Getting a mortgage involves a lot of numbers, documents, and financial terms.
One of the most important documents you will receive during the mortgage process is the Loan Estimate.
The Loan Estimate gives you an overview of the mortgage you are considering, including the estimated interest rate, monthly payment, loan costs, and other expenses associated with the transaction.
Understanding how to read a Loan Estimate can help you compare mortgage options, identify important costs, and know what to expect as you move toward closing.
What Is a Loan Estimate?
A Loan Estimate is a standardized mortgage disclosure that provides important information about the loan you are considering.
For most mortgage applications covered by the applicable disclosure rules, the lender provides the Loan Estimate within three business days after receiving the information required to constitute an application.
The document gives you an early picture of the expected terms and costs of your mortgage.
It can include information such as:
- Loan amount
- Interest rate
- Monthly payment
- Estimated closing costs
- Prepaid expenses
- Taxes and insurance
- Cash needed to close
- Loan terms
- Certain loan features
The Loan Estimate is an important tool for understanding and comparing mortgage options before you move forward.
Does Receiving a Loan Estimate Mean You Are Approved?
No.
Receiving a Loan Estimate does not mean your mortgage has been approved.
The document provides the terms and estimated costs of the loan you are considering. Your lender may still need to verify your income, assets, credit, employment, property information, and other details before making a final lending decision.
This distinction is important because some homebuyers may see a Loan Estimate and assume the mortgage is already guaranteed.
The mortgage process can continue through underwriting and other stages before you receive final approval.
When Do You Receive a Loan Estimate?
For mortgage applications subject to the applicable federal disclosure rules, the lender generally must provide the Loan Estimate within three business days after receiving the six pieces of information that constitute an application:
- Your name
- Your income
- Your Social Security number to obtain a credit report
- The property address
- An estimate of the property’s value
- The mortgage loan amount you are seeking
The specific rules can vary for certain types of loans and transactions.
If you are shopping for a mortgage, ask your lender when you can expect your Loan Estimate and how you will receive it.
What Information Is on a Loan Estimate?
The Loan Estimate is designed to give you a clear overview of the proposed mortgage.
Several sections are particularly important for homebuyers.
Loan Terms
The Loan Terms section provides key information about the mortgage itself.
You may see information such as:
- Loan amount
- Interest rate
- Monthly principal and interest payment
- Whether the rate can change
- Whether there is a prepayment penalty
- Whether the loan has certain special features
Review these details carefully.
A mortgage with a lower advertised rate is not necessarily the best option if it comes with higher upfront costs or terms that do not fit your plans.
Projected Payments
The projected payment section helps you understand how much your housing payment may be.
Depending on the loan, it can show components such as:
- Principal and interest
- Mortgage insurance
- Estimated escrow
- Property taxes
- Homeowners insurance
- Other applicable costs
This is important because the principal and interest payment is not always the same as the total amount you will pay each month.
When budgeting for a home, consider the complete projected housing payment.
Closing Costs
The Loan Estimate also provides information about estimated closing costs.
These can include various expenses associated with obtaining the mortgage and completing the home purchase.
Examples may include:
- Origination charges
- Appraisal fees
- Credit report fees
- Title-related costs
- Recording fees
- Prepaid interest
- Insurance
- Property taxes
- Other applicable expenses
The exact costs vary depending on the loan, property, location, and transaction.
Reviewing these estimates early gives you an opportunity to ask questions before you get closer to closing.
Cash to Close
Another important figure is the estimated cash you may need to bring to closing.
This is different from simply looking at your down payment.
Your total cash needed can also be affected by:
- Closing costs
- Prepaid expenses
- Escrow deposits
- Earnest money already paid
- Seller credits
- Other adjustments
This is why homebuyers should not assume that their down payment is the only money they need to have available.
Your mortgage professional can help explain how the different costs contribute to the amount you are expected to bring to closing.
What Is the Difference Between Interest Rate and APR?
You may notice both an interest rate and an annual percentage rate, or APR, when comparing mortgage options.
The interest rate is used to calculate the interest portion of your mortgage payment.
APR is designed to reflect the broader cost of borrowing and can incorporate certain fees and charges associated with the loan.
The two numbers serve different purposes.
When comparing mortgage offers, look at the interest rate, APR, loan costs, monthly payment, and cash required at closing rather than focusing on only one number.
Molly Dean’s existing FAQ also recommends using the Loan Estimate to compare the costs of mortgage offers for the same type of loan and rate.
Why Should You Compare Loan Estimates?
If you are considering multiple lenders, comparing Loan Estimates can help you understand how the different offers actually stack up.
A lender offering a slightly lower interest rate may have different upfront costs.
Another lender may offer a higher rate but lower upfront expenses.
Comparing the complete Loan Estimate helps you see the relationship between the rate, monthly payment, closing costs, and other expenses.
