Comparing two GFE’s from two separate lenders can often be a confusing and overwhelming task. It can be very difficult to differentiate between costs and fees that are connected to the lender and costs which are independent of the lender.
Here are some common tips in evaluating a GFE that will help you best understand what you’re evaluating.
* The 800 section is the only section that should vary between lender- It states very clearly on the GFE that the charges itemized in the 800 section are “ITEMS PAYABLE IN CONNECTION WITH THE LOAN.” It stands to reason then when comparing two lenders with two different loan offerings that this is the section which can vary between them. The rest of the sections in a GFE (1100, 1200, 1300, 900, & 1000) disclose charges form 3rd party-service providers or pre-paid interest, taxes, & insurance which are all independent of your lender. Although there may be discrepancies between two competing GFE’s in the non-800 sections these should not be taken into account because in the end these charges should end up being the same (some minor exceptions may apply).
*Differences in title and escrow fees do not necessarily represent a cheaper option- Many times clients will share GFE’s with us from another lender which at first glance appear to offer lower settlement charges. But, after carefully reviewing how the charges are broken out they find that it is not the case after all.
For example, let’s evaluate a situation where an applicant is comparing 2 GFE’s for a $250,000 loan they are taking out to buy a $350,000 home. Here is a summary of 2 GFE’s from two different lenders:
Lender 1-Total Estimated Settlement Charges – $7,103
Lender 2- Total Estimated Settlement Charges- $5,242
After closer evaluation the applicant realizes that despite the higher figure for Total Settlement Charges that lender is actually offering a lower closing cost option. Here is how the GFE’s broke down by section:
Sec. 800 charges (loan closing costs)
Lender 1= $1,608
Lender 2= $3,958
Sec. 900 (Prepaid Interest & Insurance)
Lender 1= $1,728 (cumulative= $3,336)
Lender 2= $467 (cumulative= $4,425)
Sec. 1000 (Prepaid Insurance & Taxes for reserves)
Lender 1= $2,650 (cumulative= $5,986)
Lender 2= $0 (cumulative= $4,425)
Sec. 1100 (Title & Escrow closing costs)
Lender 1= $975 (cumulative= $6,961)
Lender 2= $675 (cumulative= $5,100)
Sec. 1200 (County recording)
Lender 1= $142 (cumulative= $7,103)
Lender 2= $142 (cumulative= $5,242)
In taking a closer look at the GFE the applicant realizes that lender 2 is actually charging $2,350 more in lender fees than is lender 1. However, by “low-balling” the expected closing costs for title & escrow charges & by showing a loan with no impounds (versus Lender 1 who included prepaid taxes and insurance) Lender 2 was able to make their loan look cheaper. In fact, in this example it is not the case.
*Closing costs are not the only story- Just because a lender has presented to you a GFE with the lowest closing costs doesn’t make it the best option for you. Keep in mind that a GFE may not accurately disclose all the important terms of a mortgage. Therefore, in determining what loan option is best the applicant should also consider the type of loan, payment, prepayment penalty, and reliability of the lender.
Generally speaking there is an inverse relationship between closing costs and interest rate. Therefore, if an application intends on being in a home for the long-term it may make sense to incur more costs at closing by paying additional points in exchange for a lower interest rate.
*Trust your intuition- Although the GFE is meant to help consumer’s easily compare loan options from different lenders we often find that the average consumer has difficulty clearly comparing multiple GFE’s. Ultimately, it is usually a good decision to work with a lender that your intuition says you can trust. Give each lender an opportunity to walk you through their GFE and explain each of the charges. If a lender is not willing to give you a GFE or is not willing to take the time to explain it to you then often times this lender is not going to perform as promised.