One of the most important documents you’ll encounter when navigating the mortgage process is the Loan Estimate (LE). This three-page form is crucial for understanding the terms of your loan and comparing offers from different lenders. In this post, we’ll explain what the LE is, why it’s used, and the timelines for executing it, as well as provide a detailed review of its sections and key line items.
What is a Loan Estimate (LE)?
The Loan Estimate (LE) is a standardized form that provides a clear summary of your mortgage loan terms. Introduced by the Consumer Financial Protection Bureau (CFPB) as part of the TILA-RESPA Integrated Disclosure (TRID) rule, the LE replaced the Good Faith Estimate (GFE) and the Truth-in-Lending (TIL) disclosure in 2015. The primary purpose of the LE is to provide borrowers with a transparent, easy-to-understand breakdown of the loan terms, costs, and risks associated with their mortgage.
Why is the Loan Estimate Used?
The LE is designed to protect consumers by ensuring they receive all necessary information about their loan upfront. It allows borrowers to compare loan offers from different lenders easily, helping them make an informed decision. The LE also promotes transparency by clearly outlining the costs of taking out a mortgage, including the interest rate, monthly payments, closing costs, and other expenses.
Timeline for Executing the Loan Estimate
When you apply for a mortgage, the lender must provide you with a Loan Estimate within three business days of receiving your application. This timeline is crucial because it allows you to review the loan terms early in the process.
You have 10 business days to decide whether to proceed with the loan offer. During this period, you can shop around and compare offers from other lenders. When you decide to move forward with the loan. In that case, you’ll notify the lender, and they’ll begin the next steps in the mortgage process, such as ordering an appraisal and verifying your financial information.
Breakdown of the Loan Estimate Sections
The Loan Estimate is divided into several key sections, each providing important information about your loan. Here’s a detailed look at each section and the line items to pay attention to:
- Loan Terms
This section provides a snapshot of the basic terms of your loan, including:
Loan Amount: The total amount you are borrowing.
Interest Rate: The rate at which you will be charged interest on the loan.
Monthly Principal & Interest: The amount you’ll pay monthly toward the loan’s principal and interest.
Pay attention to whether these amounts can change after closing. If they can, it will be noted here.
- Projected Payments
This section breaks down your estimated monthly payments over the life of the loan. It includes:
Principal & Interest: The core of your mortgage payment.
Mortgage Insurance: If applicable, the cost of mortgage insurance.
Estimated Escrow: This includes property taxes and homeowner’s insurance.
This section is critical because it shows how your payments might change if you have an adjustable-rate mortgage (ARM) or if your escrow costs increase.
- Costs at Closing
This section summarizes the total costs you’ll need to bring to closing, divided into two categories:
Estimated Closing Costs: Includes lender fees, points, appraisal fees, and other upfront costs.
Estimated Cash to Close: The total amount you’ll need to pay at closing, including your down payment.
Review this section carefully to ensure you understand all the upfront costs associated with your mortgage.
- Closing Cost Details
This section provides a detailed itemization of the closing costs, including:
Origination Charges: Fees charged by the lender for processing your loan.
Services You Cannot Shop For: Costs set by the lender, such as appraisal and credit report fees.
Services You Can Shop For: Costs where you can choose the provider, like the title search and survey fees.
Pay special attention to this section to see where you might be able to save money by shopping for better deals on certain services.
- Comparisons
This section helps you compare the total cost of the loan over time, including:
In 5 Years: The total amount you’ll have paid in principal, interest, mortgage insurance, and loan costs after five years.
Annual Percentage Rate (APR): The overall cost of the loan expressed as an annual rate.
Total Interest Percentage (TIP): The total amount of interest you’ll pay over the life of the loan, expressed as a percentage of your loan amount.
These figures are useful for comparing the long-term costs of different loan offers.
- Other Considerations
This final section includes important additional information, such as:
Appraisal: Whether the lender will provide you with a copy of the appraisal.
Assumption: Whether you can transfer the loan to someone else in the future.
Homeowner’s Insurance: A reminder that you must have homeowner’s insurance before the lender will close the loan.
Conclusion
The Loan Estimate is a vital tool in your home-buying journey, offering a clear and comprehensive breakdown of your mortgage terms. Understanding each section and the associated line items allows you to make more informed decisions and feel confident as you move forward with your mortgage. If you have questions about your Loan Estimate or need help comparing offers, our team at UnrealFi is here to assist you.
