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If you have never purchased a home, you may never have seen a Good Faith Estimate (GFE). If you have purchased a home, you may not have really looked at it! Many home buyers do no more than glance at their Good Faith Estimate as they sign it planning to take a second look later, and never get around to it.

A Good Faith Estimate is your friend; spend a little time with it.

The process of closing on your new home is exciting but it is also a very busy time. It can be a bit overwhelming to face the stack of documents you find in the Escrow (aka Closing) Office. The Escrow Officer will want to move as quickly as possible and let’s face it, many real estate buyers want to just sign what they need to, trust that everything is as it should be, and drive straight to the new home to pick out paint colors, new plants or attractive furniture! It’s a heck of alot more fun than dealing with paperwork.

You may ask why is there an estimate at closing anyway? Haven’t the lenders and the loan officer gotten exact figures by then? The answer is simply that it is common practice in Washington and other states for the Lender to include a Good Faith Estimate in the packet of Closing Documents. The document you need to rely on as “Final” at closing is called the HUD Settlement Statement. But, I’m getting ahead of the game, lets get back to what to look for on a GFE and how to compare them if you are shopping for a loan.

Closing Costs confuse even experienced borrowers (and some loan officers!). One of the biggest areas of confusion has to do with Pre-paid Items. In general, think of pre-paid items as uncontrollable (kind of like sales tax, you cannot negotiate it) and true Closing Costs as something to watch carefully. Many of the fees (that are not pre-paid items), will vary from lender to lender and can be negotiated (or manipulated by the unscrupulous).

Some of the fees are fixed, such as the Appraisal Fee. The Lender does not establish the appraisal fee, nor does the Loan Officer. It is controlled by the Appraiser. It cannot be “marked up” to increase profitability. Remember one important thing though; a Good Faith Estimate is designed to clarify the financial picture, not cloud it. If you don’t quite understand yours, stop and get your questions answered!

The HUD website has a thorough description of the items you can expect to find on any HUD Settlement Statement. Your loan officer should also be able to provide you with a hard copy of the same publication. This pamphlet is organized by line number. It is a simple matter to compare any Good Faith Estimate by line number with the descriptions found in the HUD booklet. The line numbers on a Good Faith Estimate and on a HUD Settlement Statement are meant to correspond to each other. Keep this pamphlet with you while you compare various Good Faith Estimates. Refer to it as often as you need to. It is your roadmap.

Items To Watch For

Line 801: Loan Origination

Although it has been customary in the past and is common across the US, Washington State’s Department of Financial Institutions (DFI) insists that this line can ONLY be used by the Lender (not the Loan Originator or the Brokerage he/she works for). If you are working with a WA State mortgage broker and you see a fee on this line, challenge it. Unless the mortgage broker can provide proof that the Lender is charging this fee, it must be removed. The fee a mortgage broker charges belongs on line 808.

Line 802: Loan Discount

Any fee you find on this line MUST (again, according to WA’s DFI) be reflected on the final HUD as having been used to “buy down” the interest rate. These funds cannot be used as a source of profit for the mortgage broker. They MUST be passed through to the Lender.

Line 808: Mortgage Broker Fee

This is the fee charged by the mortgage broker and can be negotiated. It is customary for Washington Mortgage Brokers to charge 1 point (think 1% of the loan amount). But as the loan amount rises, the mortgage broker fee percentage falls. Some mortgage brokers charge a flat fee instead of a percentage.

Lines 809 to 8??: Other Fees

This is where you look for possible “Junk Fees”. The items listed below line 809 may or may not include negotiable fees. Check each line carefully and ask questions. Often you will find a Lender Administration Fee. This is not typically negotiable, it is a fee the Lender charges and can often be easily verified. Another common fee is a Processing Fee which can be negotiated. A whole slew of other fees can be found when comparing Good Faith Estimates. Some fees will vary depending on which Lender is being used, others vary depending on the mortgage broker.

Clarity is the Key

A Good Faith Estimate is designed to clarify information. It is meant to itemize all fees a loan officer can reasonably expect to be charged by various parties to close your transaction. A Good Faith Estimate is not meant to confuse. And it shouldn’t look like an endless list of charges. If you feel like you are in the middle of a Ginsu Knives commercial (but wait, there’s more!), slow down and question the need for all the little charges.

The Good Faith Estimate you receive during your initial meeting with a Loan Officer should be very close to what you find on your HUD Settlement Statement at closing. If there are major differences, make sure you question them! 

