The Loan Estimate And Closing Disclosure: What They Mean
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Of all the mortgage closing documents youll encounter during the homebuying process, keep an eye out for two in particular: the Loan Estimate and the Closing Disclosure.
Theyre not long and they dont contain a lot of fine print, but together, these legally required documents boil down all of the closing costs youll encounter when getting a home loan.
Reading them carefully can reduce last-minute loan-signing drama.
They Are Numerous And Can Easily Mount Up
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.
Getting a mortgage isnt free. Before you get those house keys, youll go to the closing table to sign loan documents and paperwork that transfer homeownership from the seller to you.
Throughout your home purchase, third partiessuch as your real estate attorney and your mortgage lenderhave performed services. Closing costs include the fees these professionals charge for these services to finalize the real estate transaction and your home loan.
The Purpose And Timing Of Your Loan Estimate
Your Loan Estimate shows the costs associated with closing on your mortgage as well as over the lifetime of the loan. If these fees from the lender change too much from the initial estimate say, because your loan length changes the lender is required to issue you a new Loan Estimate.
Youll receive this Loan Estimate within three business days of completing your mortgage application. For the purposes of these regulations, youre considered to have submitted a complete application when your lender receives each of the following items:
- Your name
- The property address of the home you want to purchase/refinance
- The propertys value estimate or purchase price
- Your loan amount
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Roll Closing Costs Into Your Mortgage
In some instances, lenders will offer to pay your closing costs or roll them into your loan. However, youre not off the hook lenders tend to charge higher interest rates to pay themselves for absorbing your closing fees, which means you ultimately end up paying interest on those closing costs, as well as higher interest on your mortgage. Do this only as a last resort.
Are Loan Estimates Accurate
When using loan estimates to compare offers, it’s important to remember that they’re not a guarantee of funding, but rather a snapshot of what the lender expects to offer if you move forward with the loan. Most numbers, including origination charges, usually stay the same from your estimate to your final loan, but some other expenses like closing costs may be updated before you close.
Another important thing to note is that your interest rate might not necessarily be what you get, unless you locked in the rate with your lender. Since rates change all the time, locking in may be a good call.
As with everything else in your loan, don’t hesitate to ask your loan officer for guidance or explanation. They’re here to help you! Click here to start your application today!
Tips For Comparing Les From Different Lenders
Here are a few things to look out for:
1. Third-party fees appearing on one lenders LE and not anothers
You should raise this with your Mortgage Expert. While the fee amount can vary, the types of third-party fees associated with a loan are fairly constant. One lender may be missing something.
2. Differences in loan amount for a refinance
A lender may increase your loan amount slightly to create a no closing cost loan. Borrowing a little more than the payoff on your current loan is one way to offset fees at the closing table, but this is increasing your debt to pay for your closing costs it does not make them go away. For an apples-to-apples comparison across lenders, you should get LEs with identical loan amounts.
3. Promises of credits after close that do not appear on the LE
This is a major red flag. The purpose of the LE is to create transparency and accountability. You lose both by transacting outside of the standard disclosure.
4. Increasing costs during a change in circumstance
Some lenders may advertise attractive rates and fees for one product, then switch into something less competitive . You should ask about any additional fee and look at the relative competitiveness of the new product by continuing to shop before locking.
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Calculating Cash To Close
In this last section of the page, your total closing costs are added to your down payment, minus your earnest money deposit, any grants you received and any credits the seller has agreed to pay to arrive at your total closing costs. This number is an initial estimate of how much you need to bring to the closing table.
Verify The Loan And Product Type
When you get the Loan Estimate the first thing you want to do is verify the details. Make sure what youre seeing is what you expected to be there.
Pay particular attention to loan type, and product. You need to compare the same types of loans when looking at different lenders. If someone is comparing a conventional loan to an FHA loan, thats not apples to apples, Beeston says.
If you think youre getting a conventional loan, make sure that box is checked. A conventional loan isnt secured by the government, but you can have private mortgage insurance requirements waived in certain circumstances. If youre not sure about what makes the most sense for you, ask your lender to explain the differences and all the possible options you might consider.
