What is a Loan Estimate?

A Loan Estimate (LE) is a standardized document that provides detailed information about the costs and terms of a mortgage loan. Issued by lenders to prospective borrowers, it helps you understand and compare loan offers. The Loan Estimate is required by law under the Truth in Lending Act (TILA) and must be provided within three business days after you submit a complete loan application.

Key Features of a Loan Estimate

The Loan Estimate is designed to simplify the mortgage shopping process by providing clear, comparable information about the loan. Here's what it includes:

1. Loan Terms

   • Loan Amount: The total amount you’re borrowing.

   • Interest Rate: The rate charged on the loan.

   • Monthly Principal & Interest: Your basic monthly payment excluding taxes, insurance, and other costs.

   • Prepayment Penalty: Whether you’ll be charged for paying off the loan early.

   • Balloon Payment: Indicates if a large lump-sum payment is due at the end of the loan term.

2. Projected Payments

   • Monthly Payment Breakdown: Shows how much of your monthly payment goes to principal, interest, taxes, and insurance.

   • Escrow Account: Indicates whether an escrow account will be set up to pay property taxes and homeowner’s insurance.

3. Closing Costs

   • Loan Costs: Includes origination fees, underwriting fees, and other lender charges.

   • Other Costs: Includes taxes, recording fees, and prepaid items like homeowner’s insurance.

   • Estimated Cash to Close: The total amount you’ll need at closing, including down payment and closing costs.

4. Interest Rate Information

   • Indicates whether the interest rate is fixed or adjustable and, if adjustable, how it may change over time.

5. Comparisons

   • APR (Annual Percentage Rate): Reflects the total cost of the loan, including fees, over the life of the loan.

   • Total Interest Percentage (TIP): Shows the total interest you’ll pay as a percentage of the loan amount.

6. Other Considerations

   • Details on items such as whether your loan is assumable, how late payments are handled, and whether the lender intends to service the loan or transfer it to another company.

How to Use a Loan Estimate

1. Compare Offers: Request Loan Estimates from multiple lenders to compare interest rates, closing costs, and terms. Focus on the APR, loan costs, and monthly payments to identify the best deal.

2. Understand Total Costs: Use the Estimated Cash to Close and Projected Payments sections to budget for your upfront and ongoing costs.

3. Ask Questions: If any terms or fees are unclear, ask the lender for an explanation. Understanding the Loan Estimate ensures there are no surprises later.

4. Negotiate: Use competing Loan Estimates to negotiate better rates, fees, or terms with your preferred lender.

When You’ll Receive a Loan Estimate

A lender must provide a Loan Estimate within three business days of receiving your completed application. Your application is considered complete when you’ve provided:

• Your name and Social Security number.

• Your income.

• The address of the home you’re buying.

• The estimated value of the property.

• The desired loan amount.

What Happens After Receiving a Loan Estimate?

• Review the Details: Ensure the loan terms and costs align with your financial goals.

• Compare Offers: Use Loan Estimates from multiple lenders to shop for the best deal.

• No Commitment Required: Receiving a Loan Estimate does not obligate you to proceed with that lender.

Loan Estimate vs. Closing Disclosure

The Loan Estimate is an initial estimate of costs, while the Closing Disclosure (CD) provides the finalized costs and terms. The lender must send the Closing Disclosure at least three business days before closing.

Conclusion

A Loan Estimate is a critical tool for understanding and comparing mortgage loan offers. It provides transparency into the costs and terms of the loan, empowering you to make an informed decision. Be sure to review it carefully, compare offers, and ask questions to ensure you’re getting the best deal for your needs.