Years ago, it was fairly simple to get mortgage financing. Unfortunately, it was not uncommon for some eager buyers to get taken advantage of by mortgage lenders. New federal rules have clamped down on the lending abuses, but you still need to protect yourself and do a little hard work upfront to make sure you are getting a fair deal when borrowing for real estate.
Dissecting the good faith estimate
The good faith estimate (GFE) — page 2 in particular — is a federally required mortgage disclosure that is supposed to help borrowers compare mortgage options. In many cases it is ineffective, however, because the GFE mixes costs and expenses that are crucial to the decision-making process with irrelevant figures, preventing borrowers from isolating the costs they actually need to review.
Here are some tips for breaking out the three types of costs on a GFE and comparing your options to get the best deal.
Costs you should compare between lenders
On page 2 of the estimates, you’ll find 11 lines detailing costs and expenses associated with your mortgage.
Lines 1-3 show the costs that you should use to compare lenders. This is where the rubber meets the road. You should look at the total for these costs and the interest rate you are being offered for paying those costs.
For example, Lender A offers you a 4.25 percent interest rate with $2,500 in lender fees. Lender B offers you the same 4.25 percent interest rate but with $4,500 in fees.
If you compare these figures among a few lenders, you will be able to analyze the amount you pay for a certain interest rate. And that’s what you need to know to get a fair deal on your loan.
Lines 5, 7, 8, 9 and 10 show the costs that are irrelevant to your decision. These costs — such as government recording charges and initial deposit for escrow — ultimately are the same regardless of which mortgage lender you use and are based on your loan amount. An independent escrow agent will calculate the true amount due for closing, so even though you may see different amounts from each lender, you can disregard these figures for analysis purposes.
Costs you can bid out
The remaining lines — 4, 6 and 11 — are costs that you can go (subject to your purchase contract) and get bids upon if you don’t like the estimate amounts from that particular vendor. So get some additional bids, if you like, on title and home insurance costs. They are relevant to saving money on the overall purchase but not for selecting the best deal on your loan — because they are not lender fees.
Don’t get intimidated by the sea of numbers in a loan offer. Knowing how to decipher a good faith estimate can help eliminate some of the headaches associated with homebuying and can save you money.
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a guest blogger on Zillow.com, the author of several books including “Real Estate Ownership, Investment and Due Diligence 101”, and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.