Whether you’re applying for a new home loan or refinancing your current mortgage, you’ll want to know how to compare mortgage options and where to look for the specifics of your loan offer.
After completing your mortgage application, you will receive a loan estimate. This is just what it sounds like: an estimate of what your loan will look like. It will outline the costs of the proposed loan, and it’s an efficient tool you can use to compare terms against other loans.
In this post, we will explore the details of the loan estimate document, what each section is used for, when you should expect to receive your loan estimate, and the differences between a loan estimate and a closing disclosure.
Table of Contents
- What is a Loan Estimate?
- Loan Terms
- Projected Payments
- Costs at Closing
- Loan Costs
- Other Costs
- Calculating Cash to Close
- Other Considerations
- When Do You Get Your Loan Estimate?
- How Is A Loan Estimate Different Than A Closing Disclosure?
WHAT IS A LOAN ESTIMATE?
A loan estimate is a three-page document that your lender prepares after receiving your completed application. The purpose of the loan estimate is to provide a high-level overview of the proposed mortgage. This overview allows you to review the terms and ensure the mortgage will meet your financial needs.
Here’s what you will find on your loan estimate:
On the first page you’ll find your loan terms, which include the total amount of the loan, the interest rate, the monthly principal and interest payment, and any prepayment penalties or balloon payments, if applicable. A good point to double-check here is that your loan amount plus your down payment equals your home’s sales price.
The estimate also includes your projected payments, breaking down how much is going to your principal, interest, and any insurances or escrow. Be sure that this projected payment fits into your monthly budget. Planning ahead and staying on track with your budget will allow you to enjoy your new home without worrying about a financial burden.
COSTS AT CLOSING
This is the next section on page one. It will include typical real estate fees, like prepaid insurance, appraisals, and title fees. It will also include your down payment. You’ll want to ensure you have the funds set aside to cover this amount at your closing.
Onto page two! You’ll see the loan costs at the top left. These costs include underwriting, originating, and processing your loan. You’ll notice two intriguing sections under loan costs: “Services You Cannot Shop For” and “Service You Can Shop For.” Services you cannot shop for typically include items required by the lender or the specific type of loan for which you’re applying. Service you can shop for are still required by the lender but could be sourced from a different provider. You might be able to save on some of those costs by shopping for a different vendor.
At the top right of page two of your estimate, these costs include homeowner’s insurance, property taxes, and transfer fees. These charges are not controlled by your lender or title company, and you are able to shop around for some of them, such as insurances. Others will be fixed, such as taxes. You can verify these numbers with your local tax authority to ensure the amount is correct.
CALCULATING CASH TO CLOSE
This section is the line-by-line detail of your loan costs, down payment, any seller credits, your deposit, and any other adjustments. It’s a visual breakdown that should match the cash-to-close amount listed under the “Costs at Closing” section on page one.
At the top of page three, this section spotlights the cost structure of the proposed mortgage. It reiterates your interest rate and calculates how much you will have paid on the loan in 5 years, including how much of those payments will have gone to the principal. This section will prove useful in comparing the loan terms to any others you may be considering.
This is the last section of your loan estimate. It details the terms specific to your loan, and includes late payment fees, refinancing information, and details on your loan servicing. Pay close attention to this section and make sure these are items you are aware of or have discussed with your lender.
WHEN DO YOU GET YOUR LOAN ESTIMATE?
Your lender is required to deliver the loan estimate to you within three business days of your completion of the mortgage application. Your application is considered complete once you’ve submitted these pieces of information:
- Full Name
- Property Address
- Estimated Purchase Price
- Proposed Loan Amount
- Social Security Number
HOW IS A LOAN ESTIMATE DIFFERENT THAN A CLOSING DISCLOSURE?
The loan estimate is a document you receive in the beginning of the mortgage process. It’s meant to give you a high-level overview of the proposed loan and it estimates your loan costs. This information will help you compare different loan types and offerings from various lenders.
While you receive the loan estimate within three days of completing your loan application, you will receive the closing disclosure three before your closing date, at the latest. The closing disclosure is a five-page form that provides your mortgage’s final details, including what you will owe at closing. As your complete your mortgage process, you will compare your closing disclosure against your loan estimate, and the three-day period will give you time to resolve any potential issues.
Your loan estimate is a powerful, three-page document that will give you a high-level overview of your proposed mortgage and empower you to make the best decision for your financial health and home buying journey.
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