A good faith estimate (GFE) is a document that outlines the estimated fees and terms of a mortgage contract prior to closing it. After applying for a mortgage, you will usually receive such a document within a few days.
Originally introduced under the Real Estate Settlement Procedures Act (RESPA) in the U.S., the GFE aimed to increase transparency and reduce unexpected charges at closing. Although the good faith estimate has been replaced by the Loan Estimate (LE) since 2015 under the TRID rule, the term is still widely used.
In Canada, the “Good Faith Estimate” isn’t officially used. Instead, borrowers typically receive mortgage pre-approval letters, commitment documents, or cost of borrowing disclosures, which serve a similar purpose. These are all common disclosure documents that will be presented during the mortgage process and contain information very similar to that of a GFE.
The primary objective of a GFE is transparency between the buyer and lender. These disclosures prevent homebuyers from misunderstanding their monthly payment or being blindsided by hidden costs.
Homebuyers can shop around for rates and easily compare offers on an even playing field. Ultimately, it protects the borrower from entering a contract without fully understanding the financial commitment involved.
A good faith estimate or its equivalent is required to present costs and conditions associated with the loan. The following are items you will likely see included in the estimate:
These requirements aim to make pertinent information readily available and easy to digest for borrowers.
Understanding each section of a GFE is essential for making informed decisions. Below is a guide to interpreting the three most important parts:
When looking at a GFE, some fees are guaranteed, while others can legally change before closing. The variability of the fees falls into one of three tolerances: 0%, 10%, and no limit.
For the most part, a GFE is not legally binding, but rather an informational document. This being said, certain parts of the GFE can become binding later in the mortgage process. For example, lenders cannot increase fees beyond the outlined tolerances. Additionally, if you sign a rate lock agreement, the lender is required to honour that rate for a certain period of time.
In Canada, once a commitment letter is signed and conditions are met, the lender is typically obligated to fund the mortgage under those terms. Similarly, in the U.S., while the Loan Estimate itself is not binding, a lender becomes contractually bound once the borrower signs the final agreement.
As mentioned previously, the accuracy of the GFE depends on the tolerance of each line item. Third-party and prepaid costs may shift based on provider selection or timing, while major lender fees should remain the same.
In most cases, total closing costs may differ by $500–$1,500 from the original estimate, while any larger changes should raise red flags.
If you notice an unexpected increase outside the tolerance ranges, it’s important to take action.
In summary, the good faith estimate (or its equivalents) serves as an essential tool in promoting transparency between lenders and borrowers during the mortgage process. By clearly outlining expected costs, it empowers homebuyers to compare multiple loan options and avoid hidden fees.
Contact a Clover Mortgage advisor today to get expert guidance on your mortgage journey!
Below is a template for a Mortgage Disclosure statement, the Canadian equivalent of a mortgage good faith estimate:
Ontario Mortgage Disclosure Statement
To compare two Good Faith Estimates, focus on the APR rather than just the interest rate as it includes lender fees and gives a clearer picture of the true cost. Review total closing costs and check if either lender is charging discount points to lower the rate. Lastly, compare third-party fees like appraisals and title services, which can vary depending on the lender’s preferred providers.
In Canada, while there’s no formal GFE, lenders typically provide a cost of borrowing disclosure or commitment letter shortly after pre-approval or conditional approval.