Starting up in the lending industry can be a challenge. The Know Before You Owe Mortgage campaign was launched by the Consumer Financial Protection Bureau (CFPB) in 2015 to help people make informed mortgage decisions. The Good Faith Estimate was replaced by the Loan Estimate form by the CFPB. It is nevertheless important to understand the fundamental concepts behind these forms despite the fact that the government mandate has made mortgage facts more evident.
What Is A True Estimate?
All lenders were obligated to use the Good Faith Estimate to inform consumers of mortgage conditions prior to October 2015. Even with reverse mortgages, the Good Faith Estimate is still in place, and it outlines the essential conditions and costs to be expected. GFEs categorize payments so you know what to expect and can better understand lender and third-party mortgage costs. For this reason, the government hoped that clients would use GFEs as a tool to compare lenders’ fees and select the best one. Borrowers didn’t find these comparisons as simple as they had hoped.
WHY WAS THE GFE REPLACED
The GFE was designed to help clients better understand the costs associated with consumer loans, such as interest rates and closing costs. GFE and its predecessors gave banks the freedom to choose the terminology they wanted to use to explain terms and fees to customers. Lenders’ ambiguous language perplexed many potential borrowers. They couldn’t tell the loans apart since they didn’t comprehend the process.
When it came time to replace the GFE with an estimate, the Consumer Financial Protection Bureau (CFPB) decided to combine four forms into two:
- Estimated Loan
- Final Disclosure
Estimated Loan
Lenders now send borrowers a three-page Loan Estimate after they fill out an application for a mortgage. It gives you an estimate of the loan terms, payments, and closing costs for your mortgage. Loan projections also show if rates and payments might change and by how much. Loan estimates are more clear than GFEs because lenders have to give the same information in the same way. Like the GFE, Loan Estimates use a common table that makes it easy to understand what is included and how the terms are used for rates and fees. The loan estimate includes a detailed list of all the fixed closing costs, so you can shop around. Lenders will give you a list of service providers they think you should use to help you decide. If you know more about the differences between lenders, you’ll be better able to choose the best lender and service provider for your needs.
Tolerances for Fees
Foreclosure loan estimates protect you from unexpected costs and unforeseen alterations. Because the form only offers estimates, fees may be changed. The law mandates that a reasonable estimate be made. Because the amount you pay at closing is more than the fees on loan estimates, it is necessary to compare them (the point when you become legally obligated to a specific lender). To make sure you aren’t overpaying for specific costs, the transparency legislation establishes tolerance standards. Due to any discrepancies between expected and paid amounts, lenders must compensate.
The following closing costs are included in the Loan Estimate:
costs to borrowers, including origination fees and non-replaceable services.
Government recording fees as well as taxes that the lender is aware of.
A certain amount of each of these fees is tolerable. Because zero tolerance fees cannot be raised, this is a non-issue. Lenders bear the brunt of any price hikes that occur. The lender has no tolerance for any costs that they are responsible for collecting. Zero-tolerance expenses include but are not limited to, origination fees, non-shoppable services, and transfer taxes. In the 10% cumulative tolerance, any fees that fall within that range are considered. These expenditures may climb by 10% for each individual, but not cumulatively. Tolerance includes the cost of records and third-party service fees (if you choose a vendor on your lender’s recommended list).
Last but not least are fees with no wiggle room. It doesn’t matter how much the cost of living increases; fees that have no tolerance must be paid in full. The lender has no control over these fees, so they can change at any time. You’ll find these costs (insurance, interest payments, and property taxes) in the Other Costs section of the Loan Estimate. Additionally, fees for non-lender services are included.
Final Disclosure
Before the loan closes, lenders must give borrowers this paperwork, which is 5 pages long. The document lists the last mortgage terms and fees, as well as the money that will be needed at closing. This form has the same information as the Loan Estimate and uses the same words. You can easily compare the final details of your loan to the estimates your lender gave you by putting the two pieces of paper next to each other. Like the Loan Estimate, the Closing Disclosure took the place of the HUD-1 Settlement Statement. The CFPB not only made the form easier to fill out, but it also made the review period longer. The HUD-1 Settlement Statement was given to the borrower on the day of closing. The Closing Disclosure, on the other hand, must be received three working days before closing. With a 3-day review period, there’s no doubt about when the deal will close.
What will this mean for your loan?
By making these forms more up-to-date, the CFPB has made it easier for people to get a mortgage. As always, knowing more gives you the power to choose the best lender and mortgage package for your needs. Before choosing a loan and a lender, look over your Loan Estimates carefully and ask any questions you might have.