How to read a mortgage loan estimate


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The average home buyer can save $ 1,500 over the life of their mortgage just by getting a second mortgage quote, according to a 2018 study by Freddie Mac.

But nearly half of borrowers aren’t looking for multiple rates, the study found.

All homebuyers should shop around for rates because there are a lot of differences between lenders, says Jennifer Beeston, mortgage educator and 13-year industry veteran who is one of the top 1%. the country’s mortgage creditors in terms of volume.

This means that it is essential to be able to interpret what you find on a loan estimate document, which is your first real look at a possible mortgage.

We asked Beeston to walk us through the loan estimate and outline what borrowers should focus on.

What is a mortgage loan estimate?

A loan estimate is a three-page document detailing your potential mortgage costs. This form describes the fees, interest rate, and all other expenses associated with your mortgage. The lender must provide you with a loan estimate within three business days of receiving your request.

To get an official loan estimate, you must have a home under contract, which means the seller of the home has accepted your offer, unless you are refinancing an existing mortgage. A lot of people think they’ll get a loan estimate with a prequalification or pre-approval, but you won’t get the official estimate without a property address, Beeston says.

All lenders are required to use the same loan estimate form. This makes it easier to compare offers, but you should always know what you are looking at. Also keep in mind that the loan estimate is only an estimate. Fees vary from lender to lender and some may change upon closing. The good news is, you don’t have to be an expert to understand the contents of a loan estimate. You just need to know what to focus on.

4 keys to comparing lenders with loan estimates

According to Beeston, all of the most important things a borrower should consider are on the first two pages of the loan estimate: loan type, foreclosure rate information, rate, and fees.

For example, the APR (annual percentage rate), which includes the interest rate plus fees, is a better measure of the overall cost of a mortgage than the interest rate. But it does include some costs such as prepaid taxes that can adjust between the loan estimate and closing. Thus, the APR on the loan estimate can change, which is why it is important to focus on comparing the lender’s fees and the interest rate.

1. Check the loan and the type of product

When you get the loan estimate, the first thing you want to do is check the details. Make sure what you see is what you expected.

Pay close attention to “loan type” and “product”. You should compare the same types of loans when you are looking at different lenders. If someone compares a conventional loan to an FHA loan, it’s not apples and apples, Beeston says.

If you are thinking of getting a conventional loan, make sure this box is checked. A conventional loan is not guaranteed by the government, but you can waive private mortgage insurance requirements in certain circumstances. If you’re not sure what’s best for you, ask your lender to explain the differences and any possible options you might consider.

2. Lock rate

Don’t let someone rush you through the mortgage application process. But, when it comes to securing a good interest rate, be decisive. “If you like it, lock it,” Beeston says. The rates change daily, so if the rate is not locked, it could change tomorrow.

Ask if the lender charges a fee to lock in the rate. You also want to ask how long the rate is blocked. If you close the house in 30 days, make sure the rate lockout covers you until it closes. If you need to extend the rate lock-in, a fee is usually charged.

3. Tariff and fees

Mortgage interest rates grab the headlines, but you can’t effectively compare mortgage deals without looking at the fees as well. People may see a lower rate when they compare lenders and assume it’s a better deal. But that’s not always the case, says Beeston.

It depends on the rate and fees in Section A on page two of the Loan Estimate. “It’s not like the industry has set an underwriting fee or that every rate has a fixed cost,” Beeston said. The same interest rate with six different lenders could cost six different amounts due to the lender’s fees.

You should always ask if the interest rate you are getting includes any discount points. Discount points are additional fees that you can pay in exchange for a lower interest rate. Paying more up front to save on interest over the life of the loan may make sense in some cases, but you’ll want to do the math with your loan officer to be sure.

Beeston advises borrowers to always ask a potential lender these questions:

  • What are your origination costs?
  • Are there any reduction points for this rate?

