There is so much going on with Real Estate, the Economy, and Financing that I had to write an article on the ins and outs of a Good Faith Estimate. This should help all of you first time buyers, and those that have not purchased a home in a few years, to know what to expect when getting a loan in this market. As you may know, interest rates change about every 5 hours, so it is difficult to compare apples to apples with lenders in this market. Unless you get the rate at the exact same time, it may be a tenth of a percent off.

The best way to be sure about your lender and your loan is to get a Good Faith Estimate with a safe lender, or a lender that your Realtor recommends and has done a great job with their own clients in the past. For me, Sharon Natarus with Wells Fargo is very honest, a great educator as you will read, and is accountable for her business!

Every lender is required to give you this Estimate. Keep in mind it is a working document that will change and become more solid as we choose a house, then we will fine tune your taxes. When you get an insurance policy, that number will become more solid. Each time this adjusts to get you closer to what your final figures will look like prior to closing, which is why they call this an Estimate.

So if you decide to shop around with closing costs and rates, first listen to your Realtor’s experience with successful lenders who won’t low-ball your estimate or your rate just to get you roped in. These GFE’s allow you to compare apples to apples, in an industry where things are constantly changing and costs are shuffled around in a thousand different ways… All a good reason to use a SAFE, trusted lender!

When I work with any buyer in this constantly changing Real Estate market, I connect you with a lender that will educate you and provide you a “Good Faith Estimate.” (aka GFE) In a purchase with the AmyBSells Team, you will sit down with our lender, talk about what you’d like your monthly payment to be, and then the lender can prepare this estimate document. These are especially helpful if you are a first-time buyer, or haven’t purchased in several years.

We would also do this estimate to provide you with an idea of what kind of money you will need to bring on the day of closing.

I had my lender, Sharon Natarus, prepare a sample Good Faith Estimate, and now we’re going to go through it step by step.

“A Good Faith Estimate is basically just that — an estimate,” Sharon said. “It’s going to show you your monthly payment, your closing costs and it’s also going to show you what we call prepaids. Prepaids are prepaid interest, setting up your tax escrow and your homeowners insurance.

“This is just an estimate. We won’t have your final figures until a couple days before closing. I like to do it a little bit on the high side so that I don’t have a customer coming to closing and not have enough money.”

We have here an FHA loan, 30 year fixed. The date is the date on which the estimate was prepared. (This effects the interest rate. These days the interest rate changes daily at minimum, if not three to four times daily!) We also have an estimate of the Sales/Purchase price of $200,000. (This is either what we agreed was your target price, or the number we came to after calculating based on your desired monthly payment.) The mortgage amount is the amount you are financing with the lender.

The P&I or Interest Only Payment of $1,115.01 is the amount of interest on $200,000 at 3.5 percent. The Insurance is just an estimate. This can vary by company, and you will probably get discounts if you go with a company you’re already using for your car, etc. Taxes are also an estimate, and Sharon likes to err on the high side. If you know what neighborhood you’re looking at, or if you already have a particular house in mind, Sharon will go into the records and pull that number for the appropriate county. PMI/MIP is an estimate of your mortgage insurance. You will pay that mortgage insurance monthly until you reach 22 percent ownership in your house. (This money then goes into a fund that helps with foreclosure, etc.) HOA cost would only apply if you have a Home Owner’s Association. (We’d probably work this in if you’re planning on buying a condo, or buying in a neighborhood with a pool community.) And your Estimated Total Monthly Payment works out to be $1,537.93.

This next section is a collection of fees that make up your “closing costs.” You maybe didn’t even know what makes up your closing costs! The lender will hire an experienced appraiser from their pool of approved professionals. The lender will pull your credit report. They will also pull court house records to see if the property is in a floodplain. The final inspection fee is only involved if there is major work done to the home after your inspection and an appraiser or inspector needs to be sent back out to the property. The commitment fee is the FHA approval, and the FHA Upfront MIP is the upfront mortgage insurance required. The various title fees have to do with obtaining the title and checking records to see if there are any liens on the property. The lender will also require you to pay title insurance to cover them against any liens on the property. (You could add more insurance to cover yourself if you choose. That coverage is called Owners Title Insurance.)

The endorsement fees will have to do with any PUD (planned urban development) fees or riders on swimming pools, etc. Again, these are just examples of all the various fees we could encounter. The various recording fees could vary, depending on the number of pages of the deed. Typically a deed is no more than 200 pages. Survey fees involve the lender checking court records on survey details. Courier charges may be involved if papers or checks have to be overnighted or delivered anywhere. The processing fee is another title company fee required for the title company processing. So, for any first-time buyers who are new to this process, this is what makes up your closing costs.

So, the closing costs are $7,857.27. We are going to subtract the mortgage insurance from this in line B (estimated closing costs to be financed) because we are rolling this amount into the loan and it will not be part of closing.

Now we put in the prepaids. Until we finalize the property we always add in 15 days of interest upfront. (If you closed on February 15, for example, we take 15 days of interest for February, skip March, and then your first payment on the home would be April 1.) Then we have one year of homeowner’s insurance ($720.00), three months escrowed insurance ($180.00) and 5 months escrowed county property taxes ($1,375.00). This could vary month to month.

The aggregate accounting adjustment: The lender cannot pay you interest on the escrowed money they holding, it is against the law. By law they can only hold onto a two month cushion. The computer calculates the exact amount the lender can hold, and the $240.00 represents the adjustment.

So, we have total prepaids of $2,479.35, added to that are the closing costs of $7,857.27. That’s how we come up with the estimated settlement costs of $10,336.62. This is where we subtract the mortgage insurance out because it is being financed, add in the down payment amount of $7,000.00 and we come to the final estimated cash payment needed on closing day: 13,959.62.

Now you understand this document! Remember, this is an estimate. But also, this is basically the same document we will prepare for closing. So to have time to study and understand it in advance is helpful.

A Good Faith Estimate should be provided to you at the time you discuss any type of rates or types of loans. The lender we worked with for this estimate will provide you a GFE within 24 hours of talking with her about a loan. All professional and honest lenders will operate this way. It is the law to provide this document to the buyer when becoming pre-approved.

When it comes time to write an offer, I will reference these GFE’s to be sure we are negotiating enough closing costs and you are understanding the type of loan you are planning to get when you write your offer. This is truly the FIRST step to buying a home and the cornerstone for what you will buy and our negotiations.

A very special thanks to Sharon Natarus at Wells Fargo for sharing all this information with me!

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