PUBLISHED: Aug 11, 2023
Understanding a loan estimate is a critical step in the mortgage application process. This three-page document, delivered within 3 business days of your mortgage application, outlines essential aspects of your potential home loan. It includes details such as the estimated interest rates, closing costs and monthly payment amounts that you’ll be liable for as part of the loan agreement.
Comparing loan estimates from different lenders allows you to make an informed decision, ensuring the loan you choose aligns best with your financial circumstances. This document, therefore, serves as a valuable tool in your journey to home ownership. To enhance your understanding, let's delve into what a loan estimate exactly is and why it plays such a crucial role in the mortgage process.
A loan estimate is a three-page document that provides information about your potential mortgage, including loan terms and costs, a projected payment schedule, the amount of cash you’ll need to close and more.
The term "loan estimate" replaced what was previously known as a "good faith estimate" when the Consumer Financial Protection Bureau (CFPB) made revisions to its regulations in October 2015 to provide more accuracy and clarity in lending practices. The good faith estimate was a form that outlined the estimated costs of your mortgage, but it was less detailed and precise than the current loan estimate. Now, the loan estimate provides a more comprehensive and standardized breakdown, helping borrowers better understand and manage their mortgage responsibilities.
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. This document allows you to compare and contrast loan terms from different mortgage lenders, empowering you to make an informed decision about which loan best aligns with your financial situation.
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. On the first page, you’ll encounter loan estimate information that contains important topline details like the total loan amount you’re applying for, projected payment estimates and more.
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.
The first page of a loan estimate consists of fundamental loan details, which typically include:
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:
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:
Besides the principal and interest, there are various fees associated with buying a home. These costs are typically divided into two categories: Services for which you can shop around, and services where shopping isn't an option. Examples of items you may encounter in these sections include, but are not limited to:
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 includes information as:
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:
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.
Looking to get started skimming loan estimates? Reach out to our friends at Rocket Mortgage® and start the mortgage approval process today.
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