A Good Faith Estimate is NOT a Commitment to Lend

One of the hardest concepts to get through consumers thick skulls is that a good faith estimate is not a commitment to lend.  A lender giving you a GFE does not mean that you are approved for a mortgage nor does it mean the lender is actually able to deliver what is being promised.  Consumers often times hang all their faith on GFEs.  But who can blame them?  They are told by Suze Orman, Clark Howard, Realtors, and everyone else who doesn’t know jack squat about mortgages to get a GFE like it is some kind of binding contract that absolutely cannot be broken. Take for instance this email I received from a client the other day:

At about the same time that we received your pre-approval we were advised to use Bank of America in times like this because they were an institution still afloat and they also agreed not to charge us an origination fee.  At the time, we were quoted an FHA rate of 6.25% and were not expecting anything unusual to happen (I know…we should have followed the advice on your blog).  Anyway, we are now being quoted rates as high as 7.5% and we are getting close to our breaking point.  We were wondering if there’s anything that could be done as far as getting better rates etc. for an FHA stimulus jumbo?

This is a classic case of the borrower relying too heavily on the GFE presented by a call center based loan officer at a big bank.  The borrower obviously went against their better judgment but the pull of a too good to be true interest rate was too strong.  It is also important to note that just because a mortgage company is a big bank does not mean they hire qualified loan officers (in most cases, the least qualified loan officers work at big banks) or won’t pull a bait and switch.

Don’t get me wrong, every consumer should get a good faith estimate from their lender.  In fact, lenders are required by law to give you one within three business days of a loan application.  However, what is important to note is that a good faith estimate is an ESTIMATE and it does not have to be accurate.   The dumbest thing consumers do is choosing a mortgage lender based solely on a GFE with the lowest cost. The GFE is only as good as the person preparing it.  This is why I always say you need to be shopping the loan officer and not the mortgage.  Only by vetting the loan officer can you be sure that you are being told accurate information or at the very least significantly reducing the risk of being lied to.  Remember, buying a home is YOUR LARGEST FINANCIAL TRANSACTION. 

Don’t you think you should be interviewing the loan officer or broker more in depth to really see if they are qualified?  Very rarely do consumers ever ask their loan officer where they went to college.  How long have they been in the business?  Who their typical clients are or their specialty?  How much business do they close annually?  What is their take on interest rates?  What is their competitive advantage?  What did they do prior to mortgage lending?  Referrals from satisfied clients?  Nope…  It is always what is your interest rate?

The focus on interest rate is understandable.  However, too many consumers don’t understand the difference between getting the cheapest mortgage and the best value.  Mortgages are a very complex financial product and often times consumers attempt to compress what is a multi-dimensional transaction into a one or two dimensional number.  What usually happens is that consumers rate shop themselves out of great mortgages in the name of trying to get one just a little cheaper.  They basically go from getting a good deal to becoming the sucker of the minute.