Getting a mortgage can be a trying experience, especially when you’re unfamiliar with the process. At Quicken Loans, we’re in the business of simplifying home financing. But, regardless of how convenient we’ve made the mortgage process, it can still be challenging to understand some of the information in the standard documents.
When you’re in the market for a mortgage, you may be so focused on getting the lowest interest rate that you forget there’s more that requires your attention. You also need to consider the differences in the terms and closing costs associated with each lender. In the past, the Good Faith Estimate form was used to inform borrowers of the nuances. However, the federal government found that most borrowers weren’t shopping around before choosing a mortgage because they didn’t know how to compare lenders’ services.
To clarify the information, the Know Before You Owe rule was introduced, ensuring that all consumers have the information they need to differentiate between the offerings of various lenders. As part of the initiative, the Consumer Financial Protection Bureau retired the Good Faith Estimate and replaced it with the Loan Estimate form. Although the federal mandate has made mortgage details more apparent, you should still understand the basic concepts behind these forms so you’re more prepared to read them.
What Is A Good Faith Estimate?
Up until October 2015, the Good Faith Estimate was the standard form The Real Estate Settlement Procedures Act required lenders to use to inform borrowers of mortgage terms. This form has since been replaced but is still used (in conjunction with the Truth-in-Lending Disclosure and HUD-1 Settlement Statement) for reverse mortgages.
Beyond detailing the mortgage terms, a GFE provides an estimate of the fees to be paid at the closing of the loan. GFEs itemize the payments you have to make so that you know what to expect. This also makes it easier to understand the lender and third-party mortgage fees.
Because GFEs are standardized, the government assumed consumers could use the form to compare the costs of various lenders and determine which lender to use when financing. However, it was discovered that these comparisons were not as easy for borrowers as expected.
Why Was The Good Faith Estimate Replaced?
Although the GFE was intended to clarify the interest rates and closing costs associated with consumers’ loans, many found the information to be far more confusing than illuminating.
Borrowers have always been encouraged to shop around for mortgages, but the GFE and its precursors allowed lenders to choose the language they used to describe terms and fees. The inconsistent language used by lenders left borrowers scratching their heads. Without familiarity with the mortgage process, they couldn’t distinguish the real differences between loans.
In the interest of protecting consumers, the CFPB eliminated GFEs and replaced them with Loan Estimates. This change simplified the information and made it more user-friendly by consolidating four forms into two: the Loan Estimate and the Closing Disclosure.