Understanding Your Mortgage Loan Estimate
When you are preparing to buy a house, one of the crucial documents you will receive is the Loan Estimate. Before you start looking for a new home, it’s important to understand the Loan Estimate and how it works.
At SIRVA Mortgage, we are dedicated to helping both first-time and experienced buyers to navigate the mortgage loan process. In this post, we’ll explain what the Loan Estimate is, what information it includes, when you should receive it, and what to do when you get it.
What is a Loan Estimate?
A Loan Estimate is a three-page, standardized document that you receive after you complete your loan application for a mortgage loan. When you submit your application, the lender has three business days to deliver the Loan Estimate to you for your review.
The form itself discloses important information regarding the terms of your mortgage, as well as the fees that will be charged. Anything that affects your mortgage contract, including rates, monthly payment amounts, closing costs, and any penalties that will be included in your mortgage contract, such as prepayment penalties or negative amortization, must be disclosed on the Loan Estimate form.
It’s important to understand that receiving a Loan Estimate from a lender does not guarantee that you’ll be approved for a mortgage.
After the lender provides the loan estimate and you decide to move forward, they will ask for additional financial documentation to be able to approve or deny your application. Keep in mind that unless the rate is locked, the interest rate, points and lender credit can change. These items will also appear on the Closing Disclosure in their final form.
Which Items Appear on a Loan Estimate?
The Loan Estimate form is, as we mentioned above, the form that all Lenders in the United States are legally required to use. The information included in the form is mandated by federal law and is meant to make it as easy as possible for borrowers to understand what to expect when they apply for a mortgage. Here is the key information you will see on the form.
Loan Term, Purpose, Product, and Loan Type
At the top of the form, you will see information about the loan term, purpose, product, and loan type. This section is basically an itemized summary of the characteristics of the loan you will receive.
Directly beneath the information about the loan term and product, is a rate lock box. Here, the lender will indicate whether your interest rate is locked. If your rate is locked, there will be a date indicating when your lock will expire. Make sure that the expiration of your rate lock falls in line with the closing on your home. If the rate is expiring before your closing, you need to talk to your Mortgage Consultant about how to get your rate extended so it coincides with your closing date.
The next section includes three important pieces of information: the estimated loan amount, the interest rate, and the part of your monthly payment that consists of interest plus principal.
Next to these numbers will be a space where the lender can indicate whether the amounts can increase after your closing. (Note that some items are not allowed to change. We will review those below). In the case of a fixed rate loan, answers to all of these questions should be No. if you apply for an adjustable rate mortgage, your lender must disclose the terms of how and when your interest rate can change.
Special Contract Provisions and Penalties
Beneath the loan terms, you will see two line items related to contract penalties. They are as follows:
Prepayment penalty. Some lenders may charge a prepayment penalty if you pay off the loan early. If there is a prepayment penalty, the terms of the prepayment, as well as the penalty itself will be disclosed.
Balloon payments. A balloon payment occurs if the amount of your monthly principal and interest payments do not pay off the entire loan amount at the end of the stated term. In this case, the last payment (balloon payment) will contain the entire remaining balance of the loan to be paid.
The next section breaks down your projected payment to include the amount of principal plus interest as included in the previous section plus additional costs. The additional costs typically include mortgage insurance (if required) and escrow charges.
The total will be included at the bottom and is an indication of what your basic monthly expenses will be if you are approved. If you are required to purchase mortgage insurance, your payment will be broken out to show the amount with and without the mortgage insurance premium.
The Loan Estimate provides you with a listing of all of your charges, divided into three separate sections. The current Loan Estimate form has been updated with some changes to protect borrowers. With the old form, some unscrupulous lenders would disclose Good Faith Estimates that changed significantly between the time the form was completed and the closing date.
The new form separates charges into three categories. The first is charges that may not change under any circumstances (zero tolerance.) These include the origination charge and a few other key items, which you can see in the chart below. The second category includes charges that may be changed within a 10% tolerance window, and the third category includes charges that may change without a tolerance limit.
The three sections for charges are as follows.
