Loan Estimate: What Is It And What Does It Tell You?

If you’re in the market to purchase a home and looking to fund your real estate purchase with a loan, it’s important to be cognizant of the specific details under which financing will be provided. A Loan Estimate can help you understand which particular financial obligations that you’ll be asked to adhere to, and quickly determine if the terms and conditions of a loan make sense for you.

However, whether you’re looking to buy a new residence or refinance an existing real estate property, you may also be wondering: What is a Loan Estimate, and how can it help you compare home mortgage options? Using it, you can get a better sense of how much money you’ll need to pay each month after the loan is closed – and whether or not a particular loan option comes recommended over another.

Simply read on to find out more about which details and insights appear on a Loan Estimate, how Loan Estimates work versus Closing Disclosures and more.

What Is A Loan Estimate?

A Loan Estimate takes the form of a three-page document that you’ll receive following your submission of a mortgage application that provides important details on your home loan. Within it, you’ll find key insights about the home loan, including estimated interest rates, closing costs and the monthly payment amounts that you’ll be liable for as part of the loan agreement. Comparing Loan Estimates from an assortment of lenders can help you get a better sense of what loan option best meets your needs and suits your financial circumstances. Note that you should receive a Loan Estimate from a lender within 3 business days after applying for a mortgage, giving you ample time to review potential home loan options.

What Is A Loan Estimate Vs. A Closing Disclosure? 

As part of the start of the home loan process, you’ll receive a Loan Estimate document, which serves as an estimate of costs and terms. You can use it as a handy reference guide and overview to your home loan – although it won’t contain final figures. By way of contrast, a Closing Disclosure document is received at the end of the process, just prior to closing on the loan. This latter submission gives you final numbers to weigh and consider. Be advised that you’ll want to compare your Loan Estimate to the Closing Disclosure that you’re provided to ensure that ultimate totals didn’t increase significantly over original estimates.

When Do You Receive A Loan Estimate?

In short, a Loan Estimate comes after you have completed a home loan application. You’ll receive it within 3 business days following your submission, as mandated by law. In order to complete a loan application, you’ll need to furnish your lender with certain pieces of information. These will include, but may not be limited to, your birth name, Social Security number and the address and value of the property you’re looking to purchase. You’ll also need to provide details on the total amount of money that you’re seeking to borrow via the loan.

How Long Is A Loan Estimate Good For?

Generally, a Loan Estimate is good for up to 10 business days from the time of issuance. You can find the expiration date of the document located at the top of the first page, which indicates how long it’s viable for. Should you have any questions concerning your Loan Estimate’s expiration date, or any terms of the document be unclear, be sure to check with your lender. They can help you ensure that you adhere to any necessary deadlines for confirmation or submission.

Which Set Of Items Appears On A Loan Estimate?

As a rule of thumb, your Loan Estimate will include loan terms that are unique to your individual credit history and personal financial circumstances. Each page will break down detailed information such as your overall loan costs, projected payments, assigned interest rate and more. You’ll also find any additional terms and conditions of the loan contained within this document. All can be used when doing your research to determine which loan best fits your situation.

Page One Of A Loan Estimate 

Your Loan Estimate form will be broken down into multiple sections to make the information that it contains easier for borrowers to read and digest. As the first page you’ll encounter, page one of a Loan Estimate contains important topline details like the total loan amount you’re applying for, projected payment estimates and more. Further details can be found below.

Basic Loan Information

For starters, you can expect to find an overview of costs and payments associated with your home loan, and any potential increases in expenses, or penalties, that you might expect to potentially incur over its lifetime. Sample details you might expect to find in this section include:

• Date Issued – The date upon which you were sent your Loan Estimate by your lender. It’s recommended that you get all Loan Estimates on the same day if possible if you’re looking to clearly compare mortgage options, as interest rates can change daily.
• Loan Term – This section spells out the life of the loan, aka how long you have to pay off any monies borrowed. In most circumstances, a loan typically lasts 15 or 30 years, though some financing options may come with other loan terms attached.
• Purpose – Under this section, you’ll find the reason for which you’ve elected to apply for the loan, e.g., to buy a home or refinance an existing piece of real estate property.
• Product – Here, you’ll find an explanation of whether your loan will have a fixed- or variable-interest rate attached. A fixed-interest rate will remain the same over the course of a loan’s lifetime, while a variable rate can fluctuate.
• Loan Type – This section points out what specific type of home loan that you’re signing up for, e.g., a conventional home loan, FHA loan, VA loan, etc.

