The new Good Faith Estimate (GFE) form is supposed to make it easier for borrowers to shop around for a mortgage by clearly spelling out what a lender will charge in fees and interest. However, you can still end up paying more than you expect if you're not careful.

In fact, what you think is a GFE may not be a GFE at all. In some cases, lenders have been reported to offer potential borrowers informal worksheets that resemble a GFE, but are not legally binding and have terms that can be significantly altered before closing.

Spells out terms of the loan

Here's how it works: when you apply for a mortgage, the lender is required to provide you with a GFE within three days. The GFE spells out the terms the lender is offering, including the interest rate, any fees charged by the lender and fees charged by third parties for settlement costs, such as closing services and title insurance.

The lender is required to honor those terms if the borrower accepts them within a certain period of time spelled out in the GFE. What the new GFI, which went into use Jan. 1, does is consolidate what had been lots of different charges into clearly identifiable categories - lender fees, interest rates, third-party fees - to make it easier to compare loan terms offered by different lenders.

Loan worksheets lack protections

An "informal worksheet" spelling out those same terms does not commit the lender to honor them. And in some cases, a lender may have legitimate reasons for offering a worksheet instead of an actual GFE.

For example, a lender may prepare such a worksheet for someone who is inquiring about a loan but has not identified the property they wish to buy or the amount they will need to borrow. Both are needed to complete the GFE, so the lender may complete a outlining preliminary terms based on certain assumptions about the property.

In fact, the lender isn't obligated to provide a GFE until you actually apply for the loan. And to do that, six pieces of information are required. the borrower's name, monthly income, social security number (needed to obtain a credit report), the address of the property to be purchased/refinanced, the estimated property value and the loan amount.

Once these six items have been provided, the borrower is considered to have applied for the mortgage and the lender is obligated to provide a good faith estimate within three days.

Some lenders have been reported to use worksheets that closely resemble a GFE but have different titles or state "this is not a Good Faith Estimate" in tiny, obscure lettering. Make sure the form you receive is the actual GFE issues by the U.S. Department of Housing and Urban Development. Lenders may not substitute a worksheet for a GFE, nor can they refuse to offer a GFE to an applicant who requests one.

GFE does not commit you to one lender

A lender cannot demand a loan commitment from a borrower in return for a GFE; the purpose of the GFE is to enable the borrower to compare terms offered by different lenders.

A few important things to note about the GFE. The interest rate offered on the GFE may only be good for a matter of hours; the offer is not fixed until you lock it in for a specific period of time, say 30 or 45 days. You'll need to pay to do this.

Certain terms allowed to vary

Also, be aware there are certain changes that are allowed under the GFE - third party fees can vary by up to 10 percent, as these are not under the control of the lender, and the GFE may spell out options you can select that may change your lender fees and interest rate, such as paying points to obtain a lower interest rate.

Some lenders have criticized the new GFI for not allowing them to spell out in detail the fees they charge and what they're for, claiming that information is needed to fully compare loan offers. However, the GFE does spell out what your total costs will be - and you can always ask your lender to spell them out in greater detail as well. Just make sure that you're provided GFE as well.

Published on March 1, 2010