Keys to Closing: The GFE and HUD-1

If you're beginning to think about the HUD-1 Settlement Statement and looking over your Good Faith Estimate, chances are you're about to close your VA loan. This exciting time comes with a lot of paperwork, and many people have trouble understanding the jargon and minutia of home loans.

Luckily, the GFE and HUD-1 Settlement are intended to help you understand your home loan completely. Here's a breakdown of how to approach these documents and the discrepancies between the two.

The GFE and HUD-1 Documents

The GFE and HUD-1 Settlement Statement was revised on Jan. 1, 2010. The system was revamped by the U.S. Department of Housing and Urban Development in order to streamline the disclosure process for fees, costs and charges.

The recently designed GFE was intended to make understanding fees and charges easier for borrowers, while allowing them to compare competing offers. All federally-funded mortgages require that the borrower receive a GFE after 3 days of making a purchase agreement.

The redesigned HUD-1 gives a detailed account of closing costs, settlement costs and how much the buyer and seller respectively pay and receive.

Essentially, the GFE gives borrowers a semi-accurate picture of what their HUD-1 will look like, and the updated versions of these documents remove some ambiguity and discontinuity between the documents.

What will the GFE cover?

You'll see the GFE shortly after signing your purchase agreement, while the HUD-1 appears right before closing time.

The first page of the GFE covers how long the interest rate is available and how rate locks will affect your settlement. At this point in the loan process, you've determined whether or not an adjustable-rate mortgage or a fixed-rate mortgage is right for you, and your decision will be documented on this page. Escrow and an estimate of your total settlement costs will also be covered on this page.

The second page consists of your origination charge (the fee the lender charges for obtaining the loan), title information, charges that the lender requires, government charges, transfer taxes, and homeowners insurance. Most of the second page is self-explanatory, but make sure to ask your loan officer about the VA Funding Fee and appraisal fees.

The final page is intended to help you compare your loan with other loans. There is a "trade-off table," a shopping chart, and an explanation of what charges can and cannot increase at closing time. Comparing different loans ensures you choose a loan that accommodates your homebuying needs.

What about the HUD-1?

The first page shows your total settlement charges and final payment. You'll also see what the seller will make on the transaction.

The second page breaks down your settlement charge some more. You'll see how much the real estate agents make on the deal, up-front costs, daily interests charges, title insurance costs and taxes.

The final page shows a user-friendly comparison sheet of the GFE and HUD-1.

What can change between the GFE and the HUD-1?

It's important to realize that the GFE is an estimate of your total costs, and these costs can change between the time you sign the GFE and the time you close your loan. These items cannot change:

• Origination charge
• Points (credit) for your specific interest rate
• Your adjusted origination charge (after locking in an interest rate)
• Transfer tax

These items can change:

• Charges for any services that you obtain from a company not listed by your lender
• Title services, lender’s title insurance, and owner’s title insurance (If you use companies not specified by the loan agency)
• Your initial escrow deposit
• Your daily interest charges
• Your homeowner’s insurance

The following items cannot increase by more than 10 percent under the new GFE:

• Required selected services
• Your title insurance, lender's title insurance, owner's title insurance (If you use companies specified by the loan agency)
• Required services you can shop for
• Government recording charges

What advantages does my VA loan provide during closing?

Balancing these different fees and costs in your mind can be cumbersome. The good news: veterans normally only pay a fraction of closing costs. This is because VA loans are dynamic and accommodating for specific needs. It's a buyer's market, and sellers can pay all of the buyer's costs if they are eager to sell their home.

Not only that, but sellers can pay up to 4 percent of the loan's value in seller concessions. Paying these concessions give sellers a competitive advantage in a stagnant market. The VA also limits what kinds of fees and costs are allowed during closing. Taking advantage of your VA benefits can almost eliminate your closing costs.