How to Read a Good Faith Estimate or HUD-1

It can be difficult to compare apples-to-apples when looking at closing cost estimates from lenders. There are lots of tricks that a lender can pull to make themselves look better, and there are so many expenses that’s it’s difficult to know which ones are “junk fees.”

Let’s review terminology first. When you make a loan application, a lender is required to provide you with a Good Faith Estimate (GFE). Most lenders provide you with this estimate even if you haven’t made a full application yet. The GFE contains three main parts: your rate/point combination, your monthly housing payment estimate, and an estimate of your closing costs. Though lenders are required to give you an estimate of closing costs—which run 2.5% to 3% in this area—they actually have no control over most of the fees shown! So be warned: do NOT compare lenders based on total closing costs! There are too many places they can under-estimate to make themselves appear more competitive.

The GFE closing cost estimate is an estimate of what will ultimately be shown on the HUD-1 at closing. The HUD-1 is a standard government form with each line item numbered for easy comparison. GFEs, on the other hand, come in a variety of format, further complicating comparisons.

Generally the expenses on GFEs and HUD-1s will fall into these categories:

Total Sales/Broker’s Commission	Section 700 on the HUD-1, and usually not shown on the GFE because this section is an expense of the seller.
Items Payable in Connection With the Loan aka “Lender’s Fees”	Section 800 on the HUD-1. These are your lender fees, and the most important part of your GFE because this is the part your lender actually controls, and is, at least in part, negotiable. This section will also include any points that you are being charged to get your loan rate. So you must compare this section in conjunction with comparing the interest rate charged.
Items Required by Lender to Be Paid in Advance	Section 900 on the HUD-1. This section is primarily driven by the day of the month you close. Lenders require that you ‘pre-pay’ the interest between settlement day and the end of the month. So if you close on the 1st, you owe 30 days of interest. If you close on the 30th, then you owe one day. If you’re comparing lenders, make sure they all use the same assumption for purposes of the GFE. As long as you’re comparing apples to apples in rates and points across lenders, you can ignore this section.
Reserves Deposited by Lender aka “Total Prepaids/Reserves”	Section 1000 on the HUD-1. Most lenders are the same in what they require—a year of hazard insurance, a few months of property and other local taxes, mortgage insurance, and possibly a month of condo fees. The lender doesn’t actually control this section of the estimate, so it’s safe to ignore it in your ‘shopping’ of loans.
Title/Settlement Charges	Section 1100 on the HUD-1. The settlement company determines this section, so it’s safe to ignore it in your comparison of lenders. This is a big chunk of your fees because it includes title insurance.
Government Charges	Section 1200 on the HUD-1. The local jurisdiction determines this section, so it’s safe to ignore it in your comparison of lenders.
Miscellaneous	Section 1300 on the HUD-1. Contrary to popular belief, this is not where the “junk fees” are. Instead it tends to be actual costs incurred for couriers, the survey of the property, and other fees that don’t fit into one of the above categories.

Read more: "Junk Fees"

Read more: Title Insurance