Table of Contents
- What is a Loan Estimate?
- The Importance of Loan Estimates
- Understanding The Loan Estimate Form
- How to Obtain a Loan Estimate
- Loan Estimate Expiration and Acceptance
- How to Compare Loan Estimates
- Loan Estimates vs. Closing Disclosure: What’s the Difference?
- Common Mistakes to Avoid With Loan Estimates
- Have More Questions About the Lending Process?
Although mortgage loan estimates are not the final core documents of the lending process, they are just as crucial to achieving home ownership. From providing preliminary insight into what it takes to buy a home to helping you to compare terms across multiple lenders, home loan estimates are an essential aspect of purchasing a home.
Before you even go view houses, apartments, or condos, it’s recommended that you obtain a home loan estimate. As this is the ideal first step in your home-buying journey, it’s important to feel confident and educated about the ins-and-outs of becoming a homeowner.
Let’s review everything you need to know to understand mortgage loan estimates and how you can acquire one!
What is a Loan Estimate?
Also unofficially referred to as “good faith estimates,” loan estimates give the buyer an idea of the terms and costs associated with getting a loan through any particular lender. Information found on a loan estimate for a mortgage includes, but is not limited to, loan terms, estimated monthly payments, closing costs, and cash to close.
Even though you may have an idea of what type of home you can afford, no one really knows until they contact a lender and ask for a housing loan estimate. By seeking out this information, buyers are setting themselves up for success by gaining an idea of how much they will need to spend to buy a home.
The Importance of Loan Estimates
There’s no doubt that house hunting is the fun part of buying a home. However, looking for a house before you have a mortgage loan estimate could lead to disappointment and wasted time. After all, you wouldn’t want to get your heart set on a specific home just to be told it is outside of your reach, would you?
As mentioned, loan estimates give buyers a solid idea of how much they can afford when purchasing a home. In addition to this helpful perk, mortgage loan estimates also empower buyers by helping them come to the table informed as they compare estimates from multiple lenders.
For example, if one lender offers undesirable terms, the buyer can seek out a second opinion from another lender. By doing this, the buyer may receive better options from a second or third lender. Or, they may be given similar mortgage loan estimates across the board.
Either way, knowledge is power and knowing where you stand as far as lending options will help you get the best deal and secure a home within your budget.
» MORE: See today’s refinance rates
Understanding The Loan Estimate Form
Knowing how to read a mortgage loan estimate form is crucial to understanding what borrowing from that particular lender will look like for you. To estimate a mortgage loan, the loan officer will typically ask for some preliminary information to ensure they have what they need to give you accurate numbers.
They won’t ask for as much information now as they will for a pre-approval down the road, but you’ll need to be prepared to hand over some personal details so they can get the ball rolling. Although that same loan officer should be able to explain to you the details of your loan estimate, it is a good idea for you to have some basic information about what it all means.
Borrower and Lender Information
All loan estimates should include basic information about you as well as the lender. This information will help you keep your loan estimates organized, especially if you seek estimates from multiple lenders.
Knowing where each estimate came from is important when it comes to comparing loan estimates.
Loan Terms and Summary
Remember, the information found in the loan terms section are estimated projected rates and are not set in stone. In fact, nothing is set in stone in the home-buying process until you find a home, hand over earnest money, and sign final mortgage documents.
A loan estimate example for the loan terms section will probably include categories such as the loan amount, interest rate, and even how long you would be borrowing for, whether it is for 15 or 30 years.
Loan terms are typically listed on a mortgage loan estimate before the “project payments” section, as it is essential to know this information to fully understand the following details.
Although the loan terms are essential to know how much you’ll pay over the course of having a loan, many people immediately care more about the projected monthly payments. This information tells you just how much you can expect each month.
Conveniently, this section also includes projected monthly insurance and escrow payments as well! Knowing the bottom line of how much you will be spending on a home will take the guesswork out of the experience and allow you to house hunt with confidence.
Closing Cost Details
Unfortunately, the projected monthly payments are not all of the costs associated with purchasing a home. From origination fees to paying for an appraisal, there are a variety of services involved with preparing and closing a loan.
Your home loan estimate will give you an itemized list of these services and how much they cost. Furthermore, the lender will most likely list what fees are specific to their company and which ones are federal or state fees that you’ll need to pay, no matter where you choose to get a loan from.
Depending on your location and the state of the market, sellers can sometimes foot the cost of how much it takes to close a loan. Speak to your real estate agent and loan officer about how you can potentially work closing costs into your negotiations!
Cash to Close
This section of your home loan estimate can be pretty intimidating to review! Including the closing cost details, the “cash to close” section highlights everything that will need to be paid for before you can claim your new home.
You can expect the cash to close section to combine your closing costs with your down payment, deposit, and any adjustments. That “adjustments” section can list any charges that may fluctuate your “cash to close” category up or down, such as prorated property taxes, HOA fees, prepaid interest, etc.
