Mortgage Loan Estimate: All You Need to Know
A Loan Estimate is a document provided by a lender to an applicant that estimates the cost of their loan, including fees and other costs. Loan Estimates are not binding, so you can still get another Loan Estimate from a different lender if you’d like. In fact, lenders are required to issue these forms by law and are there for your protection. Loan estimates are not a quote or commitment, so you can take your time and compare options before making your final decision on a lender’s offer.
The Loan Estimate is provided by the lender during the mortgage process in the United States of America. This blog post covers everything you need to know about Loan Estimates in the mortgage process!
- When is a Loan Estimate issued in the mortgage process?
- What is the difference between Loan Estimate vs Loan Commitment?
- What does the Loan Estimate include and how to review those details?
- What’s included in the estimated closing cost in a Loan Estimate?
- What are the common fees that are included in Loan Estimate?
- What is the difference between a Loan Estimate and a Closing Disclosure?
- What are the key things to keep in mind while reviewing your Loan Estimate?
- What is an APR in the mortgage process?
When is a Loan Estimate issued in the mortgage process?
Within three business days of submitting the application, your loan officer must provide you with a Loan Estimate. The Loan Estimate provides you with an estimate of your mortgage loan terms and settlement charges (also called closing charges, or costs to complete your mortgage transaction) if you are approved for a mortgage loan. With this information, you can evaluate your mortgage loan offer, and even explore a few other possibilities before accepting it.
What is the difference between Loan Estimate vs Loan Commitment?
A Loan Estimate is not a commitment to lend. The Loan Officer cannot commit to your loan application until the Loan Estimate has been reviewed and approved by you and all of those involved in processing your mortgage transaction, including underwriting, funding, appraisal review, etc. If there are any changes that occur before your Loan Estimate is approved, those changes will be reflected on the Loan Estimate.
What does the Loan Estimate include and how to review those details?
The Loan Estimate is a three-page form, in which the first page provides summary information about your loan terms, monthly payment, and money needed at closing. The second page offers details of your closing costs. Finally, it supplies you with additional information about your loan on the third page.
You can use your Loan Estimate to compare rates and settlement charges from other lenders. The following definitions should help you understand key information on your loan estimate:
Loan Terms—When you’re looking at a Loan Estimate, there are some basic terms that determine your mortgage loan. Such items define the initial loan amount, interest rate, and initial monthly payment. It also includes important information about both rising rates and prepayment penalties.
Escrow Account Information—A lender will often require an initial payment for various items payable after closing. These payments generally include homeowner’s insurance premiums and property taxes. The first page of the Loan Estimate indicates whether or not an escrow account is required and estimates.
Closing Cost Details—Your closing costs include Loan Costs and Other Costs.
What’s included in the estimated closing cost in a Loan Estimate?
Loan costs are divided into three categories:
Origination charges are fees charged by your lender for preparing and submitting your completed loan application and underwriting your loan. The Origination Charges can include an application fee, an underwriting fee, and an origination charge or points.
Services You Cannot Shop For lists the fees for those settlement services for which the lender will select the person or entity that will provide those services. These services typically include appraisals and credit reports for example.
Services You Can Shop For lists the fees for those settlement services that you may shop for and choose the service provider. These services may include the company that issues title insurance, conducts a survey, or performs a pest inspection.
Other Costs include (1) Taxes and government fees such as recording fees and taxes and transfer taxes; (2) Prepaid such as homeowner’s insurance premiums for the first year of your loan term, prepaid interest, and property taxes; and (3) Initial escrow payments at closing, which generally include two (2) months of homeowner’s insurance premiums and property taxes.
What are the common fees that are included in Loan Estimate?
Some of the common Loan Estimate fees include:
Origination fee – Application fee charged by your lender for preparing and submitting your completed loan application and underwriting your loan.
Appraisal Fee—A fee paid to an independent professional appraiser who will evaluate the value of the piece of property you are interested in buying. It’s simple: the value of your home needs to be greater than or equal to the amount you owe on it. Mortgage lenders want to know that whatever they’re lending you is safe, so if there are any doubts about whether a property will sell for enough money in order cover what someone owes them-they’ll just say no thanks and move on. Most lenders will not provide you with a mortgage loan amount greater than what the appraiser determines is the property’s fair market value.
Credit Report Fee – The cost of having your credit report assessed prior to the mortgage loan application. Your credit score is a significant factor in determining the interest rate that will be offered to you. If you are an international borrower with no or thin US credit history, this fee will be for an international credit report.
Title services fee and title insurance—the fee paid to a title company to search county records to make sure that the title to the property you wish to buy is clear and free of any complications like pending debts or liens on the property.
Government recording charges—the fee required to register the property under your name and record the mortgage or deed of trust.
Homeowners insurance—This charge is for the insurance you must buy for the property to protect your property from a loss, such as fire, floods, and storm damage. In many cases, homeowners choose to let the lender pay the insurance from an escrow account the lender sets up for you that you fund on a monthly basis.
Initial deposit for your escrow account— This represents the money that you are required to pay in advance to establish your escrow account so that this account can be used by the lender to pay for homeowners’ insurance, property taxes, and other charges, if applicable.
What is the difference between a Loan Estimate and a Closing Disclosure?
Read the Loan Estimate very carefully and go over the list of fees with your loan officer to make sure that you have a clear understanding of what are you paying and why. Please keep in mind that the Loan Estimate is only an estimate, and the actual charges you must pay at closing may differ. At your closing, you will receive a Closing Disclosure form that lists your actual loan costs. Compare the charges on the Closing Disclosure with the charges on the Loan Estimate to ensure that they have not dramatically changed. If they have changed, be sure to get a clear explanation of why. There are limits on the amount by which certain charges listed on the Loan Estimate can increase. You can read our guide Mortgage Closing Process: All You Need to Know About Your Closing and Closing Disclosure to get a detailed understanding of the various steps involved during the closing of your home loan.
What are the key things to keep in mind while reviewing your Loan Estimate?
The Loan Estimate contains certain disclosures that will enable you to see the total cost of your mortgage under the terms of your particular loan. This disclosure is required by law so that borrowers can understand what they are getting themselves into and question any part in which they don’t fully comprehend.
These disclosures reflect the most significant characteristics of your mortgage loan: (1) the annual percentage rate (APR); (2) the payment amount; and (3) the total interest percentage (TIP).
What is an APR in the mortgage process?
The APR (Annual Percentage Rate) is not the interest rate for which you applied. This percentage rate takes into account the various loan charges, including loan discounts, origination fees, prepaid interest, and other credit costs. The APR is important because it gives the true cost of borrowing since all of the finance charges associated with the mortgage loan are considered. The proposed payment amount shows the dollar amount of your payments and their frequency. The TIP is the total amount of interest that you will pay over the loan term as a percentage of your loan amount.
We have provided an overview of the mortgage loan estimate process to help you better understand how it works. If you are a foreign national who is looking for home financing, we can help pre-approve your application and provide you with alternative options that may work better for you. Click on our website link below to get started today!
US Mortgages for Foreign Nationals & Expats
Get pre-approval for a US Mortgage as a foreign national buyer without US credit history