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How To Read A Loan Estimate: Page 2
The second page of your loan estimate breaks down the costs shown on the first page. To better understand your interest rate and fees, you should look at:
- Points This shows the dollar amount you have to pay to buy down your interest rate, and actually receive the rate shown on page 1
- Application and underwriting fee Lenders all charge different fees to process your loan. Consider what youre paying the lender upfront as well as your interest rate
- Services you can shop for These are third-party services. Theyre not set by your lender, but youre free to shop for cheaper third-party providers
- Calculating cash to close This box shows you a breakdown of the cash to close shown on page 1
See where you can find these items below.
How To Read A Loan Estimate
In 2015, the Consumer Financial Protection Bureau began requiring mortgage lenders to create loan estimates for homebuyers. These three-page documents outline the terms of a buyers mortgage, the fees lenders and other parties charge, and how much buyers should expect to pay each month over the life of the loan.
US Bank loan officer Christina Razzi recently walked me through a loan estimate line by line on an episode of Money Checkup. Here, well do the same detailing what each term means, which fees are set by banks and which arent, and what you should make sure to ask your loan officer or financial advisor about.
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A Historic Opportunity To Potentially Save Thousands On Your Mortgage
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
The Ascent’s in-house mortgages expert recommends this company to find a low rate – and in fact he used them himself to refi . and see your rate. While it doesn’t influence our opinions of products, we do receive compensation from partners whose offers appear here. We’re on your side, always. See The Ascent’s full advertiser disclosure here.
Compare The Loan Estimate And Closing Disclosure Forms
When you get your initial loan estimate, review it with a fine-tooth comb. If youre unsure about what a fee entails or why its being charged, ask the lender to clarify. A lender who cant explain a fee or pushes back when queried should be a red flag.
Likewise, if you notice new fees or see noticeable increases in certain closing fees, ask your lender to walk you through the details. Its not uncommon for closing costs to fluctuate from preapproval to closing, but big jumps or surprising additions could impact your ability to close.
Be wary of a lender adding on unnecessary junk fees that duplicate existing ones or that havent been disclosed in advance.
Read Also: Is Closing Cost Part Of Mortgage
What Is A Heloc
A home equity line of credit lets you use the equity in your home to borrow money. A HELOC is similar to a credit card you can borrow up to your credit limit, and then you can pay some or all of the amount back and borrow up to your limit again.
You can use your HELOC funds for a wide range of purposes. For example, you could use the funds to pay for home repairs or your kids’ college tuition.
Just Two Closing Documents Among Many
No doubt youll see many other documents during the loan closing. Lots and lots of them.
But these two legally binding and required documents bookend the loan process: The Loan Estimate comes after you submit an application with a lender, and the Closing Disclosure form arrives when youre nearing the get-a-mortgage finish line.
About the author:Hal Bundrick is a personal finance writer and a NerdWallet authority in money matters. He is a certified financial planner and former financial advisor. Read more
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How To Read Your Home Loan Estimate Like A Pro
The key to getting a great loan is understanding all the elements of your loan and its expenses. When you apply for a loan to refinance or purchase a home, youll receive a document called a Loan Estimate that breaks down all the details of the loans closing costs.
Although every Loan Estimate you receive is three-pages long and has the same format, not all Loan Estimates are created equal. If you dont know what to look for, you might agree to a loan that isnt the best for your financial situation.
Weve broken down exactly what you need to know to read your home Loan Estimate.
Loan Estimate Vs Good Faith Estimate
Prior to 2015, you would receive a Good Faith Estimate and a Truth in Lending form when you applied for a mortgage. However, these forms werent exactly easy to navigate.
As part of its Know Before You Owe mortgage initiative, the Consumer Financial Protection Bureau did away with the Good Faith Estimate and replaced it with the modern loan estimate. The goal was to standardize how mortgage information is presented to prospective mortgage borrowers and make it easier to shop around and compare mortgage offers.
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What Is A Mortgage Loan Estimate
A Loan Estimate is a three-page document detailing your prospective mortgage costs. This form outlines the fees, interest rate, and all other expenses associated with your mortgage. The lender must provide you with a Loan Estimate within three business days of receiving your application.