Loan Terms

In this next section, also found on the first page of your Loan Estimate, you’ll find further financial details on your loan package, such as: 

• Loan Amount – The total amount of funds that you’re seeking to borrow, and whether this total amount of money can increase after closing or not.
• Interest Rate – Breaks down the specific interest rate that is being utilized when calculating payments contained within the Loan Estimate. This portion of the document will also specify if it’s a fixed- or adjustable-interest rate – and if it can increase after closing. Should you sign up for an adjustable rate, you may also find details on when your interest rate can adjust and just how high that it may increase overall.
• Monthly Principal And Interest – Gives an estimate of how much money that you can anticipate contributing toward paying back the loan and any associated interest each month. It will also explain whether or not this sum can increase after closing occurs. Keep in mind though that this number won’t include your escrow payment (which includes property taxes and insurance), so be sure to factor these additional expenses in as well.
• Prepayment Penalty – For reference, some lenders may charge you a penalty fee if you pay off your mortgage in part or in total earlier than anticipated. Any such prepayment penalties will also apply to refinancing (another form of loan repayment) as well.
• Balloon Payment – For reference: A balloon mortgage is a type of short-term loan arrangement that allows borrowers to make smaller monthly payments for a preset number of years. Following this initial period, they’re then required to make a large payment that covers the remainder of the loan principal, with the so-called balloon payment generally due at the end of 5, 7 or 10 years. These types of mortgages are often seen as being riskier debt instruments, as balloon payments can be large – to the tune of tens of thousands of dollars. Should you be in the market for a balloon mortgage, it’s important to carefully consider how you plan to make the balloon payment when it inevitably comes due.
• Projected Payments – The bottom half of this first page of the Loan Estimate form will also contain a breakdown of how much money that you can anticipate paying over the course of the life of the loan. Such payment calculations will include the amounts that you can expect to pay in principal and interest, as well as estimated escrow, private mortgage insurance (PMI), property taxes and homeowners insurance. When added together, these numbers combine to provide you with your total estimated monthly payment. You’ll observe that estimated payments are broken down into various lengths of time (e.g., years 1 – 9 and years 10 – 30), which reveals the total estimated monthly payments you can anticipate having to make once things like mortgage insurance drop off.

Cost At Closing

Generally found at the bottom of your Loan Estimate form’s first page, you’ll find an estimate of the total closing costs of the loan contained within this section. Details include:

• Estimated Closing Costs – The projected loan costs, plus any additional costs, as well as lender credits that you may hold that will be subtracted from the loan and any other cost amounts.
• Estimated Cash To Close – Specifies the full amount of money that you’ll need to bring to the meeting to close upon your loan on closing day. Note that all amounts will likely need to be paid using a cashier’s check.

Page Two Of A Loan Estimate

The second page of your Loan Estimate will delve deeper into costs attached with taking out the loan, including origination charges, taxes and government fees, etc. These will include any expenses associated with common charges like appraisal fees, credit reporting fees, survey fees and title insurance. A sampling of items that can be found within this page is detailed in brief here.

