Lenders May Be Less Than Honest On Their Good Faith Estimates?

The Good Faith Estimate (GFE) is one of the worst ways to compare lenders. I must get asked for a GFE 10 times a week. And 10 times a week I try and explain that using a GFE is the wrong way to compare lenders. Below are a few reasons why:

The GFE is one of the most poorly designed forms

It was designed by government bureaucrats, and poorly conceived. There was a survey done for a large bank that found that 53% of buyers who looked at the GFE spent very little time doing so. 26% either never looked at it or don’t know whether they looked at it. 49% of buyers said the GFE disclosure was too complicated, “a waste of time,” or they weren’t sure. Just 37% rated it useful. The form used to be a one page form for decades up until recent changes mandated by the Federal Government. Now the form is three pages somehow with less data on more pages. And its way more confusing than before.

What “should” I be asking lenders?

And the most important thing is that when comparing the loan options of different mortgage lenders, you have very few things to compare. What you should be asking is simply:

• what is the interest rate?
• what are the lender fees?

That is it. There is no need to even see a GFE. The GFE has a lot of other fees and monies on it. Those are not dictated by the lender. There are fees that are controlled by a title company, or by a state/county/city such as property taxes or recordation taxes. For example:

Loan Option #1

30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$800 title company fees
$2,500 title insurance
$3,200 property tax escrows: 8 months at $400 a month.
$1,500 per diem interest: 30 days worth at $50 per day.
$2,000 recordation tax to the county
$11,745 total

Loan Option #2

30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$750 title company fees
$2,300 title insurance
$2,400 property tax escrows: 6 months at $400 a month.
$500 per diem interest: 10 days worth at $50 per day.
$2,000 recordation tax to the county
$9,695 total

Which one is better?

Loan Option #2 is the best one, correct? You should pick the lender offering option #2, right? Congratulations on being a smart shopper, right? No. Wrong. These two loan options are exactly the same. If you chose option #2 you chose the better salesperson, not necessarily the cheaper option or the better mortgage professional.

Here is a breakdown looking at the fees:

30 Year Fixed Rate (the exact same loan type is being offered)

4% (the interest rate is the same on each option)

0 points (the cost is the same at 0 points on each option)

$895 underwriting fee (this fee is the same for each option)

$400 loan processing fee (this fee is the same for each option)

$450 appraisal fee (this fee is the same for each option)

$800 title company fees (there is a 10% variance for mistakes allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$2,500 title insurance (there is a 10% variance allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$2,000 recordation tax to the county (this is a fee that most lenders have to be accurate on, and are good at being accurate on).

Here is a breakdown looking at the escrows:

$3,200 property tax escrows: 8 months at $400 a month. (How many months of property taxes need to be collected to establish the escrow account is a big guesstimate, it will vary depending on what time of year you are settling, and is not one of the fees a lender is responsible to be accurate on; so you can fudge this quote downward, but it may indeed be a higher figure in reality, and the buyer will have to pay that higher figure, but you will have chosen a lender based on a fudged number).

$1,500 per diem interest: 30 days worth at $50 per day. (same concept as with the above on the property tax discussion).

Summary

All you have to ask a lender is what is the rate, and what are the lender controlled fees. That is it. That is all you need to know when deciding what lender to use. Then, when you choose a lender, you can expect a complete GFE. But realize it may not be anywhere near accurate due to the above reasons. If you really want to compare apples to apples on the loan choice, a Good Faith Estimate is not the tool to use. This is so because the GFE has other costs in it that are not in the control of the lender. It is also a very confusing form, made more confusing in the last few years by the Feds.

Simply compare rate, appraisal fee, document preparation fees, and any other lender fees. Then always consider the experience of the individual loan officer. Ask what type of lender you are working with. Use of mortgage brokers and big banks is drastically on the decline, while use of direct lenders has been the preferred choice. Be concerned with what the estimated turn times are. Know whether or not your source was referred. Simply get a general comfort level with the loan officer you have been talking to.

Mortgage guidelines can change at any time, so always talk to an experienced mortgage loan officer who will help you understand the current guidelines and how they might apply to you.