One standardized document you receive when you buy a home is the Loan Estimate. We’ll guide you through the finer points of the Loan Estimate and how it can empower you to be a more informed home buyer.
What Is A Good Faith Estimate And A Loan Estimate?
When you apply for a mortgage, your lender is required to give you a Loan Estimate: a standardized form that gives you important details about the mortgage you’re applying for. The Loan Estimate includes your estimated interest rate, monthly payment, closing costs and more.
The Loan Estimate has only been around for a few years. In the past, you may have received two documents – the good faith estimate and the truth-in-lending statement – from your lender. In 2015, these documents were combined into the Loan Estimate to help borrowers better understand what they’re getting when they apply for a mortgage.
Every lender uses the same Loan Estimate so borrowers can easily compare loans. Getting a Loan Estimate doesn’t mean you’ve been approved or must proceed with a particular loan. It’s simply a way to understand all the details before you move forward.
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What Does The Good Faith Estimate Or Loan Estimate Tell You?
The Loan Estimate is broken up into several sections that show how much the loan will cost you. The Loan Estimate is designed to be an easy read, with the most important information listed at the top. Let’s look at what the Loan Estimate covers.
At the very top of the Loan Estimate, you’ll see a brief overview of your loan. This information should match what you’ve discussed with your lender.
This is the amount of time over which you’ll pay off your loan.
This shows the type of rate you’re getting. This may be a fixed rate, where the interest rate stays the same for the life of the loan, or an adjustable rate, where the interest rate changes every six months after the initial fixed period. These are the most common options, but this section may show another type of loan product, depending on what you’re applying for.
The Loan ID number is the unique identification number for your Loan Estimate.
This tells you when the interest rate you’ve locked in will expire.
A rate lock is a way of guaranteeing that your interest rate won’t change before you close your loan. If you have a rate lock on your loan, your Loan Estimate will show when it expires. If your rate expires, the rest of your loan costs can change along with your interest rate.
This is the amount you plan to borrow. Double-check the loan amount to be sure it’s what you had requested from your lender. Keep in mind that if you’re buying a home, the loan amount won’t necessarily equal the purchase price. If you’re putting money down, this number should be the purchase price minus your down payment.
The interest rate is the annual cost to borrow money from your lender. The rate shows the percentage of your total loan balance that you’ll pay each year. It’s paid for as part of your monthly mortgage payment.
This section also shows whether your interest rate is expected to change after closing. If it says “yes,” you’re signing up for an adjustable rate. Make sure this section reflects what you’ve discussed with your lender.
Monthly Principal And Interest
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. Keep in mind that this doesn’t just apply to clients who come up with money to pay off their loan – it also applies to refinancing, which is a form of paying off your loan.
A balloon mortgage is a short-term loan that includes smaller monthly payments for a set number of years followed by a large payment that covers the remainder of the principal. A balloon payment is typically due at the end of 5, 7 or 10 years.
Balloon mortgages are risky. The balloon payment is often quite large – often in the tens of thousands of dollars. If you’re considering a balloon mortgage, it’s important to carefully consider how you’ll make the balloon payment when it comes due.
Principal And Interest
This shows your base monthly payment.
Principal refers to the amount you’re planning to borrow. It’s divided into equal monthly amounts based on your loan term.
Interest is part of this payment as well. As you pay down your principal balance, you’ll pay less in interest, so more of your mortgage payment will go toward the loan principal. That’s why your principal and interest payment is shown as one number – the payment amount stays consistent, but the balance between principal and interest changes over time.
You may have to pay some form of mortgage insurance depending on the type of loan you’re getting and how much money you’re putting down. Mortgage insurance protects your lender if you stop making payments on your mortgage.
An escrow account is an account that your lender uses to collect money to pay your property tax bills and homeowners insurance premiums. If you’ve chosen to have an escrow account on your loan, you’ll see estimated monthly payments in this field. Not all mortgages have an escrow account.
