Mortgage BasicsHow to Read Your Loan Estimate?

How to Read Your Loan Estimate?

Formerly known as a “good faith estimate,” a loan estimate is one of the most important documents you’ll receive during your homebuying journey. As you shop around for the best mortgage interest rate, payment schedule, and mortgage terms, a loan estimate can help you better understand and compare all available mortgage options.

In this article, we’ll answer these questions:

  • What is a loan estimate?
  • When will you receive a loan estimate?
  • How to read and compare loan estimates

Let’s take a look.

What is a Loan Estimate?

A loan estimate, formerly referred to as “good faith estimate” until 2015, is a three-page form detailing all the information about a borrower’s potential mortgage. Typically, a loan estimate outlines the following:

  • Interest rate
  • Escrow details
  • Closing costs
  • Loan term
  • Mortgage monthly payments

To ensure that borrowers understand the loan offer, the Consumer Financial Protection Bureau requires all lenders to use the same standardized loan estimate form. This makes it easy for borrowers to compare loan costs across lenders. Note that, as the name implies, a loan estimate is not final but only an estimate.

When Will You Receive a Loan Estimate?

To receive a loan estimate, you will need to submit some information within three days of your loan application, including

  • Your legal name
  • Verifiable income
  • Social Security Number (SSN)
  • The address of the potential property you hope to finance
  • The property’s value
  • The amount you want to borrow

Once they have everything they need, the lender will send you a loan estimate based on the information provided. Keep in mind, however, that the loan estimate is only valid for ten business days. If you want to accept the terms, make sure you do it within the time frame. Of course, you could still get financing from the same lender even if you missed the deadline. But remember, you might get a different offer, sometimes worse, depending on your financial situation and the market conditions.

Another thing people are often confused about is whether receiving a loan estimate means that their mortgage application has been approved. Unfortunately, while receiving a loan estimate is an exciting milestone in securing a mortgage, it doesn’t mean your loan application is approved. You will still need to provide further information at times and go through the underwriting process.

How To Read and Compare Loan Estimates

Whether you’re applying for a new mortgage or refinancing your home, your loan estimate tells you a lot about the mortgage you would potentially take out. Typically, a loan estimate consists of three pages with several sections, revealing your mortgage outlines, closing costs, and any fees associated with your loan.

How to Read a Loan Estimate: Page 1

 

Page 1 of Loan Estimate
Courtesy of Consumer Financial Protection Bureau

Page 1 of your loan estimate outlines the fundamentals of your loan and your basic information. You should pay attention to this section when comparing loan estimates between lenders.

Under Section 1 of Page 1 of your loan estimate, you will find:

  • Loan term – The length of the mortgage (such as 15 years or 30 years)
  • Purpose – What the financing is for, such as a “purchase.”
  • Product – What kind of mortgage it is, such as a “fixed-rate or adjustable-rate.”
  • Loan type – Whether the mortgage is a conventional, FHA or VA loan, or another kind of loan program
  • A rate lock – Whether the lender has locked the interest rate on the mortgage and the date the lock expires

Note that while some lenders may lock your rate when issuing a loan estimate, some may not. If the rates are favorable and you worry that they’ll go up soon, consider a rate lock.

Under Section 2 of Page 1 of your loan estimate, you will find:

  • Loan amount – The amount you’re borrowing and whether it can increase
  • Interest rate – The interest rate (a percentage) and whether it can increase
  • Monthly principal and interest – The monthly mortgage payment excluding homeowners’ insurance and property taxes
  • Prepayment penalty – Whether you have to pay a prepayment penalty or not
  • Balloon payment – Whether there’s a balloon payment or not

Under Sections 3 and 4 of Page 1 of your loan estimate, you will find information about your loan payments and fees.

  • Payment calculation – A breakdown of the monthly mortgage payment, including the principal and interest, escrow fees, and private mortgage insurance (PMI) premiums, if applicable
  • Estimated total monthly payment – The estimated monthly mortgage payment including the principal and interest, escrow, and PMI, if applicable
  • Estimated taxes, insurance, and assessments – The estimated homeowners’ insurance and property taxes
  • Estimated closing costs – The closing costs of the mortgage
  • Estimated cash to close – The closing costs plus anything else you’ve paid upfront (such as the down payment and earnest money

Please note that page 1 of your loan estimate also covers your basic information, such as your name, date issued, address of the property, and value. You should always double-check to make sure that the information is correct.

How to Read a Loan Estimate: Page 2

Page 2 of Loan Estimate
Courtesy of Consumer Financial Protection Bureau

Page 2 of a loan estimate focuses solely on three main things ─ loan costs, additional fees, and calculating the amount of cash needed to close. These sections provide a detailed explanation of all the costs associated with the loan, including fees from third-party service providers such as appraisers, home inspection companies, and title insurance companies.

Under Section 5 of Page 2, you’ll find:

A. Origination charges – The fee for initiating the mortgage, which can include an application fee and other lender charges, as well as any points you may be purchasing to lower your interest rate

B. Services you cannot shop for – A list of necessary services to close the mortgage and their costs, such as the appraisal and a credit check, that you can’t choose your provider for

C. Services you can shop for – A list of necessary services to close the mortgage and their costs, such as the title search, that you’re allowed to choose your provider for

D. Total loan costs – The sum of parts A, B, and C

When comparing loan offers between lenders, you should focus more on the information under A & B. These numbers vary by lender and significantly impact your monthly payments.

Under Section 6 on page 2, you’ll see:

E. Taxes and other government fees – The fees for recording the mortgage with the city or county and the property transfer taxes, if applicable.

F. Prepaids – Any costs you’re prepaying, such as homeowners or mortgage insurance premiums or property taxes

G. Initial escrow payment at closing – Your first homeowners’ insurance premiums and property taxes to be in escrow

H. Other – Additional costs such as an owner’s title insurance policy

I. Total other costs – The sum of parts E, F, G, and H

J. Total closing costs – The sum of parts D and I

In addition, you will also find a final section sometimes referred to as Section 7 or calculating cash to close within Page 2. This section covers all the costs needed to close the mortgage, including the required downpayment and total closing cost as stated in J.

How to Read a Loan Estimate: Page 3

Page 3 of Loan Estimate
Courtesy of Consumer Financial Protection Bureau

Page 3 is the final page of a loan estimate. Typically, it covers the name of the lender or loan officer and some other information to help you compare loan offers across lenders.

Under Section 8 of Page 3, you’ll find:

  • How much of the loan principal you’ll pay off in the first five years of the loan, as well as the combined principal, interest, and mortgage insurance (if applicable)
  • Your annual percentage rate, or APR, the combined costs of the loan as a percentage
  • Your total interest percentage, which is the amount of interest you’ll pay over the term, also as a percentage

Section 9 of Page 3 explains other aspects of the mortgage process and how the loan will be serviced.

Final Thoughts

The Consumer Financial Protection Bureau has structured the loan estimates to help potential borrowers understand the intricacies of a typical mortgage process. Take all the time you need to digest the numbers and information and compare your loan estimates before proceeding with a particular lender. This is the only way to ensure a smooth homebuying or refinancing process.

Elijah O. Agor, CFP

Elijah O. Agor is a real estate, 1031 exchange, and mortgage writer. He is a certified financial planner, former loan originator, and chief realtor for Dsquared Realty. In the past, Elijah advised first-time and seasoned home buyers on real estate and mortgage decisions in the Greater Atlanta area. Since hanging up (burning) his suits and ties, Elijah now works to make mortgage and real estate topics understandable and jargon-free.