Monday, April 9, 2007

How to compare Good Faith Estimates

A Good Faith Estimate is required by law to be provided within 3 business days of pulling your credit. It is where lenders list the costs involed with obtaining a real estate loan. I have outlined the most important elements for you. 1) Points: Not only is the origination fee important but know what is being paid by the lender to the broker. This is called the yield spread premium or YSP, the higher the rate the higher the YSP. The purpose of YSP is to pay the broker for services performed, it may also be necessary to cover adjustments charged by the lender if you have certain risk factors, or to lower your closing costs. You may wish to pay the entire amount upfront to keep your rate low. 2) Fees: Lenders commonly charge underwriting, tax, wire, and flood certification fees and a broker may charge processing and credit report fees in addition to the origination fee, anything more might be considered junk fees. Junk fees can really add up and will affect your APR. There are also fees that are more so fixed and won’t vary much, these are going to be your appraisal, pest inspection, title and escrow fees, prepaid interest, tax prorates, hazard insurance, and reserves if collected for an escrow account. If the fees are quoted too low you will need more money at closing. 3) APR: The annual percentage rate, this is the true cost of credit. The APR must always be disclosed if a rate is quoted. You will find it on the Truth In Lending disclosure that must accompany your good faith estimate. If there is a large difference between the note rate and the APR double check the fees being charged, you might want to continue shopping. 4) Terms: Are you comparing a 30 year fixed loan to a 5 year ARM, are taxes and insurance included in the payment, or will you have pre-payment penalties? You will not be able to make an educated decision if you are not comparing apples to apples. Keep in mind all good faith estimates are just that, an estimate; however its purpose is to give you a good idea of what obtaining a mortgage will cost you. If you want to see another loan type quoted, ASK!
***Changes to the RESPA laws effective 1/1/10 have changed some of the timelines and requirements by law. Stay tuned for an update.