A federal law (RESPA) tries to prevent unjustified overcharges to mortgage borrowers, or inflated charges to cover other expenses of the lender. It primarily relates to payment of referral fees by someone providing a real estate settlement service (basically, everyone involved in the transaction except for the private seller and buyer) to someone else providing such a service. When referral payments are made, the payment is not just absorbed by the payer; instead it is passed to the buyer as an additional cost of closing the loan.

Moreover, it used to be very common for a borrower to be quoted one estimate of expenses when he/she applied for a loan, and then just before the closing to be told that thousands more dollars had to be brought to the closing. These extra dollars covered those referral fees, as well as hidden interest charges and the like. Of course, the lenders always knew how much the survey, appraisal, title insurance, and other expenses would be. These costs tended to be predictable (how would the lender stay in business otherwise?), so there wasn't any justification for this sudden upsurge in closing costs.

In response to these practices, RESPA requires that lenders give borrowers an honest estimate of the closing costs. Because the lender knows pretty much how much most of the charges will be, the lender must give this estimate in good faith - meaning estimating the costs with a fair eye to what the lender knows is its typical cost.

When the borrower attends the closing, the costs charged by the lender should be very close to those described on the good faith estimate of closing costs (its full name).

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A good faith estimate (GFE) is a written list of the estimated closing costs involved in a mortgage transaction, including the lender's charges as well as the local closing agent's charges and fees. It also includes estimated costs for real estate property tax and homeowner's insurance. Pursuant to the Real Estate Settlement Procedures Act (RESPA), a U.S. mortgage lender must present a GFE to a customer. An estimate of all closing fees, including pre-paid and escrow items along with lender charges, must be provided to the borrower within three days after submission of an application for a loan. The estimate is designed to give borrowers the ability to shop and compare the fees of one loan to the fees of another, so that they can make informed decisions based on the cost of the loan.

The good faith estimate is divided into sections of similar fees, each of which is designated by a range of numbers: the 800s, 900s, 1000s, 1100s, 1200s, and 1300s. For purposes of comparison-shopping, the most significant fees are listed in the 800s. Most of the items are within the control of the lender or broker, so the estimates should be accurate. A few of the items in the 800s are charged by third parties, however, and the lender's estimates should not be far off from the actual charges. The lender has direct control over origination and discount points and fees (listed in 801 and 802) and administrative, underwriting, processing, funding, document preparation, wire transfer, and other fees (listed in 810 and higher).

Third-party fees contained in the 800s include: the appraisal, credit report, inspection, mortgage insurance application, assumption, tax service, and flood certification. These fees are supposed to be passed along to the borrower without any markups. Some national mortgage lenders own subsidiaries that perform these functions, so they can provide good estimates of these costs. Borrowers should expect smaller lenders are brokers to estimate these fees fairly precisely as well, even though they do not own subsidiaries that offer the services themselves.

Fees denoted in the 1300 series (surveys and pest inspections) should also be easy for lenders to estimate accurately. The 900s and 1000s concern prepaid items, such as mortgage, hazard and flood insurance premiums, mortgage interest and taxes that must be paid up front or deposited into an escrow account. The 1100s cover title charges-title insurance premiums, settlement or escrow fees, and attorney and notary charges. Items contained in the 1200 consist of government fees such as city and county tax stamps and recording fees.

Charges contained in the 900 to 1200 series are difficult to estimate. Some of the prepaid amounts vary based on the date of closing. For example, the borrower would have to prepay a full month's interest if he or she closed on the first of the month, but not if he or she closed on the last.

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A good faith estimate is just that an estimate. It is an estimate of charges that you can expepct when you go to closing. These charges include lender fees, broker fees, title company fees, tax and insurance (escrow account) fees, recording fees.

Be sure that you take your good faith estimate to closing and compare them. Ask questions about the differences. Usually I can get within 100 dollars if you compare my good faith estimate to the closing docs.

Compare at least 2 companies good faith estimates. Do not be sold at the table with a rate and fees that are way differant than was originally disclosed. By comparing 2 companies you have a way out. Do your homework.

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