How to Obtain a Loan Estimate
Obtaining a mortgage loan estimate is as easy as contacting your preferred lender! As industry professionals, any loan officer can give you a list of the information they need from you in order to work up a loan estimate.
Before you choose just any lender, though, you’ll want to do the necessary research to see which company would be the best fit for you.
In addition to taking recommendations from local friends and family, you can head online to check out mortgage lender reviews. Knowing what past buyers are saying about any given lender will give you a good idea about how your experience with them will go as well!
Once you choose your lender, or list of lenders, reach out and let them know your plans of purchasing a home. Be prepared to send them the personal and financial information they request, as these details are needed to ensure your loan estimate is accurate.
Loan Estimate Expiration and Acceptance
For your convenience, there is a 7-day rule for loan estimates! This means that, once a lender sends you their loan estimate, you have a minimum of 7 days to decide if you want to move forward with that respective lender.
This requirement, listed under the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rule, gives you ample time to fully understand the loan terms and compare estimates from multiple lenders.
Although housing loan estimates are typically considered valid for a minimum of 7 days, it’s important to note that they could expire after those 7 days. Since housing rates fluctuate often, this ensures the lender isn’t on the hook for an unlimited amount of time for the terms they agreed to.
Once a buyer decides they want to move forward with a lender, they should provide an “intent to proceed” as soon as possible.
If there are any changes that need to be made to the initial loan estimate, the loan officer will make those alterations and resend the document. That 7-day waiting period will restart, ensuring you have enough time to read through the terms.
Purchasing a home is a big commitment, so it’s a good thing that the proper rules are in place to ensure you have enough time to weigh this decision carefully!
After you review and accept the final mortgage loan estimate, your loan officer’s team will get to work on processing your loan. From underwriting and loan approval to loan closing and funding, there are numerous steps for your loan team to complete to effectively close your home loan.
How to Compare Loan Estimates
It’s highly recommended for anyone purchasing a home to compare loan estimates from multiple lenders. You don’t have to go overboard in how many lenders you engage with.
In fact, just 3-4 home loan estimates is considered a good number.
To compare loan estimates, you’ll want to focus on the long-term and short-term costs of your home. That is, you’ll want to pay close attention to the rates provided in addition to the estimated monthly costs.
Most lenders will also include the total loan cost of your mortgage estimate, which is approximately how much you will pay over the entire term of the loan.
While it is tempting to only focus on the monthly costs, how much your loan will cost you in the long run matters as well! By comparing loan estimates, you can determine which lender has the best options to help you purchase your home.
Loan Estimates vs. Closing Disclosure: What’s the Difference?
Your final mortgage estimate will serve as a foundation for your closing disclosure; however, they are not the same. While your final loan estimate serves the purpose of being a comparison tool, the closing disclosure is the official document that outlines the final terms of your mortgage loan.
You’ll receive your closing disclosure at least three days before you are scheduled to close on your home loan. This document will include the finalized information regarding your loan, and it will also provide information about what fees will need to be paid at the closing table.
Common Mistakes to Avoid With Loan Estimates
Home loan estimates exist to help you, as the buyer, make an informed decision when it comes to purchasing a home. Some of the most common mistakes buyers make with loan estimates involve not using them for their intended purpose— comparing multiple loan estimates.
Common Loan Estimate Mistakes Buyers Make
- Not Acquiring Multiple Loan Estimates: How can you use your loan estimate for its intended purpose if you don’t acquire more than one for comparison?
- Only Focusing on the Monthly Payment: The interest rate, total loan cost, and other pertinent information are equally as important as the monthly payment.
- Not Asking Questions: Most homebuyers are not mortgage experts; as such, it’s essential for you to ask your loan officer(s) questions when you don’t understand an aspect of your loan estimate.
- Missing Deadlines: After receiving your loan estimate, you have a set amount of time (7-10 days) to get back to your lender about if you intend to move forward with them. By missing these deadlines, you could potentially miss out on desirable lending terms.
In addition, don’t make the mistake of delaying the loan estimate process. Once you let a lender know that you are interested in obtaining a mortgage loan estimate, come prepared to provide the information they need in a timely manner.
Procrastinating when it comes to providing the needed details can result in you missing out on opportunities, influencing an inaccurate estimate, or having your application denied altogether. For example, proof of income is crucial to loan application completion, and loan officers may ask for pay stubs and tax documents to help you prove that you have a reliable stream of wages.
Have More Questions About the Lending Process?
Whether you are a seasoned homeowner or a new home buyer, the lending process can be quite confusing. With so much information needed from you, rules to know, and papers to sign, it’s understandable why so many find themselves at a loss about where to start.
Here at Refi, we’re dedicated to making the home-buying experience as stress-free as possible. Review our mortgage resources for more insights to help you purchase or refinance a home with confidence.