Be sure to question any loan agent who lists very few fees on the Good Faith Estimate. Borrowers may think they are getting a loan with very few fees only to be surprised when they see the final closing statement.

Certain fees listed on a Good Faith Estimate are used to calculate your Annual Percentage Rate (APR). These fees are added with the regular interest payments to come up with a total cost. This total is then converted to a percentage (APR) and is considered to be the true cost of borrowing money to purchase or refinance a home.

When you do compare Good Faith Estimates with other offers you have received it is important to compare items that the broker/lender has influence and control over. Line items 900 thru 1200 are often not known in fact until a title company has ordered title history on the property and all interest, insurance, and taxes are thoroughly researched. The loan officer will often attempt to get an estimate of these items generically, but the final itemization of these fees will differ at the closing table.

A good faith estimate will have four columns after the dollar amounts listed for each item. The first column is PFC. This means Prepaid Finance Charges and these items affect APR. The next column is an S which means Seller paid (the seller is paying for these items). The next column is an F which means FHA allowable. The last column is POC which stands for Paid Outside of Close. This simply means that the item has already been paid for before closing. An appraisal fee and homeowners insurance premium are two typical fees that are paid for upfront outside of close.

The lined items on the GFE have numbers corresponding to the items on the HUD-1 Settlement Statements, which is completed by the closing agent at the settlement. A copy of the HUD-1 and HUD-1A are provided for both the buyer and the seller. The costs on the HUD-1 are actual costs, since the actual figures are now available, as opposed to the estimated costs on the Good Faith Estimate provided by the broker in the initial stage of the loan application.

Understanding good faith estimates

When you apply for a mortgage, the lender is required to give you a standard form called the good faith estimate of closing costs, the operative word being "estimate."

The good faith estimate is divided into sections of similar fees, each denoted by a range of numbers: the 800s, 900s, 1000s, 1100s, 1200s and 1300s. For comparison-shopping, the most important fees are the ones listed in the 800s. Most of these items are controlled by the lender or broker, so the estimates should be accurate. A few of the items in the 800 series are charged by third parties, and the lender shouldn't be far off in those estimates.
The lender or broker has direct control over origination and discount points and fees (801 and 802) and administrative, underwriting, processing, funding, document prep, wire transfer and other fees (810 and higher).

Third-party fees in the 800s include the appraisal, credit report, inspection, mortgage insurance application, assumption, tax service and flood certification. These fees are supposed to be passed along to you without markup. Some national mortgage lenders own subsidiaries that perform these functions, so they have a good handle on what the costs will be. You should expect smaller lenders and brokers to estimate these fees fairly accurately, even though they don't own subsidiaries that offer the services.

Fees in the 1300 series -- for surveys and pest inspections -- should be easy for lenders to estimate accurately, too.

The 900s and 1000s cover prepaid items -- mortgage, hazard and flood insurance premiums, mortgage interest and taxes that must be paid up front or deposited in an escrow account.

The 1100s comprise title charges: title insurance premiums, settlement or escrow fees, attorney and notary fees.

Items in the 1200 series consist of government charges, such as city and county tax stamps and recording fees.

All the charges from the 900 series to the 1200 series are difficult to estimate. Some of the prepaid amounts vary depending on the date of closing: You would have to prepay a full month's interest if you closed on the first of the month, but not if you closed on the last day of the month.

The Good Faith Estimate is designed to give you the ability to shop and compare the fees of one loan to the fees of the next, so you can make an informed decision based on the cost of the loan.

The GFE by itself is not the best way to compare loan programs. You will need to look at the TIL or Truth in Lending to make a good comparison of the different loan programs you are looking into. The TIL calculates the true cost of your loan because it factors in other fees along with the interest rate.