Whether you’re a first-time homebuyer or have several home transactions under your belt, it helps to start the home-buying journey with accurate information so you can make informed decisions. A mortgage loan is often the largest and most expensive loan you’ll apply for in your lifetime. The more you know about the lending process, the easier it will be to select the right loan for your situation.
There’s one key document you’ll want to gain a solid understanding of when you’re shopping for a mortgage: the loan estimate (LE), also known as a “good faith estimate.” This guide will walk you through each page of the loan estimate, so you’re prepared when shopping for a home loan.
What is a loan estimate or a “good faith estimate”?
When you apply for a mortgage, your lender is obligated to provide a Loan Estimate, a standardized form that includes essential details like your estimated interest rate, monthly payment, closing costs, and more. Getting a Loan Estimate doesn’t mean you’ve been approved or that you must proceed with a particular loan, it’s simply a form to help you understand all the information before you move forward in the process.
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The loan estimate is three pages long, split into sections that outline the terms, closing costs, and fees associated with your loan.
How to read a loan estimate and compare it across lenders
All lenders must use a standard three-page document to provide a loan estimate, so the borrower can compare loan specifics to find the best deal. Every line on the loan estimate is important, so make sure to review the entire form carefully to correct any mistakes.
While it’s important to understand all the terms on your good faith estimate, there are a few key sections you’ll want to pay extra special attention to. We walk through these sections below.
Page one
Page one of the loan estimate is an overview of the mortgage loan terms and costs. Be sure to review each section carefully.
The spelling of your name: In the first left column, you’ll see your name and contact details. Review this information carefully for any errors. While this may seem insignificant, the wrong initial or a letter out of place can create complications later in the loan underwriting process.
The date issued: The good faith estimate is only good for ten days after this date. We recommend getting all of your estimates on the same day to compare across lenders as interest rates change daily.
The loan term, purpose, product, and loan type: The first right-hand column specifies the loan terms you’re considering and that you’ve discussed with your lender. For example, it will specify a 30-year fix-rate conventional, FHA, VA mortgage, or another mortgage type. Verify the loan terms are accurate and align your intentions.
Is the interest rate locked?: This will be marked “Yes” or “No.” If it’s marked yes, the lender will provide an expiration date, after which the rate will reset if you have not applied for a mortgage by that time.
Loan amount: The next left-hand column specifies the loan amount listed. Check that this amount is correct, as the remaining numbers in the estimate will hinge on that amount.
A fixed-rate or adjustable-rate mortgage: You’ll find this information in the upper-right column. Look for a heading that asks, “Can this amount increase after closing?” The column below this question should have “No” listed in each section if you are looking at a fixed-rate loan or “Yes” listed if you are looking at an adjustable-rate loan. Be sure your loan estimate shows the type of mortgage rate you were expecting.
Interest rate: The interest rate will be the current market interest rate offered for your loan type. This is not a rate based on your financial profile. Your actual rate could potentially be higher.
Monthly payments: The lender will give you an estimated monthly mortgage payment based on the loan amount and the interest rate.
Prepayment penalties: This section will show a “Yes” or a “No” whether or not you have prepayment penalties on your loan. If “Yes,” there will be a sentence to explain any prepayment penalty. Clarify with your lender what this means if you are unsure how prepayment penalties could affect you.
Balloon payments: These payments are standard with an adjustable-rate mortgage. If there is a “Yes” in this column, clarify what the balloon payments entail to ensure it’s what you expect.
Projected Payments
The projected payments section will show you a breakdown of the loan payment amount provided in the loan terms section. The most critical pieces in this section are the estimated total monthly payments and estimated insurance, taxes, and assessments not being escrowed.
Review these numbers and selections to understand your total monthly commitment and what costs and fees the lender requires you to escrow. If your taxes, insurance, or assessments are not in escrow, you will need to make a plan to pay these bills when they come due. (See more about what escrow is and how it works)
Costs at closing
The last section on page one shows the estimated cash you’ll need to close on the purchase. Most lenders will require you to wire the money to the title company or bring a cashier’s check with you to closing. You will also be required to show proof regarding the source of the funds, such as a bank statement or a gift letter Your lender should give you details as to how long you must have the funds in the bank before you can use them for closing.
Page two
Page two of your loan estimate breaks down each cost shown on page one. The lender also lays out their rules for mortgage payment amounts, how you can make mortgage payments, payment due date, and grace period.
Loan origination: The first left-hand section on page two will explain the fees and costs associated with creating the loan, called origination fees. Lenders all charge origination fees to complete the application, pre-approval, approval, and closing process of the loan. When you compare estimates, make sure to compare the origination charges and review the total for accuracy.
