Loan Estimate: What Is It And What Does It Tell You?
August 06, 2021
Buying a home is one of the biggest financial moves you’ll make and, if you use a loan to do it, you’ll have several financial obligations to uphold. When it comes to getting a loan, you’ll want to know all the details – like how much you can borrow, what your interest rate will be, what you can expect to pay at closing and what you’ll pay each month after the loan is closed.
Before 2015, you would get that information in a Good Faith Estimate and Truth-In-Lending report. Now, you get the two documents combined into what’s known as a Loan Estimate.
What Is A Loan Estimate?
A Loan Estimate is a three-page document you receive after applying for a mortgage that provides the loan amount and estimated rates, closing costs and monthly payment amounts for the loan you’ve applied for. You can find the best mortgage for your needs by comparing Loan Estimates from multiple lenders. You should receive your Loan Estimate within 3 business days of applying for a mortgage.
Loan Estimate Vs. Loan Disclosure
Your Loan Estimate is a document you get at the beginning of the loan process, while a Closing Disclosure is a document you receive just before closing on your loan – the end of the process. While the Loan Estimate gives you an estimate of costs and terms, the Closing Disclosure will give you the final numbers. You’ll want to compare your Loan Estimate to your Closing Disclosure to make sure the final numbers didn’t increase significantly from what was originally estimated.
Which Set Of Items Appears On A Loan Estimate?
Your Loan Estimate form may be broken down into specific sections to make it easier for borrowers to read. Here’s the important information that a Loan Estimate provides and where you may expect to find it on the document.
Basic Loan Information
You’ll typically find this information at the top of the first page of a Loan Estimate:
Date issued: This marks the date the lender sent the Loan Estimate to you. If you’re shopping around for mortgages, try to get all Loan Estimates on the same day, as rates change daily.
Loan term: This specifies the life of the loan, or how long you’ll have to pay off your loan. Typical loan terms last 15 or 30 years, but some loans have other terms. For example, YOURgage from Rocket Mortgage® allows borrowers to choose a loan term from 8 to 29 years.
Product: This specifies whether the loan will have a fixed or variable rate. Fixed rates stay the same throughout the life of the loan, while variable rates fluctuate.
Loan type: This specifies what type of home loan you’re taking out, like whether it’s a conventional loan, FHA loan, VA loan or Jumbo loan, to name a few.
This next section can also be found on the first page and provides more financial information on your specific loan.
Loan amount: This specifies the amount of money you’re borrowing and whether it can increase after closing or not.
Interest rate: This explains the interest rate that’s being used to calculate the payment on the Loan Estimate. It will also indicate whether it’s a fixed interest rate or an adjustable rate and can increase after closing. If it’s an adjustable rate, this section may also explain when it can adjust and how high it can increase.
Monthly principal and interest: This tells you the estimated amount of money you’ll pay back on the loan and in interest each month. It will also specify whether this amount can increase after closing or not.
Keep in mind, this number is only part of your monthly payment. It doesn’t include your escrow payment, which is your property taxes and insurance.
Prepayment penalty: This section tells you if the loan has a prepayment penalty, which is a fee some lenders charge if the borrower pays all or part of their mortgage off before the loan term is up. Rocket Mortgage does not have prepayment penalties.
Balloon payment: This will specify whether the loan has a balloon payment or not. A balloon payment is a significant, one-time payment that you’d pay at the end of the loan term. Currently, Rocket Mortgage does not offer any loans that have balloon payments.
On the bottom half of the first page of the Loan Estimate form, you’ll find a breakdown of what you’ll pay throughout the life of the loan. These payment calculations include what you’ll pay for principal and interest and estimated escrow, private mortgage insurance (PMI), property taxes and homeowners insurance. These numbers are added together to give you the total estimated monthly payment. The estimated payments are broken down into various lengths of time, showing estimated total monthly payments once things like mortgage insurance drop off.
Costs At Closing
Usually listed at the bottom of the first page of the Loan Estimate form, this section gives an estimate of the total closing costs of the loan.
Estimated closing costs: This part will list the loan costs, plus any additional costs. If you have lender credits, it will list any lender credits, subtracted from the loan and other cost amounts.
Estimated cash to close: This is the total amount you’ll need to bring on closing day to close your loan. You’ll need to pay this amount with a cashier’s check. Despite its name, you cannot pay your cash to close with actual cash – or a personal check.
If you’re looking for a breakdown of loan costs and other costs, you’ll find that on the second page, in the next sections: loan costs and other costs.
This section, on the second page of the Loan Estimate form, lays out the costs for getting the loan, including the origination fee, appraisal fee and title search fee. Costs may be broken down into services you can shop around for and services you cannot shop around for.
This section is also on the second page of the Loan Estimate and lists the costs for the various fees associated with buying a home, including recording fees, transfer taxes and any initial escrow payments.
Calculating Cash To Close
This section, on the second page of the Loan Estimate form, shows the calculation and numbers behind the estimated amount you’ll need to bring on closing day. The numbers typically include:
- the loan amount
- total closing costs
- estimated total payoffs and payments
- estimated cash to close
- the down payment
- seller credits and any other adjustments and credits.
On the third page of the Loan Estimate, you’ll find measures that help you compare that loan with other loans. The information included here is:
- How much money you’ll have paid in principal, interest, mortgage insurance and loan costs after 5 years.
- How much principal you’ll have paid off after 5 years.
- Your annual percentage rate (APR).
- The total interest percentage (TIP) for the life of the loan.
Also on the third page of the Loan Estimate is information regarding the following:
Appraisal: This states that the lender may order a home appraisal to determine the property’s value and may provide you a copy of the appraisal.
Assumption: This will tell you whether the lender would permit transferring the loan on the original terms to someone else.
Homeowners insurance: This information tells you if the loan requires homeowners insurance and that you can obtain insurance from a company of your choice as long as it meets the standards of the lender.
Late payment: In this section, you’ll find details about late fees. It should lay out the number of days past the due date you have before you’re charged a late fee and how much your late fee will be.
Loan acceptance: This simply states that you do not have to get this loan just because you received a Loan Estimate form with specific information about the loan.
Refinance: This section tells you whether you could refinance the loan in the future.
Servicing: This information states that the lender will service the loan or transfer the servicing of the loan.
The Bottom Line
Loan Estimates give you a better understanding of your loan and help you to better compare it to other loans, helping you find the best product for your situation and price point. Reviewing the Loan Estimate is just one of the steps you’ll need to take to finance the purchase of a home. Check out other articles in our Learning Center to learn more about the mortgage process.
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