Loan Estimate: Decoding Your Important Form
When applying for a mortgage, there are a ton of details to iron out. And if you are shopping a few lenders in search of the best deal, that is an incredible amount of info to keep track of and compare. Fortunately, a very important document known as a loan estimate (LE) can help.
Reviewing your loan estimate is an important part of the mortgage application process. Here’s a closer look at what it is and how to read it.
What Is a Loan Estimate?
Formerly known as a “Good Faith Estimate,” this form was updated in 2015 to be more useful and easy to read. Now known as a loan estimate, this document tells you everything you need to know about your potential mortgage, including the interest rate, term length, monthly payment amount, escrow details and closing costs. All loan estimates are formatted the same way, making it easy to compare multiple loan options.
In order to receive a loan estimate, you need to provide the lender with six pieces of personal information: your name, income, Social Security number (SSN), the address of the property you want to finance, the property’s value and the total amount you want to borrow. Once you provide this information, the lender is required to send you an LE within three days.
Keep in mind that simply receiving a loan estimate does not mean you are approved for the loan; it’s an estimate of what the lender plans to offer you based on the information you provided. You’ll still need to accept the offer and then provide additional documentation that you can repay the loan in order to lock it in.
Once issued, the terms of the loan estimate are good for 10 days. As long as there aren’t any major changes to your application or financial situation, your lender has to honor the estimate if you begin the process of securing the loan within that time frame.
9 Things You’ll Find in Your Loan Estimate
Even though a loan estimate is supposed to be easier to navigate and understand than previous versions, there is still a lot of information to absorb. Here’s a breakdown of what you’ll find in an LE so you can better comprehend it.
1. Overview of Your Loan
The top of your loan estimate will display some basic details about the loan. Here you’ll find information such as the name of the applicants, the address of the property, loan term and type and whether the interest rate is locked (and if so, for what period of time).
2. Loan Terms
Next, the terms of the loan are spelled out. You’ll see the loan amount you requested, interest rate, projected monthly principal and interest due, whether there is a prepayment penalty and whether the loan has a balloon payment.
3. Projected Payments
Next, the projected monthly payment is broken out in detail. The loan estimate will show how much you can expect to pay in principal and interest, mortgage insurance and escrow, as well as how those costs will change over time. You’ll also see the estimated monthly cost of any additional taxes, insurance and assessments.
4. Costs at Closing
The next section gives you a snapshot of the loan closing costs. You will be able to see how much cash you need on hand at closing. Keep in mind that you’ll need to provide your lender a paper trail for these funds.
5. Closing Cost Details
The closing costs are then itemized in the next section. First, the loan estimate shows what portion of the closing costs are for loan origination, any points paid, the application fee and the underwriting fee.
Next, any necessary fees for services that you cannot shop around for are outlined. These include the appraisal, credit report and tax status research fees.
You will then see a list of services that you can shop for, along with the associated fees. These include the pest inspection, survey and titles.
Other costs associated with the loan are detailed here, as well. These can include government taxes and fees, transfer fees and prepaid homeowners insurance, mortgage insurance, interest or property taxes.
Finally, all other costs are listed out, such as the initial escrow payment and optional owner’s title policy. The end of this section then adds up all these fees and highlights how much cash you will need at closing to pay them, less any money you’ve already paid and/or credits.
6. Additional Loan Information
Details such as the lender, loan officer, contact information and license numbers are listed in this next section.
7. Details for Comparison
In order to simplify the process of mortgage shopping and comparing offers, this section highlights some key loan details. You’ll see the total amount you will have paid in principal, interest, mortgage insurance and other costs after five years, as well as the amount of principal you will have paid off during that time.
The loan estimate also will note the annual percentage rate (APR), which is the yearly cost of your interest rate plus any fees, expressed as a percentage of the total loan.
Finally, you’ll see the total interest percentage, which is the total amount of interest that you will pay over the loan term as a percentage of your loan amount.
8. Other Considerations
This section of the loan estimate details other terms of the mortgage that you should consider before signing the dotted line. For example, will the original terms of the loan transfer over if you sell or transfer the title? What is considered a late payment and how much is the fee? Will the lender actually service your loan or will it be transferred to another company?
9. Confirmation of Receipt
Finally, there is space at the end of the document to sign and date it, indicating that you received the loan estimate. Signing the loan estimate is only confirmation that you received it and does not mean that you accept the terms of the offer.
Loan Estimate vs. Good Faith Estimate
Prior to 2015, you would receive a Good Faith Estimate and a Truth in Lending form when you applied for a mortgage. However, these forms weren’t exactly easy to navigate.
As part of its Know Before You Owe mortgage initiative, the Consumer Financial Protection Bureau (CFPB) did away with the Good Faith Estimate (except for reverse mortgages) and replaced it with the modern loan estimate. The goal was to standardize how mortgage information is presented to prospective mortgage borrowers and make it easier to shop around and compare mortgage offers.
Loan Estimate vs. a Closing Disclosure
In addition to your loan estimate, you may also receive a closing disclosure. Though it has some similar information, it is a separate document.
Rather than outlining the estimated cost of your mortgage, a closing disclosure details the actual costs once you select the offer you want and are officially approved for the loan.
You should compare the closing disclosure to your loan estimate to make sure the terms of your mortgage are what you expected. Details to review include the mortgage interest rate, loan amount, monthly payment amount, closing costs and estimated taxes. You receive this document at least three days before the mortgage closing date, and you have this period to review the closing disclosure and bring any questions to your lender.
Can Fees Change After the Loan Estimate?
There shouldn’t be any surprises in your closing disclosure. That said, some of the numbers can change from the original loan estimate.
For example, this can happen if your interest rate was not locked in when you received the loan estimate. If this is the case, the rate can change at any time and may be higher by the time you’re ready to close on the loan. The rate may also change if you fail to close during the locked-in time frame or there are major changes to your application information.
Changes to your information also can impact other costs of the loan. For example, the lender is allowed to raise your closing costs if there is a “change of circumstance,” which means you change your down payment, you decide on a different loan term or type, the property appraisal is higher or lower than expected, there are major changes to your credit or your income can’t be verified.
Other fees out of the lender’s control—such as prepaid interest, property insurance premiums and fees for third-party services—may also change
However, there are some fees listed on your loan estimate that legally cannot change. These include fees paid to a broker and transfer taxes.
If there are any changes of circumstance, you receive a revised loan estimate. If your costs increase more than what’s legally allowed, you are entitled to a refund for the difference.