What is a mortgage loan estimate?

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Unless you plan to pay cash for a house, you will need to get a mortgage to finance the purchase. An important part of this process is evaluating the loan estimate, which explains the mortgage offer and terms, including the interest rate.

However, a loan estimate is just that: an estimate. Here’s what you need to know about loan estimation and how to compare several to make sure you get the best deal.

What is a loan estimate?

A loan estimate is a standard three-page document from a lender that contains details about a mortgage loan, such as closing costs, interest, and monthly payment. The information in the document is an estimate – in other words, not final – but it can help you make a decision on which loan offer to commit to.

Here is an example of a loan estimate.

The loan estimate “informs buyers of the funds needed to close the loan. This will include interest, closing costs, third party fees, and escrow items. It will also provide them with the detailed estimated payment, ”says Stephanie McAllister, senior mortgage advisor at Prosperity Home Mortgage in Atlanta.

“It helps a buyer understand, early in the process, the estimated cost of the transaction,” says McAllister.

All lenders use the same loan estimate document, so it’s easy to compare costs.

“Similar to nutrition labels, loan estimates are legally required to be the same for all lenders,” says Emanuel Santa-Donato, vice president of capital markets and major acquisitions at Better.com, a digital lender. “That way, it’s easy for you to compare loan offers and harder for lenders to hide the fees. “

The loan estimate was implemented in the wake of the Dodd-Frank Act, which placed new requirements on lenders, among many other provisions, after the 2008 recession.

When will I receive the loan quote?

When you apply for a mortgage, your lender will provide you with a loan estimate within three days of your application. To apply, you will usually need to provide the lender with your legal name, proof of income, social security number, desired loan amount, desired property address, and list price.

How to read and compare loan estimates

Whether you are buying a home or refinancing, the loan estimate is an important document, so it is essential to understand the information that is presented.

Loan quote page 1

Courtesy of the Consumer Financial Protection Bureau

The first page of the loan quote presents the terms and conditions of the mortgage loan in three areas:

  1. Loan conditions
  2. Scheduled payments
  3. Costs at closing

Each of these sets out the details of the loan. In section # 1 shown in the example above, you will find the following information:

  • term of the loan – The duration of the mortgage (for example 30 years)
  • Goal – What is the financing for, such as a “purchase”
  • Product – What type of loan is it, such as a “fixed rate”
  • Type of loan – Whether the mortgage loan is a conventional loan, FHA or VA, or another type of loan
  • Rate lock-in – If the lender has blocked the interest rate on the mortgage and the expiration date of the block

In section # 2 above, you will learn more about:

  • Amount of the loan – The amount you borrow and if it can increase
  • Interest rate – The interest rate (a percentage) and if it can increase
  • Principal and monthly interest – The monthly mortgage payment excluding home insurance and property taxes
  • Penalty for early repayment – If you have to pay a prepayment penalty if you add additional payments or if you repay in full before the end of the loan term
  • Balloon payment – If there is a lump sum payment, which is a large lump sum due at the end of the loan term

In Sections # 3 and # 4 above, you’ll find an overview of your payments and fees.

  • Calculation of payment – A breakdown of the monthly mortgage payment including principal and interest, escrow fees and private mortgage insurance premiums (PMI), if applicable
  • Estimated Total Monthly Payment – The estimated monthly mortgage payment including principal and interest, escrow and PMI, if applicable
  • Estimate of taxes, insurance and assessments – Estimated home insurance and property taxes, and whether they will be in receivership
  • Estimated closing costs – Mortgage closing costs
  • Estimated cash flow to close – Closing costs plus anything you have prepaid (such as down payment, down payment or any seller credit)

The first page also includes the name of the applicant, the date of the loan estimate, the address of the house and the price of the property.

On the first page, “you need to make sure that the interest rate and loan amount shown is what you have selected or discussed with the lender,” says Santa-Donato.

