What is a good faith estimate?

Q: What is a good faith estimate?

A: It’s the most important document you’ll receive when applying for a mortgage. A good faith estimate, or GFE, summarizes the key terms of your home loan, from interest rates to closing costs. Your lender must give you a GFE within three business days of receiving your application, unless it has already turned you down.

No matter where you get your mortgage, you’ll see the same three-page standard GFE that all lenders must use.

The Consumer Financial Protection Bureau has created two new “Know Before You Owe” disclosure forms, including one to replace the GFE, that banks and mortgage brokers will have to start using Oct. 1. But the current form is what borrowers will have to depend on until then.

Q: Will this tell me how much I’m being charged for lender fees and points?

A: Absolutely. This is where you can see exactly how much up-front cash you’ll need to close any home loan.

Lenders almost always charge origination fees for processing your mortgage. Look for them in the box that says “Our origination charge” at the top of the second page of the standardized GFE.

These fees typically run between 0.5 percent and 2 percent of the loan ($1,000 to $4,000 on a $200,000 loan). The best deals charge a fixed fee of $1,000 or less.

Points refer to charges that are based on a percentage of the amount you’re borrowing. One point equals 1 percent of your loan.

There are two types of mortgage points:

• Origination points are just a form of origination fees.

• Discount points lower the interest rate on your loan and reduce your monthly payments.

Origination points must be reported in the same box of the GFE as other lender fees. One discount point typically decreases the interest rate by 0.1625 to 0.25 percentage points on a 30-year mortgage.

If you’re being charged discount points that should be reported right below the origination fees in a section that says: “Your credit or charge (points) for the specific interest rate chosen.”

If you aren’t paying points, the first box will be checked. If you are being charged points, the third box will be checked, and the amount you’re being charged will be filled in.

Some banks and mortgages companies promote interest rates in their advertising that are only available by paying points.

They hope you’ll be so wowed by a rate that looks like it’s lower than competitors are charging that you won’t notice the additional up-front cost.

That’s why it’s critical to check for discount points on every good faith estimate.