What To Know About A Good Faith Estimate (GFE)

Reverse mortgages present an opportunity for senior homeowners to tap into the home equity they’ve built in their properties over the years. They allow borrowers with substantial equity to withdraw a lump sum payment from their homes which can then be used to fund one’s retirement or allow funds for home maintenance. 

Part of the process of applying for a reverse mortgage loan involves reviewing a good faith estimate, or GFE. A GFE is a critical document and check point in a reverse mortgage application, which borrowers must review carefully. 

In this article, we’ll explain why—including more detail about what reverse mortgages and good faith estimates are, how they work, and why they are an important component of the lending process. 

What is a Reverse Mortgage? 

First, let’s discuss the context in which good faith estimates are used: Reverse mortgages.  

A reverse mortgage is a type of loan for senior homeowners (age 62+) that allows them to borrow against their home equity to receive retirement income in the form of tax-free payments. The homeowner is not required to repay the mortgage until they sell the home, permanently move out, or upon death. 

Reverse mortgages can be structured several different ways, but a common type is Home Equity Conversion Mortgages (HCEMs). Some reverse mortgage options also allow homeowners to make a “reverse purchase” by using the funds withdrawn from their home equity to buy a different primary residence. These loans are often used in cases of relocation or downsizing. It’s up to the borrower to consider reverse mortgage pros and cons before deciding on the type of loan most appropriate for their needs. 

What is a Good Faith Estimate (GFE)? 

A Good Faith Estimate, or GFE, is a document that describes the estimated fees, costs, and terms of a reverse mortgage agreement. It is provided to borrowers before they sign the agreement so that they can compare the estimate to offers from other lenders. 

GFEs were established by the Real Estate Settlement Procedures Act (RESPA), which was passed in 1974. Originally, this law required all lenders to provide borrowers with GFEs within three days of a mortgage application. This law was amended in 2015, making GFEs only applicable to reverse mortgages. For all other mortgages, loan estimate forms are used. The Consumer Financial Protection Bureau has examples of what these documents look like. 

Contents of a GFE 

Reverse mortgage estimates or GFEs generally include the following components: 

• Basic information about the lender and borrower  
• Terms and conditions of the reverse mortgage agreement 
• A breakdown of closing costs 
• Approximate cost of property taxes and insurance 
• Title fees 
• Administrative fees and other loan costs 
• The policy regarding when and how the loan should be repaid, monthly payments, etc. 

Purpose and Importance of GFEs 

Good faith estimates help borrowers by: 

• Providing accurate information about costs and fees 
• Helping them comparison shop 
• Disclosing information up front so they can make more informed decisions 

GFEs offer transparency by detailing expected fees and terms, allowing you to compare offers from different lenders efficiently. This comparison helps in making informed decisions regarding a reverse mortgage. 

However, it’s crucial to note that the costs listed on the GFE are just estimates and may change. While the GFE can help you understand the financial aspects of a reverse mortgage estimate, it’s essential to be aware of potential discrepancies between estimated and actual costs. For this reason, it’s a smart idea to budget slightly above the closing costs listed on the GFEs in case there are hidden fees or other closing costs charged by third parties that the lender did not know or have access to beforehand. 

Obtaining a GFE 

As mentioned above, since October 2015, GFEs have been specific to reverse mortgages, allowing borrowers to shop around for multiple estimates. Mortgage lenders are still required to provide GFEs within three business days of receiving the borrower’s application for a reverse mortgage. 

The only fee that might be charged to the borrower before receiving a GFE is a credit reporting fee. This covers the cost the lender may incur to run a credit check on the borrower and verify their eligibility for the loan. Besides this fee, however, no other fees can be charged to the borrower before they’ve signed the GFE. 

After receiving a GFE, a borrower should carefully review the contract’s terms and fees. It may be helpful to contact a real estate agent, broker, or other real estate professional to clarify any confusing terms among varying offers. 

Once the borrower has decided to accept an offer, they should indicate to the lender their intent to accept the GFE by signing it. They can then receive tax-free income borrowed from their home equity according to the terms of the loan agreement. 

GFE Vs. Loan Estimate Form 

To reiterate the difference between these two similar documents, GFEs, now specific to reverse mortgages, were replaced for other mortgages by loan estimate forms post-2015. 

Both GFEs and loan estimates offer breakdowns of estimated costs, with borrowers receiving these within three business days. These documents aid in comparing costs between lenders efficiently. 

While GFEs focus on reverse mortgages exclusively, loan estimate forms cater to conventional mortgages. 

Conclusion 

With a better understanding of good faith estimates and reverse mortgages in real estate, you can more confidently navigate your financial toolbox should you ever wish to tap into your home equity.