When you apply for a home loan, you will receive important information that details the costs associated with getting a mortgage.
A Loan Estimate is a standard document you’ll receive when you apply for a mortgage with any lender.
The Loan Estimate or LE always follows the same format which makes it simple to read and understand. It includes three pages and lenders are required to send you a loan estimate within three days of applying for a mortgage.
What is included in a Loan Estimate?
The Loan Estimate is three pages long and is split into sections which outline the terms, closing costs, and fees associated with your loan.
Some of the items you’ll find listed on your mortgage Loan Estimate include:
A summary of your loan details, which include your loan amount, the term of your loan, and your initial monthly payment.
Your escrow account information, which includes your pro–rated annual property tax and homeowners insurance costs.
Your estimated loan closing costs, including your lender fees, your title fees, and whatever third–party costs apply.
While it’s important to understand all the terms on your Loan Estimate, there are a few key sections you’ll want to pay special attention to.
Loan Estimate: Page One
Page One of the Loan Estimate is an overview of your loan terms and costs. You’ll want to pay special attention to:
Date Issued – The LE is only binding to the lender for 10 days after this date.
Loan Term And Type – Make sure these are the terms you wanted, and that all LEs you compare show the same information.
Interest Rate – Look for the rate, but also pay attention to page two, which shows you how much you have to pay (in the form of “points”) to get that rate.
Estimated Total Monthly Payment – This shows you how much you’d pay each month with principal, interest, taxes, and insurance included.
Estimated Cash To Close – This number shows how much money you actually need upfront, including your down payment as well as lender fees and third–party charges.
Next, let’s look at page two of the Loan Estimate.
Loan Estimate: Page Two
The second page of your Loan Estimate breaks down the costs shown on the first page. To better understand your interest rate and fees, you should look at:
Points – This shows the dollar amount you have to pay to “buy down” your interest rate, and actually receive the rate shown on page one.
Application And Underwriting Fee – Lenders all charge different fees to process your loan.
Services You Can Shop For – These are third–party services. They’re not set by your lender, but you’re free to shop for third–party providers.
Calculating Cash To Close – This box shows you a breakdown of the “cash to close” shown on page one.
Finally, let’s look at page three of the Loan Estimate.
Page Three of the Loan Estimate has a few more key numbers such as:
In 5 Years – Shows how much you will have paid altogether, and how much you will have paid off toward the loan balance alone, in 5 years.
APR –The APR represents your total loan costs over the life of the loan, including interest and upfront costs, expressed as an annual percentage.
Does a Loan Estimate mean you’re approved?
Receiving a Loan Estimate does not mean you’re approved for a mortgage. The Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward.
Remember, the Loan Estimate is issued based on an initial look at your application. You can get an LE after providing:
Your name
Your income
The property address of the home your are to purchase/refinance
The property’s value estimate or purchase price
Your loan amount
Your Social Security number
At the time a lender sends the Loan Estimate, they haven’t yet seen all the documentation supporting those numbers on your application. In other words, your loan hasn’t gone through full “underwriting.”
If anything on your application can’t be fully documented (like your income, savings, debt, etc.), your loan terms are subject to change.
The terms on your Loan Estimate are also subject to change if there’s a major change to your loan. For instance, if you change the term for 30 to 15 years or decide you want an adjustable–rate mortgage instead of a fixed–rate mortgage.
Only after the lender has fully reviewed all your documents will you be officially “approved” for the loan.
How accurate is a loan estimate? Although it’s just an estimate, the Loan Estimate is very often a reasonable approximation of what your loan will cost.
If you don’t have a home picked out yet, a mortgage lender is likely to give you a quote on possible costs.
If you do have a home picked out, you can complete a mortgage application and get an official Loan Estimate within 3 days.
Remember to work with your lender to find out the best program, payment and options for you and your needs.