Discount points: You buy discount points if you plan to pay down a portion of the interest rate upfront. Your cost to purchase discount points will be listed here.
Services you can’t shop for: In this section, the lender will lay out specific services and service providers they require you to work with – you do not have the option to shop around for a cheaper provider for these services. Some of these services are related to the loan and terms themselves, such as private mortgage insurance (PMI) if your down payment is less than 20% or if you must pay funding fees associated with a VA or USDA loan.
Services you CAN shop for: You will see the third-party services that the lender will arrange, such as pest inspection, environmental inspections, and title company services like title search and title insurance. With these services, you have the option to shop around for cheaper providers.
Taxes: Here you will see the home’s property taxes. Double-check that the form has the correct amount.
Homeowner’s insurance: You will see the homeowner’s insurance premium in this section. You can choose your insurance provider and will typically pay for 6 to 12 months of insurance premiums at or before closing. Double-check that the form has the correct amount.
Lender credits: Your lender may offer a rebate to offset your closing costs. If so, you’ll see that amount here. You may pay a higher interest rate on your loan in exchange for this rebate. Ask your lender about the options available and how credits may affect the cost of your loan.
Estimated cash to close: This section will show you an estimate of how much money you’ll need to bring to closing. It breaks down the calculation of closing costs. This amount includes your down payment, minus any funds already paid to the seller or any amounts the seller agreed to pay toward closing. It will also subtract any other adjustments, like prorated taxes or discount points. If this number is not what you were expecting, ask your lender to explain.
Page three
You will see your lender’s name, license number, and complete contact information on the third page. Verify this information is accurate.
The comparison section of this page will lay out specific costs you can use to compare lenders.
In 5 years: This amount shows how much you will have paid off in 5 years and what you will have paid in total at the end of the loan term. If you plan to move before the end of your loan term, this number is helpful to help you understand your short-term upfront costs and total long-term costs.
APR: The Annual Percentage Rate or APR combines lenders’ rates and fees, giving you another way to compare lenders. The APR reflects your upfront costs and total loan costs, including interest, expressed as a percentage.
Other considerations laid out in the loan estimate explain the appraisal, assumption (when one borrower takes over the loan to become a sole borrower, such as in a divorce for example), homeowner’s insurance, refinancing, servicing, and the treatment of late payments. The late payment section is critical as it will explain deadlines and additional charges if your payment is late.
Loan Estimate/Good Faith Estimate FAQs
Can I get multiple loan estimates?
Applying for various loan estimates will not affect your credit score as long as you seek the estimates within a 45-day window. Each lender may charge you an upfront fee for your credit report.
When do you receive a loan estimate?
The lender will provide a loan estimate within three business days of receiving your completed application. During the application process, you will provide the following personal information:
- Name
- Income
- Social Security Number
- Address and value of the property you’re considering buying
- The required loan amount
How many days is a loan estimate good for?
A loan estimate is valid and binding for ten days from issuance. If you decide to move forward with your loan during that time, the lender must honor the estimate they provided as long as there are no significant changes to your application or loan terms.
How accurate is a loan estimate?
While the estimate isn’t set in stone, it is a very reliable approximation of the total cost of your loan. By law, the final loan costs must be within 10% of the original loan estimate.
Can a loan estimate change?
A loan estimate can change if the interest rate changes or you select a different type of loan or other loan terms. In this case, you will receive a revised loan estimate.
Does a loan estimate mean you’re approved for the mortgage?
A loan estimate is not a pre-approval or approval for a mortgage loan. It only shows you what the lender expects to offer if you decide to move forward with the loan. If you choose to move forward, formal underwriting will determine if you are approved for the loan.
Loan Estimate vs. Closing Disclosure
The loan estimate and the closing disclosure are two primary forms to review as you work through the mortgage process. These are similar as they both convey all fees and costs associated with your mortgage. However, the closing disclosure shows the final terms of your mortgage – the actual amount you will pay.
Your closing disclosure will follow a similar format to the loan estimate to provide final costs and fees. At this point, your lender will have verified all third-party costs, property taxes, insurance, and prepaid interest. Your lender is legally obligated to provide the closing disclosure at least three business days before your closing date.
Reading a “good faith estimate” or “loan estimate” can be confusing. Be sure to ask your mortgage lender many questions and clarify any missing information or errors on your estimate before signing.
Redfin does not provide legal, financial, or tax advice. This article is for informational purposes only, and is not a substitute for professional advice from a licensed attorney, financial advisor, or tax professional.
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