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For generations, American homebuyers applying for a mortgage received a document called a good faith estimate (GFE) that outlined all the details of the loan. It was one of many disclosures provided to buyers. In recent years, though, those documents were streamlined and combined to create just two: a closing disclosure and a loan estimate. The GFE is still used in very narrow circumstances, but most homeowners won’t come across it. Regardless, the original GFE and the current loan estimate and serve the same purpose: to help buyers understand the terms of their mortgage offer.
Good faith estimates and loan estimates
In 2015, the Dodd-Frank Wall Street Reform and Consumer Protection Act required several key real estate forms to be combined for the purpose of clarity. The good faith estimate and the initial truth-in-lending statement became the loan estimate. Simultaneously, a new closing disclosure was created using the HUD-1 settlement statement and final truth-in-lending form. In short, four documents became two.
The changes to these documents makes them easier to read and, importantly for home shoppers, easier to compare. The loan estimate is presented at the beginning of the mortgage process, making comparison shopping easier for those hunting for the best deal.
This new process is referred to as TRID, a complicated acronym that stands for TILA-RESPA Integrated Disclosures. (TILA is the Truth in Lending Act, and RESPA is the Real Estate Settlement Procedures Act.) To protect and inform consumers, every home loan in the U.S. must follow TRID guidelines.
What information is included?
TRID disclosures contain crucial information for any homebuyer who is taking out a mortgage. The loan estimate breaks down the various costs associated with a home purchase into line items. It provides the same basic information as its predecessor, the GFE, but in a different format.
Loan estimates are required to include estimates for the following:
- Type of loan, such as conventional or FHA
- Interest rate for the loan
- Total monthly payment, including breakdowns by year in the case of an ARM
- Balloon payment, if applicable
- Total closing costs
- Property taxes
- Insurance costs
- Prepayment penalties, if applicable
Certain information is required to be in a prominent place on the first page of the three-page document, including the total monthly payment and estimated cash to close. This requirement aims to make the most pertinent information readily available and obvious to consumers.
How GFEs help homebuyers
The primary benefit of a GFE or loan estimate is transparency. These disclosures can prevent a homebuyer from misunderstanding what their monthly payment will be or being blindsided by hidden costs. Consumers can shop around for the best loan terms without being obligated to submit a full application to any particular lender — and since all lenders are required to use the same form, they can quickly compare offers from different companies.
It’s important to note that a loan estimate is not the same as an official loan approval. An estimate is just that, an educated guess about what the lender predicts your terms would look like. After you provide more details about your income and debts, you may see some changes to the terms. It’s in the best interest of a lender to make the estimate as accurate as possible, though: They know a borrower may walk away if the terms change drastically between an estimate and an official offer.
When is the original GFE still used?
In the reverse mortgage industry, a traditional good faith estimate is still used rather than the TRID loan estimate. With a reverse mortgage loan, instead of the homeowner making a monthly payment, the lender pays the homeowner a set amount every month — the homeowner is essentially borrowing a portion of their equity as tax-free income.
Consumers who apply for a reverse mortgage can expect to get a GFE from their potential lender, which will outline any fees that are associated with the arrangement. While a reverse mortgage represents incoming payments, there are still costs that fall to the homeowner, including insurance and property taxes. And when a homeowner with a reverse mortgage (or their heirs) sell the home, the profits must be used to repay the reverse-mortgage loan with interest. These terms are also outlined in the GFE.
A good faith estimate or GFE offers transparency from a lender about the estimated costs associated with a particular home loan. This document has been replaced by a loan estimate for most mortgages, but it is still used in the case of reverse mortgages. The two documents share many details and can help borrowers more easily understand and compare their options before proceeding with a mortgage application.