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Understanding The Loan Estimate The New Good Faith Estimate

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Understanding The Loan Estimate The New Good Faith Estimate

This BLOG On Understanding The Loan Estimate The New Good Faith Estimate Was UPDATED On May 12th, 2019

The purpose and goal of Understanding The Loan Estimate which is the old Good Faith Estimate is to encourage home buyers to compare and shop for costs and fees from other mortgage lenders before on deciding with which lender to go with.

  • The purpose of the Loan Estimate is to help borrower comprehend and fully understand the services they can shop for
  • Not only for the best terms and the lowest available mortgage rates but also for the best third party charges

Why Was The GFE Replaced With The LE

The residential mortgage industry is extremely regulated, unlike the commercial mortgage industry. The Old Good Faith Estimate was multiple pages and hard to understanding. Understand The Loan Estimate is very important and this is the sole reason regulators replaced the old GFE with the new LE:

  • The government want to make sure that consumers who shop for residential mortgage loans are protected
  • The whole mortgage industry went through a major overhaul after the 2008 real estate and mortgage meltdown
  • This included the elimination of no doc and stated income mortgage loans
  • Thousands of mortgage companies went out of business
  • The whole sub prime mortgage industry got wiped out
  • Disclosures and over disclosures with mortgage applications became the norm
  • The Good Faith Estimate was implemented
  • The purpose of helping mortgage loan applicants from excessive charges and fees
  • The GFE was eventually replaced with the LE

What Is The Definition Of Good Faith Estimate And Loan Estimate

The latest version of the Good Faith Estimate was implemented in January of 2010.  There are several components and factors in the newest version of the Good Faith Estimate, GFE. The Good Faith Estimate was eventually replaced by the Loan Estimate:
  • Mortgage lenders are required to issue Loan Estimate to the mortgage loan applicant in 3 days after receiving the signed completed mortgage application
  • If the loan originator does not provide the Loan Estimate within 3 days of receiving the signed completed mortgage loan application, the lender is in violation of Section 5 of RESPA
  • The United States Department of Housing and Urban Development, HUD, sets what constitutes a complete mortgage loan application
  • According to HUD, a completed loan application needs to have the following:
    • borrower’s name
    • monthly income
    • social security number in order to pull the borrower’s credit report
    • subject property address
    • the market value of the subject property
    • amount of loan
    • other information that is necessary for the mortgage loan application
The Loan Estimate is in a standardized format. The new loan estimate was simplified to make understanding the Loan Estimate much easier than the old Good Faith Estimate. All mortgage lenders must provide mortgage loan applicants with the same documents.
  • loan charges and fees
  • third party costs and fees
  • other fees and costs associated with the origination of the loan needs to be properly and uniformly displayed

Shopping For Home Loan And Understanding The Loan Estimate

Understanding The Loan Estimate is supposed to encourage mortgage borrowers to shop for the best mortgage rates and costs associated with the origination of the mortgage loan.
  • Mortgage lenders are required to provide borrowers with the Loan Estimate within three days of receiving a mortgage loan application
  • Another requirement that has been implemented by the United States Department of Housing and Urban Development, HUD, is that lenders are limited on what they can charge a mortgage loan applicant
  • HUD restricts on what the lenders can charge and how much they can charge
  • Most lenders will not charge anything
  • But a lender can charge a nominal credit report fee of up to $50.00
  • The restriction of upfront costs lenders can charge enables borrowers to shop for mortgage companies for the best rates and costs when shopping for a loan
Shopping for mortgage loans will require lenders to do credit pulls.
  • Every credit check is a hard pull credit check and will drop the mortgage loan borrower’s credit score
  • Home Buyers shopping for mortgages for a course of two to three months, most lenders and/or creditor who pull credit will think borrowers are getting denied for a mortgage loan
  • Can adversely affect their chances for a mortgage or other credit approval
  • It is best advised if borrowers want to shop for a loan, do so in 30 days and not to exceed 45 days due to the negative impact it will do on credit scores and credit report

How Accurate Are The Fees And Costs Listed On The Loan Estimate

The Loan Estimate is just what it states.

  • It is a list of costs borrowers can encounter
  • If they do not use a particular vendor or is not required that the fees and/or costs does not apply to them
  • Many borrowers do not believe in the Loan Estimate and think it is just worthless
  • A mortgage loan originator needs to prepare the Loan Estimate
  • The Loan Estimate has many costs and fees that a mortgage loan originator needs to list where the mortgage loan originator may be clueless and just overly disclose
  • For example, third-party fees and costs that a mortgage loan originator needs to list on the LE, the loan officer may not know
  • If the home has a septic/well system, the loan officer needs to disclose how much a septic and well inspection costs
  • The loan officer still needs to list it on the Loan Estimate in the event if the home buyer does encounter a well on the property and wants it inspected
  • Even though the loan officer has absolutely nothing to do with the third party well and septic inspection, the loan officer is liable for the cost of the well and septic inspection if he or she did not list it on the Loan Estimate
  • How does the loan officer know the cost of a well and septic inspection? 
  • Most mortgage loan originators will probably list $1,000 on a well and septic inspection
  • Even though a well and septic inspection may only cost $200.00, if the mortgage loan originator under discloses it the loan officer can be held liable
  • If the well and septic inspection goes over what the loan officer listed as an estimate, the loan officer is liable for anything that is over 10% of the original estimate he or she listed
  • However, if the loan officer over discloses it like stating it as $1,000, anything costs and fees under $1,000, the loan officer is not liable for
  • That is why the Loan Estimate is not an accurate indicator of the costs and fees involved with the purchase of a home and origination of a mortgage loan

Related> What is a Good Faith Estimate?

Related> Good Faith Estimate Definition

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