What is a loan estimate?
When shopping for a home, you’ll soon find out that time is precious, action is your ally and the only guarantee is that the more you know about your loan, the less you’ll awaken to sudden surprises that affect your financial future.
That’s why staying organized and being cognizant of every development during your homebuying journey is so important to manifesting a positive experience. Given the blizzard of information that accompanies your purchase, you’ll need to be a true custodian of detail or risk being overwhelmed—easier said than done, we know. But it can be done. And it typically starts with a painstaking review of the various costs, terms and conditions you’ll be responsible for should you decide to close on the home you’ve selected.
One way the mortgage industry assists borrowers with this monumental task is by issuing a government-mandated Loan Estimate (LE). The Loan Estimate is a detailed three-page document presented to you once you've provided your lender with important information and have signaled an intent to proceed with a loan application. Much like the Closing Disclosure (which is issued at the end of the underwriting process and right before loan closing), the Loan Estimate provides valuable insight into the various expenses and loan-related details you’ll be responsible for.
Given the fact that the Loan Estimate is such an information-rich document, it warrants some unpacking. In this article, we’ll dive into the loan estimate in full: where it came from, what its purpose is and why you need to compare it to the Closing Disclosure to make sure those “i’s” are dotted, those “t’s” are crossed and those numbers add up.
What's in a loan estimate?
A loan estimate is a three-page form issued to you by your lender after you have applied for a loan. It details important information regarding your loan including terms, interest rate, estimated taxes and insurance, total monthly payment and an array of key features affecting your loan.
Your lender is required by law to provide you with the LE no later than three days after receiving your loan application. While the document provides only a preliminary accounting of loan-related details, it gives you a real understanding of overall costs. Importantly, the Loan Estimate creates long-desired loan transparency and document consistency, enabling you to make smart comparisons between multiple lenders and ultimately choose a loan—and a mortgage provider— that checks all the right boxes.
Good Faith Estimate vs. Loan Estimate
Because it covers everything from the loan product itself to the rate to things like closing costs and homeowner’s insurance, the Loan Estimate is a crucial document that plays an outsized role in identifying key details that will impact your purchase at closing as well as for years to come.
Disclosure history and TILA
However, once upon a time things were less scrupulously defined, and many lenders regularly failed to provide borrowers with important details in clear, concise ways. As a result, full loan transparency was severely lacking and customers were left in the dark, often to their financial detriment.
Having identified several areas for improvement, in 1968 federal legislators got together and passed The Truth in Lending Act (TILA) to help protect consumers from deceptive lending practices and to provide increased transparency into the credit and lending process. TILA required the issuance of certain disclosures that described such items as APR (annual percentage rate), mortgage terms, payment schedules and total loan costs. TILA was an important first step in educating and empowering the consumer, but it was just the beginning.
RESPA and the emergence of the Good Faith Estimate
The Real Estate Settlement Procedures Act (RESPA) was passed in 1974 and became law the following year. RESPA was created to address a number of things including abusive practices in the real estate sector like kickbacks and unnecessary opening of escrow accounts. It also federally regulated home mortgages and mandated new disclosure forms to better educate and inform customers. Chief among these new disclosures was the Good Faith Estimate (GFE), the forerunner of today’s Loan Estimate.
The GFE was required by law to be issued within three (3) days after applying for a loan. Since at this point, the loan is still tentative and not all costs, taxes and fees have been calculated, the GFE provided value by projecting many—but not all—costs and terms associated with the consumer's loan.
TRID and Loan Estimate
TILA and RESPA (including the GFE) were incredibly useful in providing important transparency and protections to borrowers seeking loans and credit. That said, these two acts mandated the issuance of a wide array of documents that sometimes felt overwhelming to consumers.
In order to streamline the disclosure process, the governing body—the Consumer Financial Protection Bureau (CFPB)—called for the creation of the TILA-RESPA Integrated Disclosure (TRID) or the “Know Before You Owe” disclosure. While TRID contained many items already being addressed through current law, it presented them in two, new easy-to-read disclosures that measurably increased clarity and readability. This was a victory for borrowers everywhere.
As the name implies, TRID incorporates certain aspects from both TILA and RESPA to produce two essential documents governing the mortgage-process:
- Loan Estimate
- Closing Disclosure
The Loan Estimate is to be issued by lenders no later than three (3) business days after receiving a borrower’s application.
The Closing Disclosure (CD) was designed to come at the end of the mortgage process as a final and complete itemized tallying of all mortgage-related costs, terms and relevant homebuying information. It serves as your last chance to review your loan before closing.
The LE replaced the Good Faith Estimate and the Closing Disclosure replaced the Closing Statement.
Key provisions in the Loan Estimate
Vast in scope but only totaling three pages, the key provisions addressed in the Loan Estimate are as follows:
- Loan amount
- Interest rate
- Monthly principal and interest
- Prepayment penalty
- Balloon payment
- Principal & interest
- Mortgage insurance
- Estimated escrow
- Estimated taxes, insurance and assessments
- Costs at Closing
- Estimated closing costs
- Estimated cash to close
Closing Costs Details
- Loan costs
- Origination charges
- Services you cannot charge for (such as appraisal fee, credit report fee, flood determination fee and so on)
- Services you can charge for (such as title search, settlement agent fee survey fee, etc.)
