April 20, 2018.
You’re going to be given plenty of paperwork when buying a house, but the Loan Estimate form is one we urge you to take a closer look at.
Three years ago, the Loan Estimate (LE) and Closing Disclosure (CD) were added to your lineup of home loan documents. The Loan Estimate replaced the Good Faith Estimate (GFE) form and the TIL (Truth-in-Lending) Disclosure. The Closing Disclosure replaced the HUD-1 form and final TIL. Fee terminology is required to be consistent between your Loan Estimate and Closing Disclosure — one more way the Consumer Financial Protection Bureau is working to make the mortgage closing process easier on the borrower.
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Start with the basics: 5 quick facts to remember
Here’s what you need to know about your Loan Estimate at-a-glance:
- Your lender must deliver a Loan Estimate to you three days after an application is taken and before any fees or documents are required.
- The Loan Estimate is three pages long with three different sections. Each section breaks down the cost of buying your new home, based on the specific loan product you choose.
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You’ll find everything you need to know about a potential home loan in the Loan Estimate: various loan terms, mortgage interest rate, estimated monthly payments, additional charges, and more.
- The purpose of the Loan Estimate is to make getting a mortgage transparent and easy. Your lender is required to provide a clear loan summary, using the Loan Estimate form, that they will stand by for 10 days. Many people use this time to compare different loan products.
- Once you pick a home loan based on the Loan Estimate provided, you’ll be given a new Closing Disclosure by your lender. This five-page CD will reflect your finalized loan terms and will include a description of all closing costs you can expect to pay.
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Dig a little deeper: Break down your Loan Estimate by section
If you want to take a peek at the Loan Estimate form you’ll receive from your lender (and we highly recommend that you do), you can find a blank Loan Estimate provided by the Consumer Financial Protection Bureau.
As we mentioned above, your Loan Estimate is going to have three different sections. Each section will provide some key insight into the details of your mortgage:
- Page 1: In the first part of your Loan Estimate, you’ll see a complete breakdown of the terms of your loan. Details on loan amount, interest rate, and total monthly principal and interest are found here. Pay special attention to the box that notes if a line item cost could increase after closing. Also, check for any balloon payments or prepayment penalties attached to the loan. (This is the Very Important Page that many people use when comparing loans.)
- Page 2: In the next part, you’ll see more info on how much you can expect to pay for your mortgage. Look out for projected mortgage payments and estimated insurance, taxes, and assessments.
- Page 3: In the final section, you’ll see your closing costs — another very important section to familiarize yourself with if you want to avoid any surprises on closing day. Closing costs will include the total and a more detailed itemization. This section will also include the cost of property taxes, prepaid homeowners insurance, and estimated cash to close (estimating the total closing costs combined with your down payment).
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As you review your Loan Estimate, take a moment to ask yourself these questions:
- Is your name spelled correctly?
- Does your loan term, product, and/or type match what you discussed with your loan officer?
- Is your loan rate locked, if this was agreed upon with your loan officer?
- Does the loan amount match what you were expecting? For buyers purchasing a new house, the loan amount on your Loan Estimate added to your down payment amount should equal the sales price of your new house.
- Is your interest rate correctly listed as fixed or adjustable?
- Are there prepayment penalties or balloon payments on your loan? If you don’t understand these loan features that can come with risks attached, take time to discuss it with your loan officer before closing.
- Does the Estimated Total Monthly Payment on your loan match what you discussed with your loan officer?
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Do you have the funds to pay your Estimated Cash to Close?
- Does your home loan have points included? Discuss how this option impacts your loan choice with your loan officer, if you haven’t already.
- Do you understand the Services You Cannot Shop For? Some of these fees may be specific to the type of loan product you’ve chosen, i.e., related to an FHA, VA, or USDA loan. Discuss these fees with your loan officer, if you haven’t already.
- Do you understand the Services You Can Shop For? Your loan officer should provide you with a list of approved third-party vendors for these services along with your Loan Estimate. You can shop for competitive prices among these providers or ask your loan officer for more guidance and shop around.
- Does the homeowner’s insurance premium match what was quoted by your homeowner’s insurance company?
- Do the property taxes match the estimates you’ve received from your local tax office or realtor?
- Does your home loan include lender credits? Discuss how this option impacts your loan choice with your loan officer, if you haven’t already.
- Are your loan officer’s name and contact information correct?
- Do you understand the information listed in the Comparisons section? If not, discuss with your loan officer as needed. This section can be used to compare different home loan products and different mortgage lenders.
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Do you know how much you’ll be charged if you make a late mortgage payment?
Right about now, you should be feeling pretty good about yourself. You’ve mastered the basics and even some of the advanced information you’ll find in your Loan Estimate. This is a document that can be difficult for many buyers to understand on their first read. It helps to remember that reviewing the Loan Estimate is supposed to be easy. That’s why it was created in the first place. To lay out all your home loan information so that you can make the right pick.
If you have any questions, we’ll be happy to go over your Loan Estimate with you line-by-line so that you feel good about your loan options. If you’ve gotten your Loan Estimate, and you like what you see, we can take it from here. Contact one of our loan officers to choose your home loan and take the next step.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.