What Is a Loan Estimate and How Do You Read One?

A Loan Estimate is a standardized document outlining the mortgage terms a lender expects to offer you. It provides clear, comparable information about a mortgage loan offer, empowering consumers during the home buying process. This document details the loan amount, interest rate, expected monthly payment, and estimated closing costs. It helps you understand the financial implications of a mortgage and facilitates comparison shopping among different lenders. It serves as an early guide, allowing you to review proposed terms before making a commitment.

What is a Loan Estimate

The Loan Estimate is a standardized, three-page form provided to consumers after applying for a mortgage. Its origin lies in the TILA-RESPA Integrated Disclosure (TRID) rule, which integrated disclosures from the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). This integration aimed to simplify the loan application process and enhance transparency for borrowers.

The Loan Estimate helps consumers understand the key features, costs, and risks of a mortgage loan, enabling effective comparison shopping. Lenders are legally required to provide this document within three business days of receiving a mortgage application. To obtain a Loan Estimate, you typically need to provide your name, income, Social Security number, the property address, an estimated property value, and the desired loan amount. Receiving a Loan Estimate does not signify loan approval; it is an approximation of the costs and terms.

Key Sections of the Loan Estimate

The Loan Estimate is structured across three pages, providing information about the mortgage offer. This standardized format allows for direct comparisons between different lenders’ proposals. Understanding each section is important for evaluating the overall cost and terms of a loan.

Page 1

The first page of the Loan Estimate offers the loan terms, projected payments, and costs at closing. The “Loan Terms” section details the loan amount, interest rate, and the monthly principal and interest payment. It also indicates whether the loan includes features like a prepayment penalty or a balloon payment. The “Projected Payments” section provides an estimated total monthly payment, including principal, interest, estimated mortgage insurance, property taxes, and homeowner’s insurance if part of an escrow account. The “Costs at Closing” section presents the estimated closing costs and the estimated cash required to close the loan.

Page 2

The second page provides loan costs and other associated costs. “Loan Costs” are divided into three main categories: Origination Charges, Services You Cannot Shop For, and Services You Can Shop For. Origination Charges (Section A) are fees charged by the lender for processing the loan, such as application or underwriting fees. Services You Cannot Shop For (Section B) include items like appraisals and credit reports, where the lender selects the provider. Services You Can Shop For (Section C) include items like title services, for which you can choose your own provider from a list provided by the lender.

“Other Costs” are also itemized on this page, covering expenses not directly tied to the lender’s origination. Section E includes Taxes and Other Government Fees, such as recording fees and transfer taxes. Section F details Prepaids, which are items paid in advance, like homeowner’s insurance premiums, property taxes, and prepaid interest. Section G covers the Initial Escrow Payment at Closing, the initial deposit into your escrow account for future property taxes and insurance.

Page 3

The third page of the Loan Estimate includes comparisons and other considerations. The “Comparisons” section provides the long-term cost of the loan, showing how much you will have paid in principal, interest, and mortgage insurance after five years, and how much principal you will have paid off. This section also features the Annual Percentage Rate (APR) and the Total Interest Percentage (TIP). The APR reflects the total cost of the loan over its life, including interest and some fees, expressed as an annual percentage. The TIP indicates the total interest you will pay as a percentage of the loan amount if you make all scheduled payments.

The “Other Considerations” section provides disclosures regarding the loan. This includes information about whether the loan can be assumed by another party, requirements for homeowner’s insurance, and potential late payment penalties. It also indicates if the loan servicing might be transferred to a different company after closing. This section helps borrowers understand operational aspects and potential future implications of their mortgage.

Comparing Your Loan Estimates

After receiving multiple Loan Estimates, using their standardized format to compare offers is a practical step. Focus on specific data points to identify the most favorable terms for your financial situation. Start by ensuring that the loan terms are comparable across all estimates, including the loan amount, loan type (e.g., fixed-rate, adjustable-rate), and loan term (e.g., 15-year, 30-year). This “apples-to-apples” comparison is important for an accurate assessment.

Next, pay close attention to the interest rate and the origination charges, which are lender-specific fees. A lower interest rate might be offset by higher origination charges, so consider the overall cost. Review the “Cash to Close” amount, as this represents the total funds you will need to bring to the closing table. Compare the “Total Interest Percentage” (TIP) and the Annual Percentage Rate (APR) to understand the full long-term cost of each loan. If any discrepancies or unexpected charges appear, directly address them with the lender for clarification.

Understanding Loan Estimate Changes and the Closing Disclosure

While the Loan Estimate provides an initial projection, certain costs can change before closing. This is managed through “tolerance limits” established by the TRID rule. Some fees, such as origination charges and transfer taxes, have a “zero tolerance,” meaning they cannot increase at all from the Loan Estimate to the Closing Disclosure unless there’s a valid change in circumstances. Other fees, like recording fees and certain third-party services you select from the lender’s list, have a “10% cumulative tolerance,” allowing their total to increase by no more than 10%. Fees with “no tolerance” or “unlimited tolerance,” such as prepaid interest, property insurance premiums, and initial escrow deposits, can change by any amount.

A new Loan Estimate might be issued if there is a valid “change of circumstance,” such as a change in the loan product, a significant change in the interest rate, or a change in the borrower’s financial information. This revised estimate must also be provided within three business days of the change. The Loan Estimate ultimately serves as a precursor to the Closing Disclosure, a five-page document received at least three business days before closing. The Closing Disclosure presents the final loan terms and actual costs, and it should closely mirror the last Loan Estimate. Compare the Closing Disclosure with your final Loan Estimate to identify any discrepancies and address them with your lender before proceeding with the closing.