The number here shows what your lender thinks you’ll need to pay to your escrow account on a monthly basis to cover your taxes and insurance. This number can, and likely will, change from year to year as your tax bill and homeowners insurance premiums change.
Your lender may require you to make an upfront payment for escrow as well; that’s detailed in the “Other Costs” section of the Loan Estimate.
Costs At Closing
This section shows the closing costs of your loan, including what you’ll need to pay at closing. Closing costs account for a large portion of the cash you need for a mortgage and typically run about 2% – 5% of the purchase price of your home.
“Estimated Cash to Close” is the number you’ll want to pay attention to in particular. This is the amount you’ll need to cut a check for at closing. This includes your down payment.
This section gives the total numbers, but detailed information about what those numbers include is provided in later pages of the Loan Estimate.
The Loan Costs section goes over the costs of getting the loan – including your lender’s fees and fees for any third-party services.
This covers the lender’s administrative costs for the application and underwriting. It’ll also show any discount points you’ve agreed to pay on the loan.
To reduce the interest rate on your loan, you may want to purchase points. One point equals 1% of the loan. For example, if your loan is $200,000, buying one point would cost you $2,000. This information is laid out in the Loan Estimate if you elected to buy points, but you can also ask your lender how your payments will change if you choose not to buy points.
The application fee covers the costs of processing a new mortgage loan, and the full cost varies by lender. It's an upfront charge that is typically nonrefundable.
Underwriting is the way that a mortgage lender assesses the risk of lending money to you, and the fee is included in the Loan Estimate.
Services You Cannot Shop For
The required services in this section are chosen by the lender. They can include an appraisal, credit report, flood determination, flood monitoring, tax monitoring and tax status research fees. Some fees in this section may depend on the kind of loan you have chosen. For example, if you have a government loan such as an FHA, VA or USDA loan, the upfront mortgage insurance premium or funding fee will be listed in this section. If you have a conventional loan with private mortgage insurance (PMI), this would be included here.
Services You Can Shop For
These third-party services are also required by your lender but you can choose which service provider you’d like to use. For example, you might shop around to determine which pest inspector might give you the best deal. Other servicers you can choose on your own include the survey fee and title-related services.
The Loan Estimate also covers taxes and other government fees, any prepaid items, the initial escrow payment at closing and other costs. These are all added together at the bottom of the “Other Costs” section.
Taxes And Other Government Fees
Taxes and other government fees can include recording fees, other taxes and transfer taxes. Recording fees are the fees that legally record the new deed and mortgage. Transfer taxes, set by state and local governments, are collected whenever property changes hands or when a mortgage loan is made. You may see city, county and/or state taxes listed here as well.
Prepaids are expenses or items that must be paid at closing, before they’re actually due. They’re put into an escrow account and cover items such as the homeowners insurance premium, mortgage insurance premium, prepaid interest and property taxes.
Initial Escrow Payment At Closing
The amount you’ll need to pay at closing for your initial escrow payment is also included in the “Other Costs” section. This sections shows costs for homeowners insurance, mortgage insurance and property taxes.
This section typically lists the owner’s title policy cost, which is protection for you in case a claim is made on the home. It can protect you against financial losses if a title issue comes up later. Claims can arise from a previous owner’s failure to pay taxes or from contractors who say they weren’t paid for work done on the home before you purchased it. There could be a mistake in the ownership history, a previously unknown heir, a pending lawsuit, legal judgment and more.
Total Closing Costs
The total closing costs are added together and any lender credits are listed in this section. Lender credit is money given to you by your lender to offset some or all of your closing costs.
Calculating Cash To Close
The estimated cash to close is the amount of money you need to bring to closing. This part of the Loan Estimate explains how your cash to close is estimated, and it includes down payment and closing costs and the deposit you’ve already paid to the seller. It will also include how much money, if any, the seller is planning to pay toward your closing costs.
