Definition:
A Good-Faith Estimate (GFE) is a document that outlines the estimated costs and fees a homebuyer will pay when getting a mortgage. It helps buyers understand and compare loan offers.
Example:
Daniel applies for a mortgage with two different lenders. Each one gives him a Good-Faith Estimate listing the loan amount, interest rate, closing costs, and other fees. This helps Daniel see which loan is more affordable and choose the better deal.
Explanation:
The Good-Faith Estimate was a standard form used before 2015 to give borrowers a clear view of the costs associated with a mortgage loan. It included details like loan terms, interest rate, monthly payments, estimated closing costs, prepaid taxes and insurance, and lender fees. The purpose was to provide transparency and help buyers shop around for the best mortgage.
While the GFE has now been replaced by the Loan Estimate for most residential real estate transactions, the term is still widely understood and sometimes used informally. The Loan Estimate serves the same purpose but is easier to read and standardized across lenders.
Lenders were required to provide the GFE within three business days of receiving a loan application. It was not a final quote but a “good-faith” approximation of what the buyer could expect to pay at closing.
Why is Good-Faith Estimate Important in Real Estate Transactions?
The Good-Faith Estimate was important because it gave buyers the ability to compare loan offers clearly, avoid hidden fees, and better plan their finances. For sellers and agents, knowing the buyer had reviewed and accepted estimated costs gave confidence the deal would move forward.
Understanding the purpose of the GFE—or its modern version, the Loan Estimate—helps buyers make informed, confident decisions when financing a home.