Veterans must understand how to read and interpret a good faith estimate (GFE). This is probably one of the most important documents when deciding what company to choose to handle the financing on the VA LOAN. This GFE disclosure IS REQUIRED by the Real Estate Settlement Procedure Act (RESPA). If you don’t get one then the broker or lender is not adhering to laws that govern the mortgage industry.
WHAT IS A GFE ?
In a nutshell this disclosure should list all the costs associated with the VA loan. It will show the new monthly payment, payoff amount or purchase price amount, taxes and insurance and funds required to close or funds the VETERAN is getting back (refinance) and debts being paid off if applicable. There are specific costs and they are broken down into categories or numbers. I will list them below:
800 – ITEMS PAYABLE IN CONNECTION WITH LOAN
These are all the charges that the lender or broker will charge. In this section would be listed the ORIGINATION or DISCOUNT FEE. The appraisal and other broker or lender fees will be listed here too. Please remember the veteran will not pay the “junk fees”. The DEPT of VETERAN AFFAIRS will not allow an originating company to charge these fees which in return should benefit the veteran. Here is a list of the NON allowable charges. NON allowable means that the Veteran cannot pay them; on a refinance the broker or lender must pay them or not charge them at all, and on a purchase the seller can pay them.
NON Allowable Fees/Charges
- Attorney Fees
- Brokerage Fees
- Prepayment Penalties
- HUD/Inspection Fees
- Signing Fees
- Escrow/Closing Fee
813 – COMPENSATION TO BROKER
Yield Spread Premium (YSP) is the fee the bank or lender (the entity lending the money who you will make first payment to) has the ability to pay the broker a fee or premium for locking your rate in at an above PAR rate. We will discuss, understanding interest rates and points at another time.
1100 – TITLE CHARGES
All of the Title Charges will be listed here. They are title insurance, title exam, wire and endorsements. Just like the broker there are fees here that the title company cannot charge a Veteran.
1200 – GOVERNMENT RECORDING & TRANSFER CHARGES
The fees listed under this section would be recording fees, city and state tax stamps. The recording fee is what the county recorder will charge for recording the new Deed of Trust. State and City tax stamps are state specific. Some states have tax stamps and other do note.
1300 – ADDITIONAL SETTLEMENT CHARGES
This area would list any pest, termite inspections and home inspections.
900 – ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
This heading makes it sound like the VETERAN must pay for these before the loan can close. This is not the case. Is simply is referring to monies collected before the first payment. The charges listed here are the interest that needs to be collected before the first payment is due. With VA loans interest is billed in arrears which means when a payment is made in June the Veteran is paying for the interest accrued in May. So lets say you close on the 20thof the month. You will have 10 or 11 days of interest collected in this section. With VA LOANS the VA FUNDING FEE is listed in this section. If Veteran is receiving VA disability then there will be no funding fee. Veterans should pay close attention to this. An experience broker knows not to charge a VAFF when disability is being received by the veteran.
1000 – RESERVES DEPOSITED WITH LENDER
WithVA loans your taxes and insurance will need to be collected with your monthly payment. An escrow account is used to hold the money that is owed for taxes and insurance. When a Veteran makes a payment a portion of the payment gets deposited into an account. This account will continue to build payment after payment until the taxes or insurance are due. The lender will make the payment for the Veteran. This is very helpful because it will prevent unforeseen expenses on the home owner and delinquent taxes and insurance. The amount collected upfront varies based on the dates they are due. For example, lets say that taxes are due in December and the Veteran is refinancing and their first payment is due in March. The Veteran will have made 10 payments before taxes are due, but you must have enough for the year plus 2 months as a cushion. So in this section we would collect 4 months. This same principle applies to the insurance.
TOTAL ESTIMATED FUNDS NEEDED TO CLOSE/ TOTAL ESTIMATED MONTHLY PAYMENT
This just gives the overall costs and details of the transaction and the total new monthly payment.
Like I said earlier. This is a very important disclosure and should be looked at very carefully. In my experience the GFE should be used to compare offers from other companies and it also shows how competent the originating company is. Remember also, that this is just an estimate. Usually this will never be 100% accurate to the final costs. Those are listed on the HUD 1 or Settlement Statement, however, the GFE should be as close as possible and should give Veterans a good idea what to expect cost wise when buying or refinancing a home.