accurately reflected on the new GFE..

• If you are a seller, you want to make sure that any contracts you receive show an attorney or settlement agent on it, no more “Purchaser’s Attorney TBD”.  If this is not on the contract, there may be delays in getting the property to closing.

• If you are a seller, you also want to make sure that the buyer has made loan application within a few days of contract ratification, since now the lender has to produce the GFE within 3 days of loan application and the buyer now has a 10 business day right to shop around some of the costs.  Couple this with the review periods on the mortgage and appraisals and now you are pushing a 60 day closing.  So you want to make sure that the buyer has made loan application very quickly after contract ratification, has locked in a rate at the time of loan application (since this could change the settlement costs and other terms of the loan, which could then trigger additional review periods and add extra time to the closing timeframe). 

• Although there are many nice features of this new GFE, there are some drawbacks.  One of the big drawbacks is the “Lump & Dump” concept that is now incorporated into this form.  Here certain charges that in the past would have been split out, now are being lumped together into one category.  For instance, there is a category called “Origination Fees”.  In the past, you would have seen all the fees that the lender charges in connection with the loan split out line by line:  Loan Origination Fee, Processing Fee, Tax Service Fee, Funding Fee, Document Prep Fees, etc.  Now all these are going to be combined into one category called “Origination Fee”.  The government’s rationale here is that buyers don’t necessarily care about the individual fees, but are more concerned with the total amount that they are having to pay.

• The old GFE would generally specify the type of loan the buyer was going to get, as well as the total payment (Principal, Interest, Taxes & Insurance).  The new form does not specify the loan type (FHA, VA, VHDA, Conventional) and it does not specify the total monthly payment – only the principal, interest and mortgage insurance!

• The old GFE had a place where you could show the seller paid closing costs.  The new form does not have anyplace that you can account for that.

• Finally, the old GFE had a place where the total “cash required to close” was shown.  This was the amount that the buyer knew how much they had to bring to the closing table.  The new form does not give that number on a specific line, but must be backed into in order to know an close approximation of what the buyer needs to bring to closing.

Of course, as with anything else, we will all be in learning mode with this new form.  My suggestion to the buyers out there is to contact your lender prior to beginning your search.  If you wish to shop around the loan, do it before you find a home.  Once you have found a home, there are lots of new review periods built into the mortgage & appraisal processes, as well as inspection timeframes, and you want to be prepared to get your home closed as quickly as you can.  I have talked to several lenders and they are not offering lockins that are longer than 60 days, so you want to make sure you have enough time to accommodate all the different timeframes & review periods in order to be able to close within the 60 day period and not have to pay to extend your lock in.