Since 2015, lenders and loan officers are required to issue a document known as a “loan estimate.” These documents can seem complex and intimidating, but if you understand their purpose, and how they help both you and the lending agent, you’ll be able to look over the document like a pro and find the exact information you need.
You’ll also be better equipped to make the right choice for your home mortgage!
What is a Loan Estimate?
Basically, a loan estimate is an outline of what you should expect if the loan is issued. It’s not an official, binding agreement, but rather a good-faith explanation of the potential loan. It describes what you will pay and why, and will outline essential details of the loan.
Previously, lenders issued a document called the “good faith estimate.” But to standardize the lending process, the federal government outlined a slightly-adjusted system and dubbed it the loan estimate.
While it’s not a guarantee, it is an honest estimate of your loan fees. Things can change, but lenders issue these loans with as much accuracy and consistency as possible.
What to Look For From a Loan Estimate
A loan estimate is organized into three different pages. Each page serves a specific purpose and has a variety of information that helps you fully understand the loan being offered.
Page 1: The Basic Terms
Probably the most important of all the different sections, Page 1 of your loan estimate has the vital numbers that are crucial to the mortgage. Essentially, Page 1 is like the first paragraph of a news article: it should hold all the most important, fundamental information.
Mortgage companies can put different styles on their loan estimates, but at the top you will generally find your personal contact information and the address of the property being purchased; you’ll want to look these over for accuracy. This section will also tell you the terms, the purpose, and the type of loan, as well as other basic information.
Page 1 will also include the basic loan terms. This section doesn’t change much from lender to lender, and generally holds the basic numbers, such as loan amount and interest rate. For most loans, the total amount will not change unless you have a unique type of loan. If the loan is an adjustable-rate mortgage, you’ll have additional information outlining the details. This section should also state whether or not there are prepayment penalties, and whether there will be a balloon payment at the end of the loan.
This page will also have a sum total of your closing costs, but a detailed explanation of how this total was created will be found on Page 2.
When reading Page 1, you should look for:
- The loan total
- The interest rate
- Terms (30-year, 15-year, etc.)
- Fixed or adjustable rate?
- Principle and interest payment
- Are there pre-payment penalties?
- Does it have a balloon payment?
- Closing costs (Further detailed on Page 2)
Page 2: The Costs
Page 2 consists of two sections: the loan costs and other costs. On the first section, you will find an explanation of the total costs for securing the loan. This can include a variety of charges and costs, including origination fees, application fees, recording fees for the property transfer, and other costs associated with buying a home. It will also include items that are important for buying a home with a loan, such as homeowners insurance and mortgage insurance.
Assuming you use a fixed-rate mortgage, nothing in the loan costs will (most likely) change over the years, although the mortgage insurance may be dropped. However, certain parts of the loan that involve third-party costs could change. For example, costs for surveys, inspections, and title fees could be adjusted.
There is also a section that covers other costs, such as deed recording fees and property transfer taxes. It can also include parts about what you are prepaying, such as homeowners insurance or property taxes, and any interest you plan to prepay.
The second part of Page 2 will often have miscellaneous costs, such as the owner’s title policy. Page 2 will usually end with a “cash to close” total, which is the initial estimate for how much you need to bring in order to finalize the loan agreement.
When reading Page 2, you should look for:
- Origination fees
- Mortgage points you plan to pay
- Application fees
- Underwriting fees
- Recording fees
- Property transfer taxes
- Homeowners insurance
- Property taxes
- Mortgage insurance
- “Cash to close” total
Page 3: Comparisons and Considerations
The final page holds general information about your loan and will have lender and loan officer information, as well as their contact information.
The next part will be a loan comparison. This is the section that shows your potential loan next to other loan options. This first part will also include a part that describes how much you will pay off assuming you maintain regular monthly payments. You will also see the Annual Percentage Rate, or “APR,” which is essentially an expression of your interest rate on an annual basis. It will also have a section that describes the total amount that you will pay on interest if you maintain the payments.
The third page will also have a section dedicated to other considerations, such as policies issued by the lender. It will also describe whether or not the lender will service the loan themselves or if it will be sold to a third party.
At the bottom of the page, you will see the all-important line where you are supposed to sign.
When reading Page 3, you should look for:
- Lender information (Name, contact info, etc.)
- Cost compared to other loans
- Five-year payment totals
- APR
- Interest total
- Lender policies (for appraisals, assumption, etc.)
- Will lender sell the loan?
Altogether, these pages create a loan estimate that allows you to make a clear, informed decision on your home purchase. They are crucial to the overall process, which is why the federal government has mandated that all mortgage loans have a loan estimate.
Guiding You to the Right Choice for Your Future
Selecting the right loan is a tough decision. But with top-quality support from a dedicated lending agent, you can make a choice that fits you needs and budget.
Contact our staff today and let us help with your next home purchase!