If there are discount points built into the rate offered to you and the lender does not disclose it, take this as a big warning sign. Beeston says she once worked with a borrower who presented her with a loan estimate that featured a competitive refinance interest rate, but that included a 5% hidden point of call fee. On a loan of $ 108,000, that totaled over $ 5,000.

Pro tip

A price match guarantee is a red flag. Why would you want to work with a lender who offers you a high rate and only lowers it if you are going to do the job? “Why don’t they give you a lower rate now? Beeston says

Looking at Section B on page 2, you’ll see a fee for third-party services required by the lender, but Beeston says not to worry too much about this box as it’s largely nickel and obscure. These are fees for the required services that you are not authorized to purchase, so they cannot change without the lender sending you a revised loan estimate.

“In this case, they estimate the assessment fee to be $ 405. Now, if the valuation ends up being $ 600, in order to charge the customer that extra $ 200, we’ll have to disclose again, ”Beeston said.

4. Ignore cash to close (for now)

“The biggest mistake people make is that they don’t look at the details. They’ll take three loan estimates, put them next to each other, and they’ll only use the estimated money to close, ”Beeston said.

This doesn’t mean that it doesn’t matter how much money you need to close, but it’s not a good way to compare offers from different lenders. This is because the total closing amount at the bottom of page two includes sections E, F, H, and G, but which lender you choose has no impact on these costs.

The borrowers’ stores for home insurance and taxes are set by local and state governments, so the numbers you find for insurance and taxes are estimates. And estimating these costs is not an exact science.

“It’s incredibly difficult for lenders to calculate estimated property taxes,” Beeston said. In some areas, homes located a short distance from each other can have very different property taxes. Think of the property tax calculation on the loan estimate as a starting point rather than the final breakdown. The official numbers will appear on the closing disclosure you receive from your lender three days before the closing.

But don’t ignore these costs completely either, depending on where you buy, taxes and insurance can have a huge impact on housing affordability. If insurance costs are high, Beeston recommends getting a basic home insurance quote online in advance. This way, there won’t be a huge increase in your insurance costs, which could impact your ability to qualify for a mortgage.

How to choose lenders to get loan estimates from

You shouldn’t get loan estimates from every lender you talk to. You’ll want to narrow down your list and get loan estimates from just three lenders, says Beeston.

When looking for a lender, check online reviews from some loan officers, not just the lender they work for. Otherwise, you could end up with an inexperienced mortgage advisor who just works for a reputable lender. You need to feel like the loan officer is knowledgeable and knows the guidelines, it’s not just about rates, says Beeston.

To weed out lenders, call a group to get a feel for who you’re hooking up to and be sure to cover the following topics:

Ask about the rates

Beeston recommends calling a handful of lenders to ask what rates you might be entitled to. While you won’t get full pre-approval based on the information you share over the phone, the lender should be able to give you a rough estimate. A lender can’t lock in your rate based on that first phone call, but a lender should still be able to give you an estimate. By giving you an estimate, you show the lender is willing to work with you, says Beeston.

When it comes time to submit an application, confirm that the rate will be locked in and check these rate lockout details when you get the loan estimate.

Does the lender offer a price match guarantee?

A price match guarantee sounds great: if you find a lower rate, the lender promises to match it. But buyers should resist this marketing tactic, Beeston says. If you ask a lender for a better rate and the answer is, “Well, if you find someone lower, I’ll match them,” that’s a wake-up call, Beeston says. “Why don’t they give you a lower rate now? “

Why would you want to work with a lender who offers you a high rate and only lowers it if you are going to do a lot of work? Anytime you’re offered a price match, it shows you could probably find a better deal somewhere else, Beeston says.

Are there any upfront fees before getting a loan estimate?

Beeston doesn’t like the upfront fees. “If someone tries to get money from you before you see a disclosure [Loan Estimate], be afraid, ”says Beeston. She recommends that you don’t hand over your credit card information until your rate is locked, you’ve reviewed all of the loan information, and you’re comfortable with the loan.

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