The Loan Estimate is a document the mortgage company provides to you within three days of completing a Loan Application.
The Loan Estimate has all the important details of your loan including the interest rate and fees. And it will tell you if the loan has a pre-payment penalty.
If you want take a quick jump to an easy to read break down of each page of the loan Estimate.
If you’ve purchased a home or refinanced a mortgage before October 2015 you’ll remember a document called the Good Faith Estimate (GFE) and another one called the Truth-In-Lending disclosure (TIL).
Most people focused on the GFE as the disclosure had your name, address, the interest rate you were quoted, monthly payment and so much more. Late October 2015 federal regulators released a brand new document to replace both the Good Faith Estimate and the Truth-In-Lending statement. They named it the Loan Estimate.
Why the change?
Regulators at the Consumer Financial Protection Bureau (CFPB) decided that the disclosure needed an overall and they also were trying to find a way to reduce the number of disclosures a loan officer had to provide to a borrower.
Thus reducing the potential confusion borrowers had. As mentioned the Loan Estimate and it’s a combination of the Good Faith Estimate and the Truth-In-Lending disclosure. The Loan Estimate was welcome change by the industry in general as it made it a bit easier to explain the details of the loan to a borrower.
Loan Estimate – Everything You Need To Know
The Loan Estimate is a three page document that breaks down the important information associated with your loan. the document is issued when you refinance a mortgage or need a mortgage to buy a home in California (and nationwide).
The Loan Estimate is also known as the “LE”. On every new Fannie Mae or Freddie Mac conforming mortgage, FHA mortgage, and VA mortgage (purchase or refinance) a Loan Estimate is provided to the borrower. In some instances, several Loan Estimates are provided during the process.
When Is the Loan Estimate Sent?
A Loan Estimate is issued after a homeowner or potential homeowner applies for a new mortgage (within three days of completing an application). It’s very important to know that if you call a lender for a quote and don’t complete an application they will not send you a Loan Estimate. To get a Loan Estimate you actually have to apply for a loan.
It’s also important to keep in mind that the disclosure is just what it says it is; an “estimate”. The lender has to follow certain regulations and laws in terms of disclosing all the costs but there is some leeway provided in case something changes.
In addition to the initial Loan Estimate given to the borrower at the time of application a new Loan Estimate is sent whenever there is a material change to the loan. For example; if you lock in your interest rate a new Loan Estimate will be sent. If you change terms or change the loan amount then a new Loan Estimate is issued.
Information In The Loan Estimate – All Three Pages
Below is simple to read breakdown of all three pages of the Loan Estimate.
Page one of the Loan Estimate has five important points to cover.
- Mortgage rate (locked or not locked)
- Monthly payment (impounds or no impounds)
- Pre-payment penalty and balloon payment information (if applicable)
- Estimated closing costs and lender credits
- Estimated cash to close or cashback to you
Page one of the Loan Estimate provides a wealth of information and you should review it carefully. If you think your rate is locked then the Loan Estimate will reflect that.
Look in the upper right-hand corner and see the section where it says “Locked”. If the box next to “Locked” is checked then your rate should be locked. If that box next to “Locked” is not checked then your rate is definitely not locked (more on this below).
And if you are getting a lender credit to cover some or all of the fees it should be listed at the bottom of page one (towards the right of the page)
Page two of the Loan Estimate is basically a breakdown of all the fees, credits and impounds (if you are setting up impounds).
- Lender closing costs including processing fees, underwriting fees, points and origination fees
- Third-party fees such as appraisal, title, and escrow fees
- Government recording charges
- Impound amounts (if applicable)
- And any other costs associated with the loan (ie pest inspection)
When you set up an impound account to pay your property taxes and property insurance on a monthly basis it needs to be “pre-funded” with a certain amount. The total amount is going to be different for everyone and the first Loan Estimate may not have the exact/final amount listed (this is normal).
I like to say page three of the Loan Estimate has all the “legalese” wording. The good thing is that it’s laid out well and it’s fairly easy to read.
- Lender and Loan Officer information at the top including contact emails and phone numbers
- A comparison chart
- APR for the loan (the APR is the interest rate plus the costs of the new loan combined)
- Lists your Total Interest Percentage (TIP)
- Additional information such as is Assumption options, Late payment information, Servicing etc.
- At the bottom, it has a signature line so you can confirm receipt
Taking the time to review and understand the Loan Estimate is an important part of the mortgage process.
What it doesn’t it have?
Well it doesn’t answer general questions like “Who has the best mortgage rates in California?” or “Am I getting a good deal?” ….that you’ll have to figure out on your own. The Loan Estimate only has information that pertains to the quote the loan officer provided to you.
Don’t Miss The Top of Page One
One of the most important areas of the Loan Estimate is the on page one; top right corner. It clearly spells out your loan term, purpose, loan product, type and if the interest rate is locked. If you think the interest rate the Loan Officer quoted is locked then look at the top right of page 1 and locate the “RATE LOCK” line.
If the box is checked “yes” then your interest rate is locked and it will list your lock expiration deadline. If it’s not checked or checked “no” then your interest rate is not locked and can change before closing.
Don’t just accept a verbal confirmation that the rate is locked; request written confirmation. Per federal regulations once the loan rate is locked you are supposed to receive an updated Loan Estimate within three days.
Important Details About Page Two
As mentioned page two of the Loan Estimate has the break down of your fees; lender fees, third party fees and government recording fees along with impound information (if you are setting up an impound account. It’s important to remember that the numbers listed in section G on page two (for impounds) are generic estimates at first.
Many lenders input three or six months of pre-funding for both property taxes and property insurance but that could easily change by the time you move to closing. Generally speaking; you might not get the exact number of months needed for pre-funding until after the loan is approved in underwriting (provided property tax and property insurance information is in the file when it’s reviewed).
Further Explanation About Page Three
As mentioned the A.P.R. which is your interest rate plus the costs of the loan expressed as a rate. Some people get confused by the interest rate and the APR and that is understandable. Just remember that your interest rate is what your mortgage payment is based on and your APR is your interest rate plus the fees you’re paying to do the loan.
Great Questions To Ask The Loan Officer
Here is a good list of questions to ask your Loan Officer if you are buying a home in California or refinancing a mortgage.
- Can you please explain the difference between the interest rate and the APR listed on page three?
- Is the amount listed to set up an impound account final or could there be adjustments to that amount?
- Are the third party fees exact or could these adjust before closing?
- If you are getting a lender credit; ask the Loan Officer to point it out on the Loan Estimate
Asking good questions is a great way to ensure your loan closes quickly and it closes at the terms you are expecting.
Using The Knowledge
The Loan Estimate is a great tool that can really help a borrower understand the mortgage they are applying for.
Other than the benefit of being informed and more educated as to what the Loan Estimate is; having this knowledge can actually help you obtain the loan terms you actually want and a clear understanding of your interest rate in terms of it being locked in or not locked in.