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What is a “Good Faith Estimate” and why is it called that?

Because it is a highly regulated business, mortgage lending is governed by several pieces of Federal legislation, one of those being the “Real Estate Settlement and Procedures Act” (RESPA) also known in the industry as “Reg. X”. This regulation has been around since the mid 1970s and is governed mainly by the Office of Housing and Urban Development (HUD). Although, most institutions have their own in-house regulatory compliance officer, and are also governed by their individual regulatory agency such as the Federal Trade Commission. Among its many other compliance requirements, RESPA requires mortgage lenders to generate a document at the time of application, known as a “Good Faith Estimate”.

This document is supposed to represent the lenders best effort to disclose to the consumer what their closing costs and settlement fees will be on the day they “close” on the mortgage, or sign the final paperwork. Because it is somewhat of an estimate, as in many cases the exact figures, right to the penny, may not be known at the time of application, it does represent the lenders best effort, or disclosure made in “good faith”. This document is one of several mandatory disclosures that have to be made to the home buyer or home owner (it applies to refinances, as well) within three business days of applying for a residential mortgage, or multi-unit building where the borrower will be residing in the property. It does apply to commercial loans.

In addition to the Good Faith Estimate, the lender is also required to give the borrower a copy of the HUD approved “Settlement Costs and Helpful Information” booklet (HUD 398-H4). This booklet goes hand-in- hand with the Good Faith Estimate and further explains the line by line breakdown of each closing costs and settlement item. Typically, the lender will review these, as well, with the borrower, but as long as the borrower receives their disclosure within the mandatory time frame of three business days and returns that and the other required disclosures to the lender within a reasonable amount of time, the regulation has been satisfied to that point. Later, at the time of closing, another document will be generated by the attorney, or closing agent, known as the “HUD 1” Settlement Disclosure. This is the final version of disclosure of closing costs and settlement fees and if the lender did their job of providing early disclosure accurately, it should be very close to the numbers estimated on the original “Good Faith Estimate”. For more information about RESPA, you can visit the HUD’s web site.

Barbara Cunningham

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