Loan quote page 2

Like the first page of the loan estimate, the second page has three elements:

  1. Loan fees
  2. Other costs
  3. Calculate liquidity to close

These explain all the costs of the mortgage, including the fees for the providers and services you need to use, such as the appraiser, and other providers and services you can research and price for. lower, such as title insurance. business.

As noted in section 5 above, the left column details the following costs and services:

  • A: Original charge – Mortgage set-up fees, which may include application fees and other lender fees, as well as any points you could buy to lower your interest rate
  • B: Services you can’t buy for – A list of the services needed to close the mortgage and their costs, such as assessment and a credit check, for which you cannot choose your own provider
  • VS : Services you can buy – A list of services needed to close the mortgage and their costs, such as title search and investigation, for which you are allowed to choose your own provider
  • D: Total costs of the loan – The sum of parts A, B and C

The most important numbers to compare are in parts A and B: the original charges and the charges for services you can’t buy.

“These numbers vary by lender and affect your monthly payment and cash flow due at closing,” says Santa-Donato. “Other fees and prepaid amounts, while large in your overall cash flow at closing, show little or no variation between lenders. “

You have the option to search for a supplier in Part C if you think you can get a better deal. Note that even if you compare costs with other providers, your lender may have a relationship with the one they indicated on the loan estimate, which may or may not have a special partner rate.

The other details, as shown in section # 6 above, are:

  • E: Taxes and other government charges – Fees for registering the mortgage with the city or county and property transfer taxes, if applicable
  • F: Prepaid – Any fees you pay up front, such as home or mortgage insurance premiums or property taxes
  • G: Initial Escrow Payment at Closing – Your first home insurance premiums and property taxes to go into escrow
  • H: Other – Additional fees such as an owner’s title insurance policy (which is often required, but sometimes optional)
  • I: Total other costs – The sum of the parts E, F, G and H
  • J: Total closing costs – The sum of parts D and I

In the last part of page two, “Calculating Cash to Close” (section # 7 above), you will find a breakdown of the full costs required to close, including the down payment and total closing costs ( as calculated in part J). This is the estimated total amount you will need to complete the mortgage.

Loan quote page 3

The last page of the loan estimate includes details such as the names of the lender and loan officer, and three important numbers that can help you make comparisons (see section # 8 in the example below. -above) :

  • The principal amount of the loan that you will repay in the first five years of the loan, as well as the combined principal, interest and mortgage insurance (if applicable)
  • Your annual percentage rate, or APR, the combined loan costs as a percentage
  • Your total interest percentage, which is the amount of interest you will pay over time, also as a percentage

The last page also explains other parts of the process (see section # 9 above), such as appraisal and home insurance requirements, assumption (essentially, whether the loan can be borne by the next owner of the property), late payment penalties. and how the loan will be served.

What to watch out for on a loan estimate

According to the Consumer Financial Protection Bureau (CFPB), borrowers must first confirm that all of the estimate information is correct, including your name spelling and the loan amount and term.

Next, you’ll want to note the differences between the estimates, such as the interest rate, original fees, and points. You’ll also want to compare the net result of the estimated monthly payment and the estimated cash to close to see which mortgage offer best suits your needs and circumstances.

Other things to watch out for, according to Santa-Donato, include:

  • Third-party fees that appear in one lender’s loan estimate and not another’s
  • Credit promises after closing that do not appear on the loan estimate
  • Increased costs when circumstances change

If you are refinancing, Santa-Donato also cautions against loan amount differences.

“A lender can increase your loan amount slightly to create a loan with no closing costs,” says Santa-Donato. “Borrowing a little more than your current loan repayment is one way to offset costs at the closing table, but it increases your debt to pay for your closing costs. For a head-to-head comparison between lenders, you should get loan estimates with identical loan amounts.

Read your loan estimate in detail, ask as many questions as you need to fully understand it, and report your concerns to the lender. It’s also a good idea to hire a professional to go through your loan estimates with you to explain any unclear information.

“If buyers compare lenders, I suggest doing a full comparison for them so they can quickly compare the differences,” says McAllister.

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