What Is a Loan Estimate Disclosure?

A Loan Estimate is a standardized, three-page document providing clear information about estimated mortgage loan costs. Lenders are legally required to provide this document within three business days of receiving a completed mortgage application. Its purpose is to help prospective borrowers understand the terms and estimated expenses associated with a loan offer. This document plays a significant role in empowering consumers to compare different loan offers. Introduced under the TILA-RESPA Integrated Disclosure (TRID) Rule, it consolidated previous, less standardized forms into one uniform disclosure, making it easier to evaluate various options.

Key Sections of the Loan Estimate

The Loan Estimate breaks down the mortgage offer into several key components, providing a comprehensive overview of the financial commitments involved. The first page summarizes the loan terms, projected payments, and estimated costs due at closing. This initial section provides an immediate snapshot of the loan’s fundamental structure.

The “Loan Terms” section outlines the estimated interest rate, the monthly principal and interest payment, and estimated cash required to close. It also indicates whether the interest rate is fixed or adjustable. Any special features, such as a prepayment penalty for paying off the loan early or a balloon payment, are listed.

The “Projected Payments” section details the estimated total monthly payments over the loan’s life. This breakdown includes the principal and interest payment, any required monthly mortgage insurance, and estimated amounts for escrow. Escrow typically covers property taxes and homeowner’s insurance, collected by the lender and paid on the borrower’s behalf.

The “Costs at Closing” section provides an itemized list of all expenses due at loan consummation. This section is divided into “Loan Costs” and “Other Costs.” Loan Costs include charges directly related to the loan, such as Origination Charges, which are fees the lender charges for processing and underwriting. These may also include points paid to lower the interest rate.

Loan Costs also specify “Services You Cannot Shop For,” such as appraisal fees and credit report fees, which are determined by the lender. In contrast, “Services You Can Shop For” include items like title insurance, pest inspections, or surveys. For these, the borrower can choose their own service provider from a lender-provided list.

“Other Costs” encompass various expenses not directly tied to loan origination but necessary for closing. These include taxes and other government fees, such as recording fees paid to local authorities for property transfer registration. “Prepaids” cover items like initial homeowner’s insurance premiums, property taxes for a certain period, and daily interest charges. An initial escrow payment, which establishes the reserve account for future tax and insurance payments, is also listed.

The “Cash to Close” figure represents the total amount a borrower needs to bring to closing. This figure is calculated by adding the down payment and all closing costs, then subtracting any deposits already paid, seller credits, or other adjustments.

The “Comparisons” section on the Loan Estimate’s third page offers insights into the loan’s long-term financial implications. It projects the total amount of interest a borrower would pay over the life of the loan and the total payments made, including principal, interest, and mortgage insurance, over the first five years. This section also displays the Annual Percentage Rate (APR), which reflects the total cost of the loan as a yearly rate.

How to Compare Loan Estimates

Comparing multiple Loan Estimates helps secure the most favorable mortgage terms. Since all lenders use a standardized form, it is straightforward to conduct a side-by-side analysis of different offers. Focusing on key financial figures allows for direct comparison of overall cost and monthly burden.

Begin by comparing the estimated interest rate, the total monthly payment, and the cash to close across each Loan Estimate. While a lower interest rate is often appealing, consider the total monthly payment, which includes principal, interest, mortgage insurance, and estimated escrow, as this reflects the actual recurring expense.

Next, carefully analyze the “Loan Costs” section, particularly focusing on “Origination Charges” and “Services You Cannot Shop For.” These lender-controlled fees can vary significantly between institutions. For “Services You Can Shop For,” compare the total amount in this category, keeping in mind that these costs can be influenced by the service providers you select.

It is important to understand “tolerance” levels, which dictate how much estimated costs on the Loan Estimate can change by closing. Some fees, such as the lender’s origination charges and transfer taxes, have a “zero tolerance,” meaning their final cost cannot exceed the estimate. Other fees, like recording fees and charges for services you can shop for (if you choose a provider from the lender’s list), have a 10% cumulative tolerance, allowing a slight increase. Costs like prepaid interest, property insurance premiums, and amounts placed into an escrow account have no tolerance limit and can change based on market conditions or actual costs.

When discrepancies arise, or if certain fees appear higher than expected, ask lenders for clarification. Inquire why a particular fee is higher or what specific services are included. This approach can help uncover hidden costs or identify potential errors before proceeding with a loan.

What Happens After the Loan Estimate

After reviewing and comparing Loan Estimates from various lenders, the next step involves formally indicating your decision to proceed with a loan offer. This is known as expressing your “intent to proceed.” This communication is necessary before a lender can charge fees, such as for an appraisal or credit report.

Communicate your intent to proceed within 10 business days of receiving the Loan Estimate. If you delay beyond this timeframe, the lender has the right to revise the terms and estimated costs presented in the original Loan Estimate. This signifies your commitment to move forward with a loan application.

Following your intent to proceed, you will discuss locking in your interest rate with your chosen lender. A mortgage rate lock is a commitment to secure a specific interest rate for a predetermined period, usually ranging from 30 to 60 days. This protects you from potential increases in market interest rates while your loan application is being processed.

The Loan Estimate is an estimate; final loan figures appear in the Closing Disclosure. This five-page document is received at least three business days before your scheduled closing date. It provides the precise, final details of your loan terms, all closing costs, and the exact cash needed at closing.

The Loan Estimate relates to the Closing Disclosure through tolerance levels. While some costs can change, tolerance rules ensure certain fees do not increase beyond specific percentages without a valid change in circumstances. Compare your Loan Estimate with your Closing Disclosure carefully to identify any significant changes.