Loan Estimate Definition – Investopedia

February 13, 2022 By admin

Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
Do you know what purpose a loan estimate serves when you apply for a mortgage? Checking the latest national average mortgage rates can only take you so far when you’re planning to buy or refinance a home. To know what interest rate you might pay in real life, you have to get in touch with a mortgage lender and give them some specifics.
When you do, you’ll get a loan estimate, an important document showing the key details of the mortgage for which you have applied. You’ll want to review your loan estimate carefully before moving forward with the underwriting process to see if you understand the loan and can comfortably afford it.
A loan estimate is a three-page form that presents home loan information in an easy-to-read format, complete with explanations. This standardization not only makes the information easy to digest; it also makes it easy to compare offers among lenders to see which one is offering you the best deal.
You’ll get a loan estimate within three business days of applying for a mortgage unless you don’t meet the lender’s basic qualifications and your application is rejected. If that happens, the lender must give you a written notice within 30 days stating why your application was rejected. The only fee you may have to pay to get a loan estimate is a credit report fee.
When you receive a loan estimate, it’s valid for 10 business days. If you want to accept a loan offer, try to do it within that time frame; the lender may change the terms and issue a new loan estimate if you take more time to decide.
You won’t necessarily get a different offer or a worse offer, but things can change with market conditions and your credit. In fact, mortgage rates can change multiple times within a single day. Of course, it might take you longer than 10 days to identify a property you want to buy and make an offer, and you should take your time with such important decisions.
Try to get all your loan estimates on the same day, so you can see which terms different lenders offer under the same market conditions. It’s also important to apply for the same loan type and term with each lender in order to make accurate cost comparisons.
You can and should get a loan estimate before you find the property you want to buy, especially in a seller’s market, wherein buyers often need to act quickly to make a purchase offer. You want to have mortgage preapproval and maybe even pre-underwriting to be confident you can get financing.
However, you do need a property address and purchase price to get a loan estimate. What’s the solution if you haven’t pinned one down yet? Provide a property address for a similar home and the purchase price for which you want approval. A loan estimate is not an official preapproval, but it gets you moving in the right direction. The lender can issue a revised loan estimate after you have chosen a property.
Which items appear on a loan estimate? We’ll walk you through it page by page and help you understand each one.
Page 1 begins with basic information:
Next is a box with the loan’s terms:
These days, most loans don’t have prepayment penalties or balloon payments. Also, your loan amount is unlikely to increase after closing. These three disclosures relate to features that were more common during the housing bubble of the early to mid-2000s.
It’s also unlikely that your interest rate or monthly principal and interest payment would increase after closing. If you are taking out an adjustable-rate mortgage, they may. Most people get fixed-rate mortgages.
The second box on Page 1 goes into more detail about your projected monthly payment. In addition to your monthly principal and interest payment, it shows two items that are likely to apply if you’re putting down less than 20%: your estimated monthly mortgage insurance payment and your estimated monthly escrow payment of homeowners insurance and property taxes.
Finally, the third box on Page 1 shows your estimated closing costs and estimated cash to close. Page 2 will break down these costs in detail.
The loan estimate’s second page itemizes the loan’s closing costs and shows how much cash you’ll need to finalize the loan.
The typical mortgage origination fee is around 1%. It might be higher if you choose to pay points to lower your interest rate. The loan’s underwriting and application fees are included here too. These fees compensate the lender for its efforts to qualify you for a loan and get you the money so you can buy a home. They also vary by lender and can be a good place to save money.
Many other vendors are involved in making your mortgage happen. Some vendors you can choose, while for others, your lender gets to choose.
It doesn’t matter whether the cost of these closing services differs from one lender to the next when you’re deciding on a lender. They’re just estimates, and you’ll be able to shop around for these providers and decide how much to pay.
Any fees your local government charges when a property is transferred and a new deed of ownership is recorded go here.
Lenders require homeowners to have their homeowners insurance in place before the loan can close, so there’s a charge for that here that will usually cover six or 12 months’ worth of insurance.
You might have to prepay mortgage insurance premiums and property taxes, and you’ll probably have a charge for prepaid interest. It covers the days you’ll have the loan between your closing and the first of the following month when you’ll make your first principal and interest payment.
If the loan requires you to maintain an escrow account (shown on Page 1 of your closing disclosure, also called an “impound account“), then this section will show how much you have to fund that account to cover future homeowners insurance premiums, mortgage insurance premiums, and property taxes. Lenders are allowed to keep a two-month cushion in this account, so that’s probably what they’ll charge you here.
Remember that lender's title insurance policy you have to buy? It doesn’t cover you. It’s a good idea to buy an owner’s policy as well, and that fee will show up in this section.
This line sums up all of the above charges. It should match the estimated closing costs from the bottom of Page 1. If you’re getting any lender credits, you’ll see those subtracted here.
This section totals up your closing costs and down payment and subtracts any earnest money deposit you make.
The top of Page 3 says who your loan officer is, what their license number is, and how to contact them (you might also be interested to know how loan officers are compensated). Here’s what else you’ll learn on Page 3:
This box provides four numbers you can use to compare one loan estimate with another.
This section tells you six more things about the loan for which you've applied:
Keep the loan estimate for the lender with which you ultimately move forward. Before closing, you’ll receive another CFPB-created form called the closing disclosure. By comparing it with your loan estimate, you can make sure the lender hasn’t made any mistakes or tried to slip any last-minute charges by you.
The Consumer Financial Protection Bureau (CFPB) designed the loan estimate to help you understand any mortgage you apply for, whether you’re buying a home or refinancing one. Because any lender who wants your business is required to give you a loan estimate, you can use this form to easily compare offers from different lenders and get a better deal. You can also make sure you aren’t being overcharged for any services and that you understand all the loan’s costs and features. This important form is definitely one to review closely. Ask your lender questions about anything you don’t understand.
Consumer Financial Protection Bureau. "What Is a Loan Estimate?" Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "I Never Received a Loan Estimate. What Can I Do?" Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "§ 1002.9 Notifications." Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "Loan Estimate and Closing Disclosure: Your Guides in Choosing the Right Home Loan." Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "My Loan Officer Said That I Need to Express My —Intent to Proceed— in Order for My Mortgage Loan Application to Move Forward. What Does That Mean?" Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "Request Loan Estimates From Multiple Lenders." Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "What Information Do I Have to Provide a Lender in Order to Receive a Loan Estimate?" Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "Look Out for Revised Loan Estimates." Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "Loan Estimate Explainer," Select "Page 1." Accessed Nov. 16, 2021.
StemLending. "Closing Costs Explained — Five Categories You Can’t Miss." Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "Loan Estimate Explainer," Select "Page 2." Accessed Nov. 16, 2021.
Consumer Financial Protection Bureau. "Loan Estimate Explainer," Select "Page 3." Accessed Nov. 16, 2021.
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