By law, all mortgage brokers must complete a Good Faith Estimate of Closing Costs (GFE) within three days of the date of a loan application. The GFE is a detailed estimate of the anticipated borrower costs associated with the transaction. Further, the GFE discloses the compensation to the broker.
The accuracy of the GFE depends on the competency and integrity of the preparer. Most competent and ethical mortgage brokers guarantee the accuracy of the GFE with respect to lender fees.
Some borrowers confuse closing costs with lender fees. Without an understanding of the distinction between these two terms, borrowers can make a well intentioned but wrong decision.
For example, an agent recently had a client who made an initial decision to use mortgage broker “A” vs. mortgage broker “B”, based on a perceived $3,000 difference in closing costs between the two. In fact, the real difference between the two was $25. Here’s how the confusion arose:
A GFE is supposed to include all buyer costs associated with the transaction. These costs are broken down into two basic categories: non-recurring closing costs and recurring closing costs.
Recurring costs consist of pre-paid items such as one year’s insurance premium, interest to the end of the month in which the transaction closes and any prepaid property taxes. Recurring costs are ongoing costs of home ownership.
The nonrecurring costs are those costs attributable to the transaction itself, such as appraisal, title costs, etc. They are one time costs. Nonrecurring costs consist of costs paid to the mortgage broker and costs paid to others.
Here’s how the confusion referred to above happened:
Agent B’s GFE set forth, as a recurring cost, 20 days’ interest from date of closing to the end of the month. This is a recurring cost (roughly $2,400) that the Agent “A” did not include in their GFE.
Agent B’s good faith estimate included a transfer tax (roughly $600) that he knew the city in which the property is located would collect. The other agent failed to include this in their GFE.
There is very little difference in actual costs paid to one mortgage broker or lender versus another. Rarely would the difference be greater than a couple hundred dollars.
There can be significant differences in other costs however, that are totally unrelated to the lender or broker. This can create the situation where the broker who prepares a complete GFE, including all known or anticipated costs may be erroneously judged to be more expensive.
