What Are the Differences Between the Good Faith Estimate and the Hud-1 Settlement Statement?
This is one of the most frequently asked questions from new and seasoned borrowers. Many assume that the Good Faith Estimate (GFE) is an exact representation of their actual closing costs. If the mortgage professional fails to educate the borrower, this misunderstanding can cause great heartache at the closing table. Consider the differences between the GFE and the HUD-1 Settlement Statement (HUD).
The GFE is an “estimate” of the closing costs at the time of loan application, so it does not guarantee the closing costs. It is the mortgage professional's educated “guess” as to the closing costs based on a combination of the following:
1. Down Payment or Equity: This is the true starting point in estimating closing costs. The amount of money available for a down payment—or the amount of equity in the property for a refinance—plays a large role. If the borrower has a large down payment (20% or more), then Mortgage Insurance (MI) is not required. Mortgage Insurance is different from Homeowner's Insurance. It protects the lender in case the borrower defaults on the mortgage. When the down payment is at least 20% of the purchase price—not including closing costs—then MI is not necessary because the loan is determined not to be a high risk of default.
2. Credit Report Information: The credit score determines how much the Homeowner's Insurance premium will be. If the borrower has damaged credit, he will pay more for Homeowner's Insurance, and this will reflect in the closing costs. At the time the GFE is prepared, insurance premiums may not be available. Therefore, there may be a difference on the HUD.
The credit score will also determine the interest rate, so the interest rate on your GFE may not be an accurate. Credit scores can change between the time the GFE was prepared and closing.
3. Your Mortgage Professional's Knowledge of Available Loan Programs and Requirements: The mortgage professional may choose a program that the borrower does not like or that does not fit the borrower’s profile. This program may be the one on which the initial GFE is based.
Outstanding debt can disqualify a borrower from certain loan programs. The borrower would have to pay the debt at closing in order to qualify. This information too may not be available at the time the GFE is prepared but will reflect on the HUD.
Different loan programs have different requirements for prepaids. Prepaids are fees paid in advance such as taxes, insurance and reserves (vary by lender). If the loan program changes, then possibly the prepaids change based on specific loan program requirements.
4. The lender's fees: Different lenders have different fees. Some fees are negotiable, and some are not. If the loan program changes, the lender fees may change. Pay close attention to the broker fees and the yield spread premium (YSP). If the broker fees are inconsistent with the GFE, discuss it with the mortgage professional. If the YSP on the HUD seems high—even though the lender pays it—question your mortgage professional. Usually, the higher the YSP, the higher the interest rate is. Keep in mind that the mortgage professional has to earn a living.
5. A final consideration involves real estate taxes and fees in the locale where the property is situated. These fees should be static. They will not change unless the tax rate, local fees or value of the property changes.
The HUD differs from the GFE in that the HUD is the bottom line. The HUD contains the true closing costs. Always request a copy of the HUD at least 24 hours before closing. Compare it to the GFE. If there are glaring discrepancies, contact the mortgage professional, and have him explain them in detail. Do not be afraid to question him. The borrower is the one committing to the loan. The borrower has a right to know what the different fees represent.