You can use the final page of the Loan Estimate to see how much you’ll pay in principal, interest, mortgage insurance and more over the course of five years.
It shows your annual percentage rate (APR), which is usually higher than your interest rate, because it takes into account not only your interest rate, but any points, mortgage broker fees and any other charges you pay to get your loan.
This section also shows your total interest percentage. This number refers to the total amount of interest you’ll pay over the loan term as a percentage of your loan amount. It’s calculated by adding up the scheduled interest payments and dividing that total by the loan amount.
The “Other Considerations” section of the Loan Estimate doesn’t list any costs. It’s simply a list of items you’ll need to be aware of, including appraisal, assumption, homeowners insurance, late payment, refinance and servicing information.
This is the cost to professionally evaluate the market price of the house. If the property isn’t worth the purchase price, you can negotiate a lower offer, pay the difference between the mortgage and what is still owed, or walk away. The Loan Estimate mentions that you can pay for an additional appraisal at your own cost.
Assumption indicates whether the loan could become an assumable loan in the future, meaning that if you sell or transfer your home to someone else, that person may or not be allowed to adopt your outstanding mortgage and its terms.
You must have homeowners insurance from a company that your lender finds acceptable. Homeowners insurance protects your home against risks such as lightning, fire and theft. Be sure your policy offers the right types and amounts of coverage for your home.
You’ll pay a late fee if you make late payments on your loan, and this section explains the terms of those late fee payments.
When you refinance your mortgage, you get a new loan for your home. The new loan pays off the old one so you’re left with just one loan and payment. It’s generally done to shorten a loan term, lower monthly payments, or to take cash out of the equity you’ve built in the home. When you’re allowed to refinance depends on your future financial situation, property value and market conditions. This part of the Loan Estimate may tell you that you may be unable to refinance your loan.
Servicing will tell you whether your lender plans to service your loan or not. In other words, you’ll make your monthly payments directly to your lender if they service your mortgage. Many lenders transfer the servicing of your loan to another lending institution.
Applicants and co-applicants sign and date this section of the Loan Estimate. By signing, you only agree that you’ve received the form. You don’t have to accept the loan.
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What Is A Closing Disclosure?
Under the direction of the Consumer Financial Protection Bureau, the Closing Disclosure replaced the HUD-1 Settlement Statement and the Truth-in-Lending (TIL) document in 2015. The old form listed all the fees associated with closing but was notoriously confusing for home buyers, and buyers had to review it quickly on the spot at closing. Now, lenders are required to provide your Closing Disclosure three business days before your scheduled closing.
Compare The Loan Estimate And Closing Disclosure
The five-page Closing Disclosure includes all the same information as the Loan Estimate, and they’re both laid out similarly so you can easily compare the two documents. It’s a good idea to double-check that all your loan details are correct on your Closing Disclosure.
The Closing Disclosure lists loan terms and costs, closing costs and the amount of cash you’ll need at closing. Instead of an estimate, the Closing Disclosure lists the actual figures you’re responsible for. You can’t make any changes after you sign the Closing Disclosure. That’s why it’s essential that you understand every item before you close on your loan.
If the figures in the Loan Estimate and Closing Disclosure match, you’re good to go. But if there are big differences, including an increase in the mortgage interest rate or borrowing costs, you need to talk to your lender.
The good faith estimate used to be the definitive guide to what your expenses were estimated to be but has been replaced by the Loan Estimate. The Loan Estimate and the Closing Disclosure together have made it even easier to understand your loan details and your financial responsibilities when you take out a loan.
The Loan Estimate covers your loan terms, projected payments, costs at closing, loan costs, other costs, a calculation of cash to close and other considerations. The Closing Disclosure lists loan terms and costs, closing costs and the amount of cash you’ll need at closing. If you’re ready to get started, Rocket Mortgage® by Quicken Loans® is here to help you every step of the way!
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