What we'll cover
What is a Loan Estimate
Components included in a Loan Estimate
Comparing estimates from different lenders
Whether you're a first-time homebuyer, or a seasoned pro looking to optimize your financing, a home Loan Estimate holds the key to understanding the cost, terms and conditions of your mortgage.
What is a Loan Estimate?
A Loan Estimate is a standardized document that details the features, costs and risks associated with your mortgage. Whether you're getting a fixed-rate mortgage or an adjustable-rate mortgage — or if you're considering both options, you should receive one.
Read more: Which mortgage is right for you?
Every lender you approach will provide you with Loan Estimate. The beauty of these estimates is their uniformity: They all contain identical information, making it a breeze to compare different loan options. Lenders are obligated to give you this document within three days of receiving your completed mortgage application. Most importantly, they can only charge you for the expenses incurred in pulling your credit report and assessing your credit score.
The Loan Estimate is a valuable tool for comprehending and comparing loan choices. Although it offers a more precise insight than what you would calculate independently using a mortgage calculator, it's important to note that it does not indicate approval or denial of your loan. Should you choose to proceed with any of the loan options under consideration, your lender will request further financial details.
What is included in a Loan Estimate?
This document includes your estimated interest rate and monthly payment, plus information about how your interest rate and monthly mortgage payments may vary in the future.
The Loan Estimate also gives you information about closing costs, property taxes, third-party fees, homeowners' insurance costs, and any features, like prepayment penalties, that are unique to that mortgage loan.
For a closer look at what’s in a Loan Estimate, go to the Consumer Financial Protection Bureau (CFPB) Loan Estimate Explainer, and check out their interactive sample document.
Different lenders? Look for these things
It's a good idea to fill out a few mortgage applications from reputable lenders, so you can compare the loan terms and decide which one works best for you. While the Loan Estimate makes it easier to compare mortgages, you still need to be on the lookout for several things when you review your Loan Estimates. Here are some potential red flags:
Third-party fees appearing on one lender’s Loan Estimate and not another’s can be a sign that one of the lenders is missing something. While the fee amount can vary, the types of third-party fees associated with a mortgage are fairly constant.
Differences in loan amounts for a refinance could be a sign that one lender has created a “no closing cost” loan. That just means they've included closing costs in the bulk of the loan, thereby increasing the loan amount. For a true comparison, be sure to get Loan Estimates with identical loan amounts.
Promises of credits after close that do not appear on the Loan Estimate simply defeat the purpose of having one in the first place. It's best practice not to agree to any transactions outside the standard disclosure.
Unanticipated changes in circumstance may signal a lack of transparency. To ensure compliance, a legitimate change in circumstances could include situations where the lender initially depended on specific information to formulate the Loan Estimate, which subsequently becomes inaccurate or undergoes modifications. It could also involve the discovery of new transaction-specific information that the lender didn't consider when providing the original disclosures. For instance, examples may include borrower requested changes, rate lock fees that weren't accounted for in the initial Loan Estimate, or an appraiser charging a premium due to unique property aspects that weren't known at the time of the application. Be watchful for unforeseen costs and fees.
When getting a mortgage, brace yourself for all the associated paperwork. It can be a lot, but with the right ally, it's manageable. A Loan Estimate can make comparing your loan options easier (and give you good insight into the cost of your monthly payment), especially now that you know what to be on the lookout for.
