Loan Estimate: What It Is And What Appears On It
Buying a house is a significant financial transaction that will impact your life for years to come. So, you need to understand exactly what you’re getting yourself into when you apply for a mortgage. Your Loan Estimate will help you do that by clearly stating the key terms of your loan, so there are no surprises as you move through the home buying process.
What Is A Loan Estimate?
A Loan Estimate is a three-page document prospective borrowers receive from their lender shortly after submitting a mortgage application. It spells out your potential loan terms, as well as upfront, monthly, and closing costs. That way, you’ll know how much you can expect to pay for housing both now and over time.
Did you buy your last home before 2015? Since then, the Consumer Financial Protection Bureau (CFPB) replaced the Good Faith Estimate with the Loan Estimate to better help you understand the financial obligation you’re about to assume.
Why Do Borrowers Receive Loan Estimates?
Your lender will issue your Loan Estimate to you within 3 business days of receiving your completed mortgage application. That way, you can see and prepare for the upfront and ongoing expenses of buying your new home. The bank will consider your mortgage application complete for the purposes of generating a Loan Estimate if you have provided them with:
- Your name
- Your income
- The address of the property you want to purchase/refinance
- The property’s value estimate or purchase price
- Your loan amount
- Your Social Security number
Keep in mind that your Loan Estimate is just that – an estimate. You have not yet gotten approved for your mortgage. That means the loan details could change during the underwriting process. If they change dramatically (like going from a 15-year to a 30-year mortgage), your lender must give you an updated Loan Estimate.
Which Set Of Items Appears On A Loan Estimate?
Your Loan Estimate contains a lot of information, so we’ll break down what it covers page-by-page. That way, you understand every last detail.
Check out this Loan Estimate example from the CFPB to help you visualize the document.
Page 1: An Overview
Your Loan Estimate’s overview will give you the essential details upfront so that you can see them at a glance.
This first section will list basic details about you, the property and the mortgage, such as:
- Your contact information
- The address of the property
- Whether you’re buying or refinancing
- Your loan term
- The type of mortgage you applied for (conventional, FHA, USDA, VA)
- Whether you’ll have a fixed or adjustable interest rate
- Whether your interest rate is locked and when the lock expires
The loan terms section will dive a little deeper and cover:
- Your loan amount
- Your interest rate
- Your monthly principal and interest
- Whether the loan has a prepayment penalty (Rocket Mortgage® doesn’t charge you a fee if you pay your mortgage off early.)
- Any additional payment required
This section will also note whether any of these amounts can increase after closing. The loan terms likely won’t change after you receive your Loan Estimate. That means you can expect to see the same information on your Closing Disclosure (which spells out the final details of your mortgage and gets issued at least 3 days before you close).
In the projected payments section, you’ll see how much you can expect to pay the lender each month over the life of the loan. It will include costs for:
- Mortgage insurance (if applicable)
- Homeowner’s insurance
- Property taxes
This section will also note whether you must pay into an escrow account to cover expenses like your homeowner’s insurance and property taxes. If so, you’ll see an initial estimate of how much you’ll need to pay every month. Remember, though: this amount will likely increase over time as your insurance premium and property value go up.
Note: If you applied for an adjustable-rate mortgage (ARM), the document would also include a table showing how your monthly payment may change over time due to shifts in your interest rate.
Costs At Closing
In this section, you’ll see how much cash you’ll need to bring to the closing table to cover your closing costs. Closing costs are fees you have to pay to your lender to process your mortgage and include line items such as your property appraisal, title insurance or discount points. You’ll get a complete list of these expenses on the next page.
Page 2: Closing Cost Details
The second page itemizes every closing cost you can expect to pay, broken down into multiple sections.
On the left-hand side of the page, you’ll see the costs of securing the loan itself, starting with your origination charges. Origination charges include your application fee, underwriting fee and any points you elected to reduce your interest rate (if applicable).
Next, you’ll see costs for services that you can’t legally shop around for, such as the appraisal, credit report, and flood determination fees. Finally, the section lists services that you can shop around for, like a property survey, pest inspection, or title search. At the bottom of this column, you’ll see the total of your loan cost expenses.
On the right-hand side of the page, you’ll see your other closing costs, including:
- Taxes and government fees (property transfer taxes and deed recording costs)
- Prepaids (what you must pay upfront for homeowner’s insurance, mortgage insurance, interest and property taxes)
- Initial escrow deposit (what you must pay into your escrow account in advance to cover homeowner’s insurance, mortgage insurance and property taxes)
- Other costs (such as an optional owner’s title policy)
Toward the bottom of this column, you’ll see the sum of your other costs and the total closing costs you'll have to cover.
Did you know?: Putting money into your escrow account at closing and with each monthly mortgage payment helps you save for significant expenses like your homeowner’s insurance policy and property taxes. A third party will hold onto the funds until it’s time to pay your insurance company or county. Then, they will disburse the funds on your behalf, so you don’t have to think about it.
Calculating Cash To Close
In the cash to close section, you’ll see the math behind how much money you’ll need to bring with you on closing day. The Loan Estimate will add your required closing costs and down payment together.
Then, it will subtract your deposit, how much in closing costs you’re rolling into your mortgage (if applicable) and any credits received from that amount. The new figure is the cash necessary to finalize your real estate transaction.
Page 3: Comparisons And Other Considerations
Page three of your Loan Estimate begins with some additional basic information about your lender, loan officer and mortgage broker (if applicable). Then, you’ll see the Comparisons and Other Considerations sections.
In this section, the document highlights some data to show you how this loan stacks up against other mortgage options. You’ll see:
- Your projected cash outlay: how much you’ll pay over five years in total and how much will go towards the principal
- Your annual percentage rate (APR): your total cost to borrow that includes both your interest rate and loan fees
- Your total interest percentage (TIP): how much interest you’ll pay over the life of the loan, expressed as a percentage
Based on this insight, you may find that a different mortgage makes more sense for your financial situation and goals.
In this section, you’ll see important notes and policies from your lender concerning topics such as:
- Property appraisal
- Loan transfer (if you sell the home)
- Homeowner’s insurance
- Late fees
- Loan servicing
Note: While many lenders will transfer the servicing of your loan to another institution, Rocket Mortgage services most of the loans we originate. That means you’ll likely send your monthly mortgage payment to us if we underwrite your loan.
The Bottom Line
Your Loan Estimate helps you get ready for what’s likely the biggest purchase of your life. It covers the math behind your mortgage so you can see what your home will cost you at closing and over the life of the loan. Now that you know what appears on a Loan Estimate, you’ll be better prepared to navigate the homebuying process.
Since interest rates change often, it’s critical to have your finances organized so you can take advantage of the current affordable deals. So, if you’re ready to secure your mortgage loan, apply online with Rocket Mortgage today!