- Loan Costs
- Origination charges
- Services you cannot shop for
- Services you can shop for
- Other Costs
- Calculating your Cash to close
These charges cannot increase at settlement:
These charges can increase up to 10% at settlement:
These charges can change at settlement:
On the third page of your Loan Estimate form, you’ll see some numbers that are designed to make it easy for you to compare loans from different lenders. These include a total of the amount of interest and principal you’ll pay in the first five years and the amount of principal you will have paid off in that time.
It also includes an estimate of your APR and your total interest payments over the term of the loan. Again, you should use this information to compare loan costs.
You will need to provide your lender with some basic information in order to get a Loan Estimate. You can request Loan Estimates from multiple lenders for comparison purposes. The basic information you should provide includes the following:
Your Social Security Number
The address of the property you want to buy
An estimate of the value of the property
The desired loan amount
If you do request Loan Estimates from multiple lenders, make sure to review each one thoroughly to ensure you understand the mortgage loan being offered and its terms. Remember, the information on the third page is designed to make comparison easy, so take advantage of it!
When Should You Receive a Loan Estimate?
There are legal requirements for lenders in terms of when they issue a Loan Estimate to a prospective borrower. They are not required to issue a Loan Estimate if they have not received the basic information listed above.
The time frame is specific. After receiving the required information from a borrower, a mortgage lender has no more than three business days to send the Loan Estimate. If you want to compare loan terms and expenses, you should try to get all Loan Estimates at approximately the same time, so you can do your due diligence and choose a lender.
We should note that the same time period applies if you request a revised Loan Estimate. If you give a lender information that necessitates a revision, they should get it to you within three business days.
What to Check When You Receive Your Loan Estimate
You have Loan Estimates from three lenders and you need to compare them. Where should you start? Here are the things you should be sure to check before you choose a mortgage lender.
The accuracy of the information. Is your name spelled correctly? Did the lender enter information for the type of mortgage you requested and for the property you want to buy?
The details of the loan. Double check the estimated loan amount, the interest rate, the term of the loan, the estimated total monthly payment, and anything else that might affect you as a borrower.
The escrow details. What do you need to put in escrow? Does it include money for insurance payments and taxes? Many lenders include payments for homeowners insurance in the escrow as well as title insurance. What are the escrow charges?
Cash on hand. This final item is essential. Closely review the estimated closing costs and determine how much cash you will need to have on hand to pay for non-escrowed items. Crunch the numbers to ensure that the loan is one you can afford.
We strongly recommend getting out your calculator and checking every number. This isn’t the time to assume that everything is correct.
Once you’ve double checked the accuracy, we suggest looking at the comparison numbers on the third page and making an apples-to-apples comparison to help you choose the best lender and mortgage for your needs.
We want to close by going into a bit more depth regarding some of the special considerations that may appear on your Loan Estimate.
Adjustable Rate Mortgages (ARMs) often start with an attractive initial rate that may be locked for a period of time. However, after that initial period, the rates can (and will) change and may have a significant impact on your monthly payment.
If you apply for an ARM, the lender should attach a projected payment table. Keep in mind that your lender cannot project unexpected interest rate increases or financial crises. You should only agree to an ARM if you’re willing to live with the uncertainty that comes with them.
The second consideration addresses balloon payments. Balloon payments are not allowed for most Qualified Mortgages but there are exceptions for some small lenders. If you do receive a Loan Estimate with a balloon payment, you should be aware that you will be responsible for either refinancing or paying off the amount specified on the balloon payment.
Finally, many mortgage lenders will allow you to make additional monthly payments toward the principal of your loan or even to make one or more additional payments per year. Some put penalties in place for people who pay their mortgage quickly. These are considered prepayment penalties and should be listed clearly on the Loan Estimate.
We single out these penalties and features to make sure that you understand that each one can impact your financial situation. If you don’t understand something on the Loan Estimate, ask for clarification.
The Loan Estimate is a tool designed to make it easy for consumers to evaluate loans from different lenders and choose the one that’s best suited to their needs. The information we have included here should help you to compare loans and get the mortgage you need for the home you want. At SIRVA Mortgage, our Mortgage Consultants can help you compare any Loan Estimates you receive to determine which one gives you the best terms.
Are you in the market for a mortgage lender? Click here to read about SIRVA Mortgage loan options and start the application process today!