Federal regulations require mortgage companies and other lenders to provide a truth-in-lending statement within three days of loan application. The truth-in-lending statement usually accompanies the good-faith estimate whenever a lender quotes a mortgage loan's costs or interest rate. The federal government requires the truth-in-lending disclosure under the Consumer Protection Act, Regulation Z. For most mortgages, the "Amount Financed" box contains a number that is usually less than the actual mortgage amount.
Good Faith Estimate
The good-faith estimate outlines all of the costs associated with obtaining a mortgage loan. Lenders charge their own origination and discount fees, along with processing fees, underwriting fees and some other mandatory third-party fees. Virtually every loan requires an appraisal report and the credit report. On many loans, all of these fees add up to several thousand dollars. The truth-in-lending statement is always accompanied by a good-faith estimate. Most, but not all, of the charges listed on the good-faith estimate show up in the second box labeled "Finance Charge" on the truth-in-lending disclosure statement.
"Finance Charge" Section
When homeowners refinance, they often include the closing costs in the new loan amount. They may require a loan for $200,000 but then raise the loan amount by $5,000 to pay for the closing costs. The "Finance Charge" section of the truth-in-lending disclosure tells the borrower how much it cost to obtain the new loan. Some closing costs, such as the cost to set up the escrow account, are not included in the finance charge on the truth-in-lending disclosure statement. However, most of the closing costs appear in the finance charge section.
"Amount Financed" Section
The "Amount Financed" section of the truth-in-lending disclosure outlines the amount borrowed minus the finance charges. In most cases, these two numbers should add up to the total loan amount. This outlines the amount of money borrowed, which is not used to pay for obtaining the mortgage. If the homeowner pays for the closing costs without financing those costs into the loan amount, then the amount financed should reflect the loan amount listed on the good-faith estimate.
One additional factor that may change the amount financed from the actual loan amount is mortgage insurance. Federal Housing Administration (FHA) and Veteran’s Affairs (VA) loans require the borrower prepay the required upfront mortgage insurance required by FHA or loan guarantee fee required by VA. The amount required depends upon the loan type and other factors. Since these fees are insurance, they do not appear in the finance charge section of the truth-in-lending statement; but they are treated similar to escrow accounts. If the mortgage loan has either of these fees, the discrepancy between the amount financed, the finance charge and the actual loan amount may exist.