When comparing offers, make sure you are comparing similar loan scenarios.
For example, comparing a 30-year fixed conventional loan from one lender with a different loan type from another lender may not give you a meaningful comparison.
What Should You Look for When Comparing Loan Estimates?
Start by comparing the most important loan terms.
Look at:
- Loan amount
- Interest rate
- APR
- Monthly principal and interest
- Estimated total monthly payment
- Mortgage insurance
- Closing costs
- Cash to close
- Loan term
- Prepayment penalty, if applicable
- Other special loan features
Then look at the broader financial picture.
A lower monthly payment may be attractive, but it is important to understand why the payment is lower and what you are paying upfront to receive it.
Can Loan Estimate Costs Change?
Yes.
The Loan Estimate contains estimated costs, so some numbers can change as the mortgage process continues.
For example, property taxes, insurance, third-party services, and other transaction details may change based on circumstances that develop during the process.
Certain fees are subject to specific tolerance rules, while other costs can change under circumstances permitted by the applicable requirements.
If you receive an updated Loan Estimate, review what changed and ask your mortgage professional to explain anything you do not understand.
The goal is to know why the numbers changed rather than simply accepting a new figure without reviewing it.
What Is the Difference Between a Loan Estimate and a Closing Disclosure?
The Loan Estimate comes earlier in the mortgage process.
It provides estimated information about the mortgage you are considering.
The Closing Disclosure comes later and provides the final details of the mortgage transaction.
For most applicable mortgage transactions, the borrower must receive the Closing Disclosure at least three business days before closing.
The Closing Disclosure includes the final loan terms, projected payments, closing costs, and other transaction details.
This gives you an opportunity to compare the final numbers with the Loan Estimate you previously received.
Why Should You Compare Your Closing Disclosure to Your Loan Estimate?
Comparing the two documents can help you identify changes before you sign your final mortgage documents.
Look at:
- Interest rate
- Loan amount
- Monthly payment
- Closing costs
- Prepaid expenses
- Credits
- Cash to close
- Other loan terms
If something looks different from what you expected, ask your lender or closing professional about the change.
The CFPB recommends using the three-business-day period before closing to review the Closing Disclosure, compare it with the Loan Estimate, and ask questions about anything you do not understand.
What If You Find an Error on Your Loan Estimate?
If you believe information on your Loan Estimate is incorrect, contact your mortgage professional.
Do not wait until the closing appointment to ask about something that does not make sense.
Errors can sometimes be the result of incorrect information, updated property details, changed circumstances, or simple misunderstandings.
The sooner you ask questions, the more time your mortgage team has to investigate and explain the situation.
What Questions Should You Ask About Your Loan Estimate?
You do not need to understand every mortgage term immediately.
If something is unclear, ask questions.
Some useful questions include:
- What is my total monthly payment?
- How much cash will I need at closing?
- Does this payment include taxes and insurance?
- Is mortgage insurance required?
- What fees am I paying to obtain the loan?
- Are there discount points?
- Can the interest rate change?
- What could cause these costs to change?
- How does this loan compare with another option?
- What should I expect to see on my Closing Disclosure?
A good mortgage professional should be willing to walk you through the numbers and explain how the different costs affect your loan.
Should You Choose the Loan With the Lowest Interest Rate?
Not necessarily.
A lower interest rate can reduce your monthly principal and interest payment, but it may also require higher upfront costs.
For example, a loan with discount points may offer a lower rate but require more money at closing.
Another option could have a slightly higher rate with lower upfront costs.
The better choice depends on how long you expect to keep the mortgage, how much cash you have available, and what your overall financial goals are.
This is why looking at the complete Loan Estimate is more useful than simply choosing the lowest advertised rate.
How Molly Dean Team Can Help
Mortgage documents can be difficult to understand, especially when you are comparing multiple loan options.
The Molly Dean Team works with Kansas City homebuyers to simplify the mortgage process and help borrowers understand their available loan options. The team offers conventional, FHA, VA, USDA, 203K, jumbo, and other mortgage solutions based on individual borrower circumstances.
If you receive a Loan Estimate and are unsure how to compare the numbers, a mortgage professional can help you understand the rate, payment, closing costs, and other terms before you decide which option fits your situation.
Conclusion
A Loan Estimate is one of the most useful documents you will receive while shopping for a mortgage.
It gives you an early look at the proposed loan amount, interest rate, monthly payment, closing costs, and other important terms.
Rather than focusing only on the interest rate, review the entire Loan Estimate and consider how the loan fits your budget and financial goals.
If you are comparing lenders, use the Loan Estimate to compare similar loan options and look at both the upfront costs and long-term payment.
Then, when you receive your Closing Disclosure, compare it with your most recent Loan Estimate and ask questions about any changes you do not understand.
Taking the time to understand these documents can make the mortgage process feel less confusing and help you make a more informed decision about your home loan.
