What is a Loan Estimate?
A loan estimate gives you the opportunity to know the details of the mortgage before you accept and compare offers from different lenders to determine which works best for you. Here’s an overview of what you’ll find on your loan estimate and how it can help you choose the best mortgage option.
What is a Mortgage Loan Estimate?
After you’ve submitted a mortgage application to a mortgage lender, they will send you a loan estimate. This three-page document details every part of the mortgage offer: the loan type, interest rate, the process of how principal and interest will be paid over time, and the types of fees that will have to be paid upfront along with the down payment.
A loan estimate allows you to compare the numbers on different offers before accepting one. In some cases, you can even use a loan estimate from one lender to argue a better offer from another.
What Information Appears on a Loan Estimate?
There’s a lot of information to digest on the three pages of a loan estimate, and it’s important to read it over quickly to get the ball rolling on moving forward with the home-buying process.
Loan terms cover what type of loan you’re applied for and what terms apply to it.
- Type of Loan: Your loan terms will be specific to the type of loan you applied for. An FHA loan typically requires 3.5% down and charges interest rates that are a little lower than conventional loans. If you’re eligible for a VA loan or want a 15-year loan instead of a 30-year, this will affect your interest rate and penalties that apply.
- Interest Rate: The loan terms will detail the interest rate that the lender wants to charge on the loan. A fixed-rate loan will have an interest rate that remains the same over the lifetime of the loan, whereas an ARM (adjustable-rate mortgage) will have a rate that reflects changes in national rates. ARM loan estimates will include additional information on how your interest rate will change over time.
- Purpose of the Loan: The loan purpose noted on your estimate details what the loan will be used for, whether for purchase or refinance. The loan purpose will play a factor in the interest rates and payment terms as well.
- Prepayment Penalties and Balloon Payments: Your loan terms also include information about the end of your loan (which is important even if it feels like a long way off!). Some loans include prepayment penalties that will apply if you want to pay off the loan in a shorter time frame. Others have balloon payments, which lower initial monthly payments but require a much larger payment towards the end of the loan.
A second section of the loan estimate will detail the projected payments of the mortgage. This details the different fees that make up your monthly payments.
- Principal and Interest: Most of your monthly payments will be made up of principal and interest that are combined into a fixed payment for a fixed-rate loan or a series of payments that change over time for an ARM.
- Mortgage Insurance: Many types of loans include a monthly mortgage insurance payment (which is different from homeowner’s insurance) that helps insure your loan in the case that you default on future payments. This will appear as an additional monthly payment.
- Taxes and Insurance in Escrow: Most lenders will require something called escrow, which is an account held by a neutral third party for your homeowner’s insurance and property taxes. By having oversight and access to this account, lenders can make sure that you are making these payments on time. Payments towards escrow will often be made as a part of your overall monthly payment and will be deposited by the lender into the escrow account, from where it is distributed to homeowner’s insurance and property tax payments.
This section of the loan estimate details the closing costs that come with the loan, including your down payment and fees. These costs will have to be paid on the closing date, so it’s important to know that you’ll be able to have enough cash on hand to cover them.
- Cash to Close: Your cash to close is determined by the complete amount of fees that have to be paid on the date of close. This includes your down payment (minus any payment you have already made to the seller), initial payments to escrow, and origination fees.
- Fees: Your mortgage comes with a handful of payments that vary by lender. Some of these are due directly to the lender, while others go to the third-party insurance or title fees.
Fees that go to the lender are known as fees that you can’t shop for, and they include the cost of appraisal, credit report, and tax monitoring that the lender carried out for your specific loan.
There are other fees that can be shopped around for (meaning that you can compare rates and terms), mostly involving your property’s title search and policy.
On the third page of the loan estimate, you’ll find breakdowns of how interest and principal will be paid off throughout the loan along with the estimate’s APR and TIP.
An APR rate takes your interest rate and all of the additional fees charged by the lender and combines them into one percentage rate. APRs are calculated the same way for each lender, allowing you to quickly compare rates when you have multiple offers.
Similarly, the TIP (Total Interest Percentage) shows the total amount of interest compared to your property value that you will pay over the life of the loan. Longer loan terms will have larger TIPs, making this another valuable tool when comparing loan options.
The last section of the loan estimate is titled “Other Considerations” and includes information about other requirements that come with the loan, like terms to refinance, insurance standards, and late payment penalties. These will also differ by lender and can greatly impact how your loan will impact your financial future.
How to Get a Loan Estimate
To get a loan estimate, you’ll have to provide the lender with all of the information concerning the property you’re interested in, your proof of funds or employment, and your financial history on a mortgage application. The application will take some time to fill out and will require official documentation including your social security number, tax records, income statements, and record of debt.
Loan Estimate vs. Closing Disclosure
It’s important to know that your loan estimate, while detailed, still only provides approximate numbers and is not an official record of the payments and rates associated with the loan. When you decide to move forward after looking through the loan estimate, your lender will send a closing disclosure three days before your closing date to give you enough time to look over the final numbers and ask any follow-up questions.
Using Your Loan Estimate
What is a mortgage loan estimate? Essentially, it’s an approximate breakdown of all of the numbers that affect your monthly payments and your closing costs. This includes anything from how principal and interest are paid off over time to the tax payments that will be held in escrow from your monthly payments. An estimate gives you the opportunity to compare a mortgage with other options to find out which set of payments and fees works best for you.
This page last updated: March 21, 2022
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