Should You Have Faith In A Good Faith Estimate?

Kirk Charles

I was speaking with a client yesterday who was thoroughly confused by the good faith estimates he received from three different mortgage companies for his refinance.  He and his better half are dream candidates for a loan officer.  They each have great jobs, better than average credit and are highly educated.  If I was still originating mortgages I’d be salivating over them.  Anyway, I looked over the good faith estimates and admittedly I was also confused although I thoroughly understand the process.  Each estimate had different loan amounts, different closing costs and different interest rates.  One estimate seemed absurdly low, while the other two were about average.  So, with the great variation among the estimates, the question became which good faith estimate should he put his faith in?

In today’s tough economic times it’s hard for lenders to get deals done.  Consequently many loan officers have morphed into jackals jousting over scraps of meat–and you know who the dinner is!  Since I’m positive you don’t want to be gobbled up any time soon, I’ll just cover one thing which could save you some money.  When my client looked at one of his good faith estimates, it said closing costs would be approximately $7,458.  Immediately my antennae shot up because it seemed absurdly low. I knew he would have to take more than that out of his pocket to consummate the deal, based purely on my experience.  He then confirmed that he got the verbal from the loan officer that it would cost him $7,458.  I then get a fax of the good faith estimate and it was indeed true that the closing costs reflected that amount.

So, what’s the problem? The loan officer didn’t include tax escrows and pre-paid interest in the closing costs, which technically is the correct thing to do.  But, clients aren’t technical people.  They want the bottom line.  Including tax escrows, pre-paid interest and closing costs, the client would have to take $12,264 out of his pocket, which would be the total settlement charges.  Do the math–that’s nearly $5,000 more than the estimate given by the loan officer. So, when the client asked the loan officer the magic question, how much would it cost him, did he mean closing costs or how much out of his pocket?  To make his deal look better obviously the loan officer gave him the lower of the two figures, which to me is a travesty.

There’s much more about this scenario that I could rail about, but I’ll save my agitation for my next post.  Needless to say that loan officer won’t get the deal and he’ll have to go searching for another piece of meat, but don’t let that meat be you.  Be on top of your game and understand where your dollars are going.

Kirk Charles, a.k.a. The Mortgage Confidant, is a mortgage consultant and author of The Real Deal: How to Get a Mortgage During & After the Subprime Crisis