Loan Estimates: What You Need To Know

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.

What Is A Mortgage Loan Estimate?

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.

What’s Included In 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. 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.

How To Read A Loan Estimate: Page One

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.

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.

The first page of a loan estimate consists of fundamental loan details, which typically include:

• Issue date: 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 duration of your loan, essentially indicating the time period you are given to repay the borrowed amount. Commonly, loan terms are 15 or 30 years, though certain financing options may offer different term lengths.
• 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 rate or an adjustable rate attached. A fixed-interest rate will remain the same over the course of a loan’s lifetime, while an adjustable rate can fluctuate.
• Loan type: This section points out what specific type of home loan 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 it may increase overall.
• Monthly principal and interest: This gives an estimate of how much money 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: 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, usually due at the end of 5, 7 or 10 years. These types of mortgages are often seen as 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 becomes due.

Estimated Costs

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, 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.

How To Read A Loan Estimate: Page Two

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:

• 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.
• Private mortgage insurance (PMI) – 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 and homeowners insurance. 

Calculations

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:

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

How To Read A Loan Estimate: Page Three

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:

• A snapshot of how much the borrower will have paid in 5 years
• The amount of principal that will be paid off in 5 years
• The loan’s annual percentage rate (APR)
• The total interest percentage (TIP) for the loan term

Other Considerations

• Appraisal: This 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: Specify 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.
• 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.

The Bottom Line: Loan Estimates Help You Preview Your Home Loan

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.