September 23, 2020
A loan estimate is a three-page document provided to you by a lender when you apply for a mortgage loan. It is meant to detail important figures like your estimated down payment, interest rate, monthly payment amount, and total closing costs. It’s also meant to help you understand the full financial implications of going forward with the loan, as well as to provide a standard format if you were to compare to other lenders. Lenders are required by the Consumer Financial Protection Bureau (CFPB) to issue your loan estimate within three business days of receiving your application.
What is not a loan estimate?
A loan estimate is not an approval of your application. It is also not a final offer of rates or costs associated with your loan. A loan estimate is just what it implies — an estimate of what the lender predicts for your total costs and fees associated with the loan will be, should your application be approved. As you progress forward with the loan, your lender will ensure you receive the final costs no later than three business days before closing in a document called a Closing Disclosure. Be sure to keep the loan estimate on hand so you can compare it with the Closing Disclosure to keep track of any changes.
How do you read a loan estimate?
All lenders use the same Loan Estimate Form, which is three pages long. Let’s walk through each page — you can use this example to follow along. The first page is where you’ll find high level information like your loan amount, interest rate, and projected monthly principal and interest. It also details your projected payments throughout the life of your loan as well as the closing costs. On this page, you’ll want to pay special attention to whether the amounts stated can change after closing, and whether you can incur penalties by paying off the loan early.
The second page lays out the costs involved with getting the loan itself, as well as any other costs you’ll be expected to pay at closing. These include everything from underwriting fees to property taxes, and they are all rolled up into one figure, called “Estimated Cash to Close”, which is the estimated amount you will need to pay when you close the deal.
The third and final page of your loan estimate includes information about your lender, comparison rates to use when looking through other estimates, and other important details like late payment and refinancing policies. Look through this section carefully to make sure you understand both your responsibilities and your options for selling the property or possibly refinancing the loan in the future.
Will I receive a loan estimate for any kind of mortgage application?
Loan estimates are not required for every type of mortgage. For example, reverse mortgages and home equity lines of credit (HELOCs) may use a Good Faith Estimate and a Truth-in-Lending disclosure in lieu of a loan estimate. There are other exceptions as well, like homes that are attached to a property and mobile homes.