The Real Estate Settlement Procedures Act (RESPA) requires that banks, mortgage brokers, and mortgage lenders provide borrowers with a Good Faith Estimate and Truth in Lending disclosure as part of the loan process.
These forms, which must be provided within three days of loan application, are essentially a loan summary and an estimate of the charges you’ll incur upon settlement of your loan.
Good Faith Estimate
The Good Faith Estimate, or “GFE” provides basic information such as the lender name and address, sales price, loan amount, interest rate, and type of loan.
It also contains a list of potential fees like the origination fee (if applicable), the appraisal fee, the credit report fee, lender fees, inspection fees, title and escrow fees, settlement fees, and more.
You’ll also find your estimated monthly mortgage payment, including taxes and insurance, so you have an idea as to how much you’ll need to shell out each month assuming the loan closes.
Truth in Lending
The Truth in Lending, or “TIL” disclosure provides your actual APR, which is basically the interest rate factoring in most of the fees tied to the loan.
The TIL is a more accurate representation of the interest rate you will receive because it factors in things like the loan origination fee, underwriting and processing fees, and other costs associated with the loan.
It will also show you the total amount of interest paid over the life of the loan, the total amount of all payments, whether the loan has a variable rate or a prepayment penalty, the cost of late charges, and so on.
Use Them to Shop Your Loan
Once you’ve got your GFE and TIL, you’ll have a better idea as to what the mortgage broker or bank/lender is offering you.
So even if lender “A” offers you a lower interest rate, once related costs are factored in, the actual APR may be cheaper with lender “B” who is offering a higher interest rate because they’re charging you less in the way of fees.
While this information is generally helpful and useful to shop for a loan, remember that it’s just an estimate, and for that reason, may change.
Don’t be surprised if fees fluctuate between the time you receive the GFE/TIL and the time your loan actually closes.
You should always thoroughly review a copy of the GFE/TIL before making a commitment to any broker, lender, or bank.
All this said, remember that neither a GFE or a TIL is an interest rate lock, and the actual interest rate is not locked until you make an official lock request and get the confirmation in writing.
It’s important to understand this because rates vary daily, and your estimate is only as good as the day it was written.