Decode this important form – Forbes Advisor
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When applying for a mortgage, there are a ton of details to work out. And if you shop around multiple lenders for the best deal, there’s an incredible amount of information to track and compare. Fortunately, a very important document known as a loan estimate (LE) can help.
Reviewing your loan estimate is a key part of the mortgage application process. Here’s an overview of what it is and how to read it.
What is a loan estimate?
Formerly known as the “Good Faith Estimate”, this form was updated in 2015 to be more useful and easier to read. Now known as a loan estimate, this document tells you everything you need to know about your potential mortgage, including the interest rate, the length of the term, the amount of the monthly payment, escrow details and closing costs. All loan estimates are formatted the same, making it easy to compare multiple loan options.
In order to receive a loan estimate, you must provide the lender with six personal information: your name, your income, your social security number (SSN), the address of the property you wish to finance, the value of the property and the total amount. you want to borrow. Once you have provided this information, the lender is required to send you an LE within three days.
Keep in mind that just receiving a loan estimate does not mean that you are approved for the loan; this is an estimate of what the lender plans to offer you based on the information you have provided. You will still need to accept the offer and then provide additional documents for you to repay the loan in order to lock it in.
Once issued, the conditions of the loan quote are valid for 10 days. As long as there are no major changes in your application or your financial situation, your lender must honor the estimate if you begin the process of obtaining the loan within this timeframe.
9 things you’ll find in your loan estimate
Even though a loan estimate is supposed to be easier to navigate and understand than previous versions, there is still a lot of information to digest. Here’s a breakdown of what you’ll find in an LE so you can better understand it.
1. Overview of your loan
The top of your loan estimate will show some basic details about the loan. Here you will find information such as the name of the applicants, the address of the property, the duration and type of loan and whether the the interest rate is blocked (and if so, for how long).
2. Loan conditions
Then the loan conditions are specified. You will see the loan amount you requested, the interest rate, the projected monthly principal, and the interest owed, if there is any. early repayment penalty and if the loan has a balloon payment.
3. Projected payments
Then, the projected monthly payment is detailed. The loan estimate will show how much you can expect to pay in principal and interests, mortgage loan insurance and escrow, and how these costs change over time. You’ll also see the estimated monthly cost of all additional taxes, insurance, and assessments.
4. Costs at closing
The following section gives you an overview of the loan closing costs. You will be able to see how much money you need at the close. Remember that you will need to provide your lender with a written record of these funds.
5. Details of closing costs
Closing costs are then detailed in the next section. First of all, the loan estimate indicates what part of the closing costs is intended for the origination of the loan, all points paid, the administrative fees and the subscription fees.
Then all the necessary charges for the services that you cannot search are described. These include fees for assessment, credit report and tax status research.
You will then see a list of services that you can purchase, along with the associated fees. These include pest inspection, investigation and titles.
Other costs associated with the loan are also detailed here. These may include government taxes and fees, transfer fees, and prepaid fees home insurance, mortgage insurance, interest or property taxes.
Finally, all other costs are listed, such as the initial escrow payment and optional owner. title policy. The end of this section then adds up all of these fees and highlights how much money you will need at closing to pay them off, minus the money you have already paid and / or the credits.
6. Additional loan information
Details such as lender, loan officer, contact details and license numbers are listed in the next section.
7. Details for comparison
In order to simplify the process of finding mortgages and comparing offers, this section highlights some key loan details. You will see the total amount you will have paid in principal, interest, mortgage insurance and other charges after five years, as well as the amount of principal you will have paid back during that time.
The loan estimate will also indicate the annual percentage rate (APR), which is the annual cost of your interest rate plus any fees, expressed as a percentage of the total loan amount.
Finally, you’ll see the Total Interest Percentage, which is the total amount of interest you will pay over the life of the loan as a percentage of your loan amount.
8. Other considerations
This section of the loan estimate details other mortgage terms that you should consider before signing the dotted line. For example, will the original loan terms transfer if you sell or transfer the title? What is considered a late payment and how much are the costs? Will the lender actually service your loan or will it be transferred to another company?
9. Confirmation of receipt
Finally, there is a space at the end of the document to sign and date it, indicating that you have received the loan quote. Signing the loan quote is only confirmation that you have received it and does not mean that you accept the terms of the offer.
Loan estimate vs good faith estimate
Prior to 2015, you received a Good Faith Estimate and Loan Truth Form when you applied for a mortgage. However, these forms were not really easy to navigate.
As part of its Know Before You Owe mortgage initiative, the Consumer Financial Protection Bureau (CFPB) removed the good faith estimate (except for reverse mortgages) and replaced it with the modern loan estimate. The aim was to standardize the way mortgage information is presented to potential borrowers and to make it easier to find and compare mortgage offers.
Loan estimate vs. closing disclosure
In addition to your loan estimate, you may also receive a closing disclosure. Although it contains similar information, it is a separate document.
Rather than describing the estimated cost of your mortgage, a final disclosure details the actual costs once you’ve selected the deal you want and are officially approved for the loan.
You should compare the closing disclosure to your loan estimate to make sure your mortgage terms meet your expectations. Details to consider include the mortgage interest rate, loan amount, monthly payment amount, closing costs, and estimated taxes. You receive this document at least three days before the mortgage closing date, and you have that time to review the closing disclosure and ask your lender questions.
Can fees change after loan estimate?
There shouldn’t be any surprises in your final disclosure. However, some figures may change from the original loan estimate.
For example, this can happen if your interest rate was not locked in when you received the loan estimate. If so, the rate may change at any time and may be higher by the time you are ready to take out the loan. The rate may also change if you do not close during the lockout period or if major changes are made to your application information.
Changes to your information can also affect other loan costs. For example, the lender is allowed to increase your closing costs if there is a “change in circumstances” which means you change your down payment, decide on a different term or type of loan, l If the property valuation is higher or lower than expected, there are major changes to your credit, or your income cannot be verified.
Other charges beyond the lender’s control, such as prepaid interest, home insurance premiums, and charges for third-party services, may also change.
However, some fees listed on your loan quote cannot legally change. These include fees paid to a broker and transfer taxes.
If there are any changes in circumstances, you receive a revised loan estimate. If your costs increase more than what is legally allowed, you are entitled to a refund of the difference.