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What is Included in a Loan Estimate?

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You did your loan legwork. Now what?

Moving forward with a home loan is a huge step for homeowners, and if you're at that point, you've probably done your research homework on loans. Understanding all aspects of a loan is important so you can find a loan that works best for you, but have you found yourself wondering if you need a loan estimate? As part of the home loan process, lenders are required to send a loan estimate to potential buyers after they apply for most types of home loans. A loan estimate can help you learn what to expect as you compare rates and explore your home loan options. Plus, prepping yourself may help prevent pesky surprises. Here's a breakdown of what you need to know about loan estimates.

What is a loan estimate, and when will I get one?

A loan estimate is a document you'll receive from a lender within three business days of applying for a home loan. The document outlines important details about the loan, as well as estimated closing costs, to give you an idea of your overall home loan expenses.

So, exactly what's in a loan estimate? Take a look at some key items:

  • Loan term (length of the loan)
  • Total potential amount you plan to borrow
  • Projected interest rate
  • Notification if interest rate can change in the future
  • Approximate principal and interest
  • Details to note, such as prepayment penalties and balloon payment
  • Approximate total monthly payment
  • Mortgage points – if you're paying points to reduce the interest rate
  • Projected tax and insurance costs  
  • Total estimated and itemized closing costs
  • Total estimated cash to close

What should I know about loan estimates?

Loan estimates are just that – approximations of the costs you're applying for, so some things may be subject to change. For example, loan details or the interest rate could potentially change, in which case, you'd receive a revised estimate. Remember, a loan estimate isn't a guarantee that you'll be approved, and similarly, the interest rate on a loan estimate isn't final until you lock in your rate.

What is a closing disclosure and how is it different from a loan estimate?

Keeping in mind that a loan estimate is literally just an estimate, a closing disclosure  differs because it represents the final details and actual costs involved with your loan. There are other differences, too, such as the information that's required for each form, and the length of each. After letting a lender know you want to proceed with a loan application and after the initial underwriting approval, you'll receive a closing disclosure no later than three business days prior to closing.

Here are some items that'll be finalized when you receive your closing disclosure:

  • Total loan amount
  • Confirmed interest rate
  • Verified total monthly payment
  • Final tax and insurance costs
  • Exact total and itemized closing costs

With a clear understanding of what a loan estimate includes and what to check for once you receive your closing disclosure, you'll be ready to find the right loan for you and progress on your path to home ownership.

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