What is a good faith estimate in mortgage financing?
A good faith estimate (GFE) is a document that outlines the estimated fees and terms of a mortgage contract prior to closing it. After applying for a mortgage, you will usually receive such a document within a few days.
Originally introduced under the Real Estate Settlement Procedures Act (RESPA) in the U.S., the GFE aimed to increase transparency and reduce unexpected charges at closing. Although the good faith estimate has been replaced by the Loan Estimate (LE) since 2015 under the TRID rule, the term is still widely used.
In Canada, the “Good Faith Estimate” isn’t officially used. Instead, borrowers typically receive mortgage pre-approval letters, commitment documents, or cost of borrowing disclosures, which serve a similar purpose. These are all common disclosure documents that will be presented during the mortgage process and contain information very similar to that of a GFE.
Why do lenders provide a good faith estimate?
The primary objective of a GFE is transparency between the buyer and lender. These disclosures prevent homebuyers from misunderstanding their monthly payment or being blindsided by hidden costs.
Homebuyers can shop around for rates and easily compare offers on an even playing field. Ultimately, it protects the borrower from entering a contract without fully understanding the financial commitment involved.
What information is included in a mortgage good faith estimate?
A good faith estimate or its equivalent is required to present costs and conditions associated with the loan. The following are items you will likely see included in the estimate:
- Type of Loan
- Interest Rate
- Total Monthly Payment Breakdown
- Balloon Payment
- Total Closing Costs
- Property Taxes
- Insurance Costs
- Prepayment Penalties
These requirements aim to make pertinent information readily available and easy to digest for borrowers.
How to read a good faith mortgage estimate step by step
Understanding each section of a GFE is essential for making informed decisions. Below is a guide to interpreting the three most important parts:
-
Origination Charges
- These are fees charged by the lender when processing the loan, usually presented as a percentage of the loan. This includes:
- Application Fee
- Underwriting Fee
- Other Administrative Costs
-
Points
- A one-time fee you pay to
lower the interest rate
on your home purchase.
- 1 Point = 1% of your loan payment
- Can lower your monthly payments but increase your upfront cost
-
Rate Lock
- Indicates whether your interest rate is locked in and for how long
- A locked rate means your rate won’t change before closing
- If it’s not locked, the rate could rise before your loan is finalized
What fees are guaranteed in a good faith estimate — and what can change?
When looking at a GFE, some fees are guaranteed, while others can legally change before closing. The variability of the fees falls into one of three tolerances: 0%, 10%, and no limit.
-
0% Tolerance
- Fees that are guaranteed and can not change.
- Origination Charges
- Discount Points
- Transfer Taxes
- e.g. Your GFE says your lender’s origination charge is $1,500. On closing day, that charge must remain the same.
-
10% Tolerance
- Third-party fees that can increase by no more than 10%.
- Appraisal Fee
- Credit Report Fee
- Title Services
- Government Recording Fees
- e.g. Your GFE lists $3,000 total for the above services. The final amount can’t exceed $3,300
-
No Tolerance Limit
- Fees that can change by any amount. They often depend on the service provider you choose.
- Insurance Premiums
- Property Taxes
- Title Insurance
- Inspection Fees
- Daily Interest (if closing is delayed)
- e.g. Your GFE estimates $800 for homeowners insurance, but after shopping around, you choose a premium plan that costs $1,200.
Is a good faith estimate legally binding?
For the most part, a GFE is not legally binding, but rather an informational document. This being said, certain parts of the GFE can become binding later in the mortgage process. For example, lenders cannot increase fees beyond the outlined tolerances. Additionally, if you sign a rate lock agreement, the lender is required to honour that rate for a certain period of time.
In Canada, once a commitment letter is signed and conditions are met, the lender is typically obligated to fund the mortgage under those terms. Similarly, in the U.S., while the Loan Estimate itself is not binding, a lender becomes contractually bound once the borrower signs the final agreement.
How accurate is a good faith estimate compared to final closing costs?
As mentioned previously, the accuracy of the GFE depends on the tolerance of each line item. Third-party and prepaid costs may shift based on provider selection or timing, while major lender fees should remain the same.
In most cases, total closing costs may differ by $500–$1,500 from the original estimate, while any larger changes should raise red flags.
What should you do if your final mortgage costs are higher than the estimate?
If you notice an unexpected increase outside the tolerance ranges, it’s important to take action.
- Review the Documents Carefully - Compare your GFE to the final mortgage costs. Look for itemized differences and variance in costs that is beyond the tolerance range.
- Speak to the Lender for Clarification - Speak to your lender to find the reasoning behind the discrepancy and whether it is legitimate.
- Escalate if Necessary - If the lender cannot justify the changes or refuses to correct them, you can file a formal complaint with the lender’s compliance team or the FCAC (Financial Consumer Agency of Canada).
Conclusion
In summary, the good faith estimate (or its equivalents) serves as an essential tool in promoting transparency between lenders and borrowers during the mortgage process. By clearly outlining expected costs, it empowers homebuyers to compare multiple loan options and avoid hidden fees.
Contact a Clover Mortgage advisor today to get expert guidance on your mortgage journey!
FAQ
What does a mortgage good faith estimate look like?
Below is a template for a Mortgage Disclosure statement, the Canadian equivalent of a mortgage good faith estimate:
Ontario Mortgage Disclosure Statement
How do I compare two good faith estimates from different lenders?
To compare two Good Faith Estimates, focus on the APR rather than just the interest rate as it includes lender fees and gives a clearer picture of the true cost. Review total closing costs and check if either lender is charging discount points to lower the rate. Lastly, compare third-party fees like appraisals and title services, which can vary depending on the lender’s preferred providers.
When do I receive a good faith estimate from a mortgage lender?
In Canada, while there’s no formal GFE, lenders typically provide a cost of borrowing disclosure or commitment letter shortly after pre-approval or conditional approval.
