Mortgage basics: The good faith estimate

Your lender is required by the Federal Real Estate Settlement Procedures Act to provide you with a good faith estimate of the fees due at closing. This document, called the good-faith estimate, or GFE, is supposed to be provided to you within three days of applying for a loan. The requirement is satisfied if the good faith estimate is mailed within three days.

Closing fees, also called settlement costs, cover almost every expense associated with your home loan. Because closing costs typically amount to between 3 percent and 5 percent of the sale price, it is best to wait until you receive the good faith estimate before committing to a loan. Smart shoppers obtain good faith estimates from two or more lenders, compare their costs and ask questions about any large discrepancies.

Here's a list of some of the fees you'll find listed on your good faith estimate:

Discount
Property appraisal
Credit report
Lender's inspection
Mortgage insurance application
Assumption
Mortgage broker fee
Tax-related service fee
Application
Commitment
Rate lock
Processing
Underwriting
Wire transfer

Abstract or title search
Title examination
Document preparation
Notary
Attorney
Title insurance
Recording
City/county tax stamps
Transfer tax
Survey
Pest inspection
Condominium application
Prepaids for interest, hazard insurance, property taxes, mortgage insurance and flood insurance

It's just an estimate

The good faith estimate is just that -- an estimate. The lender directly controls some of the fees, and those are the ones to pay the most attention to when you are comparing offers. Some fees are generated by third parties and usually don't vary much from lender to lender. Other expenses are under your control, and there are taxes and government fees that should be the same, regardless of the lender.

Lender-controlled fees

The fees that the lender controls, and which are most subject to negotiation, are origination, discount, credit reporting, assumption, mortgage broker, tax-related service, application, commitment, rate lock, processing, underwriting and wire transfer.

If a fee seems vague or questionable, ask. Some mortgage companies include so-called junk fees that you can eliminate or reduce.

Third-party fees

There are some fees that cover services that the lender typically shops for. The lender is supposed to pass these fees directly to you without marking them up. These third-party fees include the settlement, closing or service fee; appraisal; abstract or title search; title examination; document preparation; notary; attorney; and title insurance.

You don't have a lot of negotiating room on these fees, but if one is much higher or lower than the comparable fee in a competing offer, ask for an explanation.

Fees for services that you can shop for

There is some overlap here with the third-party fees mentioned above -- specifically, the attorney's fees and settlement, closing and service fees. In some states, the closing is done by attorneys, and in other states, the closing is done at a title office. Either way, you can shop for a less expensive closing-service provider. You also are expected to shop for homeowners insurance instead of taking the lender's estimate as gospel.
Non-negotiable stuff

Your local and state governments will charge recording fees, tax stamps and transfer taxes. There's not much you can do to negotiate those.

Be skeptical

Lenders, especially those that are huge and operate nationwide, often have trouble estimating title insurance and government fees. Scrutinize these line items; the lender with the smaller estimate for title insurance or government fees might be inaccurate. National lenders have particular trouble estimating the buyer's cost for title insurance -- not because they estimate the price wrong but because of varying customs regarding who pays what. In one county the seller might customarily pay for title insurance, while in the adjoining county the custom is for the buyer to pay.

Remember, you can always negotiate with the sellers to have them split or pay outright some of the closing costs, points or fees. You don't have to follow the customs of your area.

Close at end of month

Because all mortgage loan payments are due on the first of the month, you can avoid or reduce the prepaid interest due by closing on or near the last day of the month.