To get an official Loan Estimate youll need to have a home under contractmeaning the home seller has accepted your offerunless youre refinancing an existing mortgage. A lot of people think theyll get a Loan Estimate with a prequalification or a preapproval, but you wont get the official estimate without a property address, Beeston says.
All lenders are required to use the same Loan Estimate form. This makes it easier to compare offers, but you still need to know what youre looking at. Also keep in mind the Loan Estimate is just that an estimate. Fees vary between lenders and some can change by the time of closing. The good news is you dont have to be an expert to understand whats on a Loan Estimate. You just need to know what to focus on.
What Is A Loan Estimate Or Good Faith Estimate
A Loan Estimate is a standard document youll receive when you apply for a mortgage with any lender.
This document used to be called a Good Faith Estimate, but was updated in 2015. The new version, called a Loan Estimate, is easier to read and a more useful tool for loan shoppers.
LEs always follow the same format making it simple to compare loan offers side-by-side and find out which company offers the best rates and fees.
Lenders are required to send you a loan estimate within 3 days of you applying for a mortgage.
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What Is A Loan Estimate And When Do You Get It
- A loan estimate lays out your mortgage terms, and it’s useful for comparing offers from several lenders.
- It explains how much you are borrowing, which closing costs you will pay, and what your monthly payments will be.
- The lender you choose will send you a final closing disclosure, which you can compare to the loan estimate.
- Read more of Insider’s mortgage coverage here.
When you apply for a mortgage, the lender gives you a loan estimate. This document explains the terms of your mortgage and how much you will pay.
You can apply for a mortgage with multiple lenders and receive a loan estimate from each. This strategy allows you to compare detailed offers from each lender and choose the best fit.
Full List Of Mortgage Loan Estimate Definitions
Key terms on Loan Estimate page 1:
- Loan amount The home price, minus your down payment
- Interest rate Your annual interest rate expressed as a percentage of the loan amount
- Principal and interest Your monthly paymentto the mortgage company. Includes the amount paid toward your loan balance and interest paid to the lender
- Prepayment penalty May be charged if you sell, pay off a big chunk of the loan balance, or refinance within the stated time frame. Not all lenders have a prepayment penalty
- Balloon payment Most loans do not have a balloon payment. This is a special type of loan with lower initial payments, and a large lump-sum payment due at the end
- Mortgage insurance Mortgage insurance is an additional monthly charge, usually required if you put less than 20% down
- Escrow Typically, you pay taxes and insurance in monthly installments along with your mortgage. This money goes into an escrow account
- Taxes and insurance What you owe for property taxes and homeowners insurance, divided by 12 to show a monthly charge
- Closing costs Closing costsinclude all upfront fees charged by your lender and third-party companies to approve, set up, and fund the loan
- Cash to close Cash to close includes closing costs, plus your down payment this represents the total amount you have to pay out-of-pocket at the closing table
Key terms on Loan Estimate page 2:
Key terms on Loan Estimate page 3:
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How To Get The Closing Disclosure
Unlike the loan estimate, which you may have received from multiple lenders, youll only get a closing disclosure from the lender you ultimately decide to work with.
Good to know:
After you receive your closing disclosure, there are three types of changes to the loan terms that could delay your closing:
If one of these three things happens, the lender is required to give you a new closing disclosure and restart the three-business-day review period before closing the loan.
Closing Services For Which You Cannot Shop
Many other vendors are involved in making your mortgage happen. Some vendors you can choose, while for others, your lender gets to choose.
- Your lender will order an appraisal to make sure the home is worth what youve offered to pay for it.
- A credit report tells the lender whether you have a history of repaying the money you borrow .
- Flood determination and monitoring fees go toward finding out if your property is in an area thats at high risk of flooding. If it is, youll have to buy flood insurance, which is separate from homeowners insurance. Homeowners insurance doesnt cover flooding.
- The tax monitoring fee and tax status research fee will go toward making sure you pay your property taxes in full and on time every year.
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