Understanding Your Mortgage Company's Good Faith Estimate
UPDATED: March 30, 2020
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The closing costs for a new mortgage are significant. Some states charge mortgage taxes which can be the highest line item on a closing statement. Other smaller fees include the Application Fee, Processing Fee, Underwriting Fee, Attorney Fee, Title Search, Appraisal, Hazard Insurance, Wire Fees and More.
Your closing costs will always vary depending upon location and state real estate law. But all of these costs get combined into what your lender calls a Good Faith Estimate.
Back to Basics: What is a Good Faith Estimate?
The Good Faith Estimate, oftentimes referred to merely as a GFE, is a document provided to a borrower early in the mortgage application process that shows a breakdown of approximate closing costs and the mortgage payments that will be due on a regular monthly basis after the real estate closing.
The Good Faith Estimate is a critical document for the borrower because it allows the consumer to shop and compare costs and fees of other lenders and brokers before the actual closing date. The Good Faith Estimate is the only document that a borrower will receive from a lender or broker that outlines the main details the borrower should expect at the closing table when it comes time to sign all the mortgage documents.
Why You Should Use a Trusted Mortgage Broker
The use of a qualified mortgage broker is a good idea when the home buyer has atypical loan issues that would make approval for a mortgage loan more challenging. For example, a person with low credit scores or self-employed income would benefit from the use of a mortgage broker if underwriting guidelines used by the standard Fannie Mae or Freddie Mac residential underwriting process does not qualify the loan.
An irregular property will sometimes also need the help of a mortgage broker to find an alternative lender when the property does not meet traditional Fannie or Freddie underwriting guidelines. Private lenders are oftentimes more willing to offer funding (at higher interest rates of course) when a property has some defect that does not meet traditional guidelines. A mortgage broker is a great way to help locate funding when a borrower is having a difficult time obtaining financing.
Nevertheless, mortgage brokers are notorious for pulling a bait and switch in which the terms of the Good Faith Estimate change significantly from the original terms to when the deal closes. There are laws such as the Real Estate Settlement Procedures Act (RESPA) that prevent a mortgage broker from pulling this bait and switch which requires that a lender or mortgage broker send out a new Good Faith Estimate when the terms of the deal change.
However, many mortgage brokers ignore these laws with the understanding that Banking Departments are not sufficiently staffed to oversee all the mortgage brokers in their jurisdiction. It is not uncommon for a borrower to show up on closing day and to learn that the interest rate and the closing costs are significantly different than originally promised.
What is the Yield Spread Premium on the GFE?
Of all the items on a Good Faith Estimate, the most well-hidden is the line item listed as Yield Spread Premium or YSP. All borrowers need to locate the line item on A GFE that shows whether the broker (originator) will receive a Yield Spread Premium (YSP). The YSP is paid to the broker at funding as part of the broker’s compensation.
Locating the YSP on the GFE allows a borrower to see how much of the Origination Charge is paid indirectly through a higher rate. This fee is important for a borrower to locate and understand on their GFE because it demonstrates the amount of indirect compensation that a broker is receiving from the lender.
A high YSP fee of an amount greater than around $4000 will indicate that a broker could have offered a significantly lower interest rate to the borrower if they were willing to take a smaller commission.
As such, a borrower should learn the amount of YSP that a broker will receive at closing. The YSP will show the borrower exactly how much the broker is earning in total indirect compensation on the transaction and is useful to any borrower who has retained a mortgage broker and is not shopping alternatives.
Find Yourself an Honest Mortgage Broker
Buying a home is a significant moment, and who you choose matters. The biggest negative of using a mortgage broker is that many are unscrupulous and dishonest. The most important quality to look for in a mortgage lender is honesty because there are many unscrupulous lenders that will charge unnecessary junk fees that can easily be avoided by shopping.
It is critical to find an honest loan officer that promises that will be no hidden closing costs that suddenly appear on the day of closing. Frequently, mortgage brokers get paid (Yield Spread Premium) by the lender for originating the loan.
As such, sometimes a mortgage broker will originate a loan with a lender even though the terms may be less favorable for the borrower, if it means they would earn a higher commission.
The best way to find an honest mortgage broker is through family, friends and other trusted referrals. It is advisable not to use the Internet when searching for a mortgage. A direct lender also may be a safer alternative for many borrowers, but in the end, finding someone you can trust is best!
David Reischer, Esq. has been a licensed real estate attorney for over 15 years and is the Founder and CEO of LegalAdvice.com