Loan Costs

In addition to principal and interest, there are several costs associated with securing a home mortgage. These expenses are generally broken down into a number of services that you have the option to shop around for, as well as other services that you do not have the option to shop around for. For example, sample items you may find noted here include, but are not limited to:

• Origination Fee – A fee that your lender will charge you for processing your home mortgage. This amount generally falls between 0.5% – 1% of your total loan amount.
• Appraisal Fee – The cost associated with hiring an appraiser to evaluate and determine the value of the home to ensure that it’s in line with the amount of money that you’re requesting to borrow.
• Title Search Fee – Expenses associated with performing a title search to make sure that the property owner holds all necessary titles and legal rights to sell you the property and convey rights of ownership.
• Credit Report Fee – Costs to pull your credit report and history.
• Recording Fees And Other Taxes – Fees necessary to ensure that all records and taxes are properly paid and filed with the government.
• Homeowners Insurance – Necessary to insure your property.
• Mortgage Insurance – Needed if you’re putting less than 20% down on your new home purchase.
• Escrow Payments – Money you must put aside for future expenses, such as property taxes.

Calculating Cash To Close

Typically found at the bottom of page two of your Loan Estimate form, this section reveals the numbers and calculations behind the estimated amount of money that you’re projected to need to bring on closing day. The breakdown of details and numbers typically include such information as:

• Loan amount
• Total closing costs
• Estimated total payoffs and payments
• Down payment
• Estimated cash to close
• Seller credits
• Any adjustments or other credits

Page Three Of A Loan Estimate

The third page of your Loan Estimate will contain information that can help you in your efforts to compare the details of one loan with another. Types of data that you’ll find here will equip you with the kind of knowledge and insights that you’ll need to effectively see how one home mortgage lender’s offer stacks up vs. a competing offer. In this section, you might expect to find items like:

Comparisons

A few helpful details outlined here that can assist you as you work to determine which mortgage option best meet your needs are as follows.

• How much money that you’ll have paid in interest, mortgage insurance and loan costs after 5 years.
• How much of your loan’s principal that you will have paid off over a 5-year period.
• Your annual percentage rate (APR).
• The total interest percentage (TIP) for the lifetime of the loan.

Other Considerations

Additional details that you’ll find contained on the third page of your Loan Estimate speak to topics such as:

• Appraisal – Explains that your lender may order a home appraisal to get a better sense of the property’s value and whether it aligns with the loan amount that you’re seeking to obtain. (A copy of which may be provided to you.)
• Assumption – Specifies if your lender would or would not allow the loan to be transferred to another party on its original terms.
• Homeowners Insurance – Reveals if the loan requires you to take out homeowners insurance, which can be secured from an insurance provider of your choice that meets your lender’s standards.
• Late Payment – Puts forth information on late fees, including how many days past the specified due date that you have before you begin to start incurring charges for late fees – and how much these fees may be.
• Loan Acceptance – States that you don’t need to commit to and take out a specific home mortgage simply because you have requested a Loan Estimate form that provides further information on the potential loan option.
• Refinance – Indicates whether or not you have the option to refinance the loan at a future date.
• Servicing – Notes if your lender plans on servicing the loan itself or will instead transfer loan servicing to a third party.

How To Compare Mortgage Loan Estimates

The good news for potential borrowers is that Loan Estimates are fairly easy to read and digest. Armed with the information contained within them, you can get a better sense of the total lifetime cost of the loan, whether interest rates and mortgage payments will remain static or fluctuate and other details. As you go about crunching the numbers, keep in mind that there may be more to the story to consider than monthly payments alone to boot. Oftentimes, it's important to keep a close eye on loan terms and conditions (including any prepayment penalties or late fees) as well.

The Bottom Line: Find The Mortgage Right For You With A Loan Estimate

Loan Estimates are helpful documents issued towards the beginning of the home loan process that offer a handy estimate of projected costs and terms associated with your mortgage. Note that you don’t have to accept an offer simply because you’ve received one. Rather, you’ll often find yourself using these documents to get a better understanding of your loan and how any given offer that you receive compares to other loan options from alternate lenders.

Armed with a Loan Estimate, you’ll be far better equipped to find the best financing option for your individual financial situation and living circumstances. Reviewing a Loan Estimate is just one of the steps you’ll take (albeit an important one) as you work toward securing a mortgage and financing (or refinancing) the purchase of a new home. Looking to get started skimming Loan Estimates? Reach out to our friends at Rocket Mortgage® and start the mortgage approval process today.