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Increasingly Rich and I are responding to email questions from SoundBiteBlog readers. In the past we have answered each question by return email. Because our readers are asking some very interesting and pertinent questions about real estate in Washington, we have decided to answer some of them right here on the blog. In August we received 23 different real estate related questions on a variety of subjects from “why do sellers hate va buyers” to the question below. Rich and I believe that if one reader has a question, it’s probable that other readers have the same question. So, we’ll be trying to answer as many questions as we can on SoundBiteBlog each month.

“Mark, I looked you up because I need some information I hope you can help me with. I would like more information on purchasing a new home. We still own our other house but need more spcae. We do not know if we want to keep the house we have and rent it out or if we need to sell it to buy a new home. I do not know how it works if we choose to keep our house now.”

LM — Bremerton, WA

Growing your wealth with real estate

If you can relate to this question, congratulations! You are on your way towards building a Real Estate “Portfolio”. Almost all of America’s most affluent people are heavily invested it real estate. It is a cornerstone of many asset-building strategies. Real estate investments are historically stable and safe. Kitsap County real estate in particular has shown itself to be the perfect wealth-building vehicle for many Washington homeowners.

The thought of owning two homes in Kitsap County can be exciting. The thought of having two mortgages on the other hand can be rather intimidating. One of the first questions many folks ask is “Will the bank allow me to have two mortgages at the same time?”. The answer fortunately, is “yes”. Banks are just careful about how they decide who can afford additional debt and who may be venturing too far into dangerous financial territory.

The criteria an underwriter uses to establish an approvable new loan is fairly simple. The borrower is allowed to count rental income. But they are not allowed to count all of the rental income. This creates a safety margin that keeps both the borrower and the bank out of trouble. Consider the following example to see how it works.

• The old loan balance – $155000
• The old loan payment – $1200 / month
• Taxes – $150 / month
• Insurance – $50 / month
• The projected rental income – $1300 / month
• The projected monthly loss – ($100 / month)

Many people would be happy to have real estate in their portfolio with this scenario. The annual tax benefits more than offset the negative cash flow each month. In addition, the property will continue to increase in value over time. Now take a look at how an underwriter will view this same scenario while building in a financial safety net.

• The old loan balance – $155000
• The old loan payment – $1200 / month
• Taxes – $150 / month
• Insurance – $50 / month
• The projected rental income – $1300 / month
• Less a vacancy factor of 25% – ($325 / month)
• The projected monthly loss – ($425 / month)

This “paper loss” of $425 each month is then applied against the borrowers gross income just like a car payment or student loan would be. If the borrower has enough income to handle a new mortgage payment, plus all their other financial obligations and the $425 loss, the new mortgage is likely to be approved. The 25% that an underwriter subtracts from the gross rental income is intended to compensate for any vacancies, repairs to the property, maintenance on the property and unexpected expenses. Some loan programs will allow more than 75% of the rental income to be counted, but they are uncommon (and riskier for both the bank and the borrower).

Even if this $425 per month loss raises a borrowers debt-to-income ratio too high to allow a loan approval, it may still be possible to keep the old house as a rental and buy a new home to live in. There may be a $425 car payment that could be paid off by refinancing the old home prior to making it a rental. Or credit card debt could be eliminated with a refinance. Each situation is different. If you are considering becoming a landlord, your favorite loan office will be able to compare different possible solutions for you.

Keep in mind that the underwriter will require proof that you have a new tenant. The homeowner will need to provide a copy of a lease agreement or a rental agreement as part of the loan approval conditions.

Insurance and the old lender.

There are a couple of additional items to check before making a decision like this one. The first item is to check with your insurance agent to see if the insurance policy you have on the home currently will need to be altered if the home becomes a rental. The insurance premium is likely to be higher for a rental than it was when the house was your personal residence.

If you live in a neighborhood with an active Homeowners Association, check your CC&R’s (codes, covenants and restrictions) to make sure you are not restricted from turning your home into a rental. 

And finally, it is wise to dig out the old mortgage on the property and read it carefully. It is very possible that you are required to let the lender know that you are moving out of the home. When the original loan was approved, it was approved under the belief that you would be living in the home as your primary residence. If the situation changes, the lender will probably have a clause in the mortgage document requiring you to let them know of the change. As a homeowner you have the right to do what you want with your asset (the home), but the lender also has the right to protect its investment. A loan on a rental property is riskier for the lender.

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