Builder & Remodelor, August 2004 By Michele Francis

I recently hosted a workshop for first time homebuyers that focused on common mistakes that people in their position make throughout the entire process. Putting together my master list of pitfalls was an easy task in that, despite the availability of relevant educational material on-line and in print, I am often first approached by distressed mortgage shoppers immediately after committing such errors.

While the many articles and home buying guides vary in content, one warning is universally issued: “Make certain that the lender or broker provides you with a good faith estimate (GFE).” At the workshop, I made the same point, of course. But I took it step further. I stressed that, while it is important to make sure that the lender/broker provide a GFE, it is even more critical to truly understand what it means.

According to the Real Estate Settlement Procedures Act of 1974, mortgage loan applicants are required to receive a good faith estimate (GFE) from the lending institution within three days of applying for the loan. This document is intended to provide the home buyer with a clear understanding of what the closing costs consist of and how much they will be. In theory, this sounds great but it is at this point in the process where customers might begin to be taken advantage of by the bad apples in the mortgage industry. These unscrupulous mortgage “professionals” will look to downplay the good faith and, instead, focus loosely on the estimate.

Understandably, home buyers can easily become confused or intimidated by the rush of information and forms that require their signature. What amazes me, however, is that they often accept the GFE without asking questions or for a thorough explanation of the fees listed. Unfortunately, many mortgage brokers will cut to the chase, pointing to the total funds needed to close while offering two or three vague sentences in explanation.

At my workshop, one man in attendance actually brought a GFE given to him by another broker and volunteered that he had very little understanding of its content. We used this opportunity to dissect the GFE and question why there appeared a 1 point (1% of the loan) loan origination fee after the broker assured him that there were no points involved in this loan. I also pointed out, given the fact that he was indeed being charged a point, that the interest rate was too high for the particular loan program. Furthermore, the escrows (AKA prepaid items) were left blank.

My recommendation to the entire group was to insist on a GFE before even applying for the loan and review it with their attorneys. In most cases, taking this extra step will reassure the buyers that they are not being sold a bill of goods and are working with a reputable broker, working in their best interests.

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