- Other costs
- Taxes and government fees
- Prepaids (e.g., homeowner’s insurance premium)
- Initial escrow payment at closing
- Other (e.g., owner title policy)
- Total closing costs
- Calculating Cash to Close
Total closing closets + down payment - deposit = estimated cash to close*
- In 5 years you will have paid this much principal, interest, mortgage insurance and loan costs: $____
- In 5 years you will have paid this much principal: $____
- Annual percentage rate (APR)
- Total interest percentage (TIP)
- Homeowner’s insurance
- Late payment
- Confirm receipt: Applicant and co-applicant signature
Making sense of your loan estimate
As a borrower, it’s incumbent upon you to stringently review the loan estimate and make sure you understand the various costs, rate, verbiage and attendant responsibilities should you go forward with the loan. You’ll also want to sit down—or at least have a discussion over the phone—with your trusted loan officer. You’re on the eve of the most momentous purchase of your life and it’s only logical that you take the necessary time to understand the full scope and impact of every term, feature and estimated cost. A professional loan officer is an expert in such matters and can quickly demystify complexities and precisely point out how the LE captures all the pertinent information about your prospective loan.
Comparing Loan Estimates from multiple lenders
It’s very much your right to compare Loan Estimates between multiple lenders. While an LE is not free of charge, it’s not expensive either (usually around $30—the cost to pull your credit report), and you may want to obtain more than one if you want to seriously compare pricing between different lenders.
This usually begins with the information on page 2, such as origination charges. This is a fee that is often negotiable and therefore can fluctuate from lender to lender. Charges around your title search, lender title policy and other title-related items, are also prime areas for comparison.
On page 3 of the LE there’s an actual section simply entitled “Comparison.” You guessed it: This is where you can compare key components of your loan without digging too deep. This section captures pivotal information regarding total payments made in your first five years, total principal you will have paid in that same time period and your APR and total interest percentage (which highlights how much interest you will pay as a percentage of the overall loan if you keep paying it down until the final scheduled payment). Together, these are all figures that will impact how much you will pay at the outset and over time.
It’s rare for two Loan Estimates to be exactly the same. While superior customer experience and ease of process will invariably influence your decision on which lender to select, there’s nothing quite like knowing you're getting the most affordable loan for your home. And a Loan Estimate is one of the best ways to compare prices.
Loan Estimate vs. Closing Disclosure
The value of the Loan Estimate is actually two fold: It provides excellent loan transparency, including all the less-known items that inform things like projected monthly payments and closing costs; it also furnishes borrowers with a kind of yardstick—something to measure the veracity of the Closing Disclosure against.
Closing Disclosure synopsis
The Closing Disclosure (CD) is, of course, exactly what it sounds like: The final tabulation of all costs, fees, terms, rates, and taxes and other items related to your prospective loan. Unlike the LE, which is issued at the beginning of your mortgage journey, the CD is presented to you right on the eve of signing your promissory note (loan agreement).
Much like its counterpart, the Closing Disclosure is also an outgrowth of the TRID legislation and was designed to add superior clarity and readability to the loan disclosure process. Mandated by law to be issued to borrowers no later than three days prior to closing, it’s an essential document that wraps everything up and allows you an opportunity to look things over one last time before signing on the (digital) dotted line.
Will the Closing Disclosure differ from the Loan Estimate?
Besides sitting down with your loan officer and perhaps a real estate attorney, the other action you’ll want to take is to review your Closing Disclosure alongside your Loan Estimate. By and large, the terms, rates and figures should be much the same. However, don’t have a heart attack if there are some discrepancies as some of that is by design.
If you failed to lock in your rate at the time of your application, then that could have very well changed over the ensuing weeks—either to your advantage or disadvantage. Make sure you take a close look at your rate and don’t be shy in asking questions if you think it doesn’t look right. This is your last chance to get satisfaction and you only have a few days to think it over.
Closing costs: potential changes**
The good news is that some of the more substantial closing costs are not allowed to change from the Loan Estimate to the Closing Disclosure. These include origination fees, appraisal fees and transfer taxes.
Certain closing costs, items such as title search, lender title insurance, survey fee and pest inspection fee, can all change up to 10% from the numbers outlined in your LE.
Other closing costs—those not governed by the lender—can increase by any percent at any time. While a small increase shouldn’t alarm you or be a reason to cancel the loan (something that TRID legislation gives you three days to do), it can still be worthwhile following up with your lender to get the full story on the increases. Costs affected include the following:
- Prepaid interest
- Prepaid property taxes
- Prepaid homeowners insurance premiums
- Initial escrow account deposits
- Real estate–related fees
Due to the (obvious) fact that buying a home is such an expensive and impactful purchase, you’re going to want to take the process seriously—and that means getting involved. You can’t afford to take a hands-off approach to mortgage-related details or merely trust that everything’s in order based on a few conversations with a real estate agent or loan officer. You need to take charge. You need to vet the loan agreement and the profusion of terms, conditions and costs that accompany it.
That’s precisely why the Loan Estimate was created and it’s why reviewing it should be an important part of your loan acquisition process whether you’re buying your first home or refinancing your current one. Because it was specifically designed to be clear, concise and easy to read, it doesn’t take a Master’s degree to understand. It’s all there—the essential elements of your future loan agreement—in three compact pages.
And if you do have a question, that's a great opportunity to sit down with your lender and go over the document, section by section, until you’re comfortable with the terms and numbers and how they will affect your loan.
*Varies from borrower to borrower based on a range of factors including seller credits, adjustments, funds for borrower and closing costs financed.
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