Buying or refinancing a home represents the largest financial transaction many of us will ever make. Therefore, it makes sense that you’d want to understand the details of the loan you’re getting.
As part of your mortgage transaction, the Consumer Financial Protection Bureau (CFPB) requires that you receive a Loan Estimate at the beginning of your loan application process.
Let’s look at the details of the Loan Estimate and discuss what you need to look for when applying for a new home loan.
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.
You’ll receive the Loan Estimate within three business days of completing your mortgage application. For the purposes of these regulations, you’re considered to have submitted a complete application when your lender receives each of the following items:
The property address of the home you want to purchase/refinance
The property’s value estimate or purchase price
Your loan amount
Your Social Security number
What’s in a Loan Estimate?
Mortgage companies in Utah may put different branding on the Loan Estimates they issue, but the actual form they use and the details are prescribed by the CFPB. Here’s a sample of what the document looks like.
Much like a news article, the most important details of your estimate are listed first.
At the top of the estimate, you’ll see your contact information as well as the address of the property you’re purchasing or refinancing. It will also tell you the term of the loan, the purpose (i.e., purchase or refinance) and the type of loan you’re applying for. For example, is it conventional or FHA? Is the rate fixed or adjustable?
You’ll also see a checkbox that tells you whether your rate is locked. This is important because an adjustable or unlocked rate can create changes that significantly impact the costs over the life of the loan.
The next section is loan terms. This is the section that can’t change much between when you get your Loan Estimate and when you receive your Closing Disclosure. This section includes:
Monthly principal and interest
You’ll find that many of these items have a figure next to them and an indication of whether that figure can change.
In the vast majority of cases, your loan amount will not change unless you have a special type of loan. Your interest rate could change if you have an adjustable rate mortgage (ARM). In that case, you’ll have additional information in terms of projected payments and some additional tables that give you that information included in your Loan Estimate. It will also tell you what your monthly principal and interest payment will be and whether that could change.
Also included in this section is whether you have a prepayment penalty associated with your loan. If you do, the terms of that penalty will be laid out there. Advanced Funding does not charge prepayment penalties.
Finally, this section informs you if there’s a balloon payment where you make one large payment for the principal at the end of the loan term.
This section will show you your projected principal and interest payments along with any added costs for mortgage insurance.
Most mortgage companies require you to have an escrow account, particularly if you put less than 20% down on your home purchase. Your initial monthly escrow payments are listed here. These can increase over time if your taxes or homeowners insurance payment increases.
Costs at Closing
This section breaks down the costs associated with getting the loan and the amount of money you’ll need to bring to the closing table. There’s a further breakdown of these items on the next page.
The left side of this page details the total costs of getting the loan.
The first section details the costs associated with getting the loan itself – origination charges, any points you’re paying to buy down your interest rate, and the application and underwriting fees.
The next two sections include incidental items that are also necessary to get a mortgage. These are broken down into services you can and cannot legally shop around for. For instance, you don’t get to shop around for the cheapest appraisal, but you can pick your title insurance provider.
If your interest rate is locked, nothing about the loan costs you’re paying to your lender should change between the time you receive your Loan Estimate and the closing table. On the other hand, certain third-party service costs, such as the inspection and survey and title fees can change by up to 10%, although not in every circumstance. If you have questions, be sure to ask your mortgage broker.
The right side of this page covers other costs outside of actual lending costs – things such as deed recording fees and other property transfer taxes in your county. There’s also a section for things you’re prepaying, including homeowners insurance and property taxes, as well as any prepaid interest. Any mortgage insurance premium also falls under this section.
The next section is about initial payments you’ll make into your escrow account so there are available funds for your lender to use to make payments on your behalf.
You’ll also have a section labeled “Other,” which might have miscellaneous optional costs such as an owner’s title policy that you can get in order to protect you in case someone comes along with a claim to your property.
Finally, your total closing costs are calculated by adding the loan costs to the other costs. Then, lender credits are subtracted. Lender credits are given when you build some of the cost of closing into the loan by taking a higher interest rate.
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.
The final page contains general information about your loan, including the name of the lender and the loan officer you’re working with as well as their contact information and that of your mortgage broker.
At the bottom of the page is where you’re asked to sign. But let’s take a look at those other useful sections in between.
This section allows you to compare the cost of your loan against other loans. There’s a section that shows how much money you’ll have paid on your loan in five years, including how much principal you’ll have paid off.
You’ll also see the annual percentage rate, which is an expression of your interest rate on the loan with your closing costs factored in as well.
Finally, you’ll see the amount of interest you’ll pay on your loan over time if you pay it off at the end of the original loan term. This is expressed as a percentage of your loan amount.
In this section, lenders disclose policies they have that may affect your decision beyond the financial considerations.
This may include their appraisal policies, whether your loan can be assumed under the same terms by someone else and how much they may charge for a late payment.
Also included in this section are policies on whether your lender will service the loan – if they intend to collect your monthly payments and be the ones to help you if you are having difficulties making payments – or if they intend to sell the servicing rights of your loan.
If you’re looking to buy or refinance a home, you’ve got a big decision to make when choosing the best loan. Knowing how to read a Loan Estimate will help you compare your options.