A GFE is a mandated three-page government form that borrowers receive within three days of a loan application. In October 2015, the GFE was replaced with a new document called the Loan Estimate.
The purpose of this document is to outline the estimated costs and fees on a loan. It is not a guarantee of the loan but rather a way for borrowers to shop around and compare prices from different lenders. This summary also gives consumers a better estimate of the real cost of owning a home. These hidden costs, such as third-party services that are included in closing costs, may be surprising for first-time homebuyers.
A GFE contains the summary of the loan terms, such as a fixed or floating interest rate, and estimated settlement charges. An important date to note is when the GFE expires.
The first thing you should note is when the GFE expires. If your interest rate is fixed, you must close by that date for that interest rate to be effective. If your interest rate is floating, the terms of the GFE may only be valid for a short period of time.
Your document should clearly disclose the initial loan amount, monthly payment, and loan term. Be aware that your monthly payment amount does not include property tax or homeowners insurance. Be sure to read the terms of the loan, such as if there is a prepayment penalty or a balloon payment.
If your lender collects a portion of the annual property taxes and homeowners insurance premium, the funds will be held in escrow until they are due. Your GPE should discuss any applicable escrow account information.
Your loan origination charges and the loan’s interest rate go hand in hand. There are three main options for these charges. The first option is that the loan origination charges are explicitly stated. Another scenario is that the loan may feature a credit that reduces the charges but raises the interest rate. The final option is that the loan includes points, which increases the charges but reduces the rate.
You will also see your closing costs, such as an appraisal, lender’s title insurance, escrow account deposit, prepaid interest, or homeowners insurance.
Once you enter a loan agreement, you will then receive a closing disclosure. These numbers should be a close match to the GFE, or what is now the Loan Estimate.
There may be changes to the amounts, such as prepaid interest, property insurance premiums, initial escrow deposits, and fees for third-party services. If there are significant differences between your GFE and closing disclosure, you will need to discuss it with your lender immediately before closing.