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What is a Loan Estimate for a Mortgage?
According to federal law, lenders must provide applicants a Loan Estimate that outlines a good faith estimate of key mortgage terms including interest rate, closing costs and loan features within three business days of the borrower submitting a loan application. The Loan Estimate is designed to increase transparency, make it easier to compare mortgage proposals and enable borrowers to hold lenders accountable. Receiving a Loan Estimate does not obligate you to work with that lender. If a lender is unwilling to provide a Loan Estimate this is a warning sign and you should shop other lenders for your mortgage.
- Click on the Loan Estimate icon to review an example document
The Loan Estimate is a powerful tool that borrowers can use to compare proposals from multiple lenders. You can use the information presented in the Loan Estimate to find the best mortgage terms and select a lender. The Loan Estimate is a standard document that is the same across all lenders. The figures may change as loan terms vary across lenders, but the form remains the same. When you compare Loan Estimates, you should focus on three key items that impact your upfront and long term mortgage costs the most:
- Mortgage Rate: This is the rate that lender charge you to borrow money until the loan is paid in full. The interest rate is on the top of page 1 of the Loan Estimate. The lower the interest rate, the better. In some cases a lender charges you a lower interest rate but higher closing costs so there may be a trade-off to consider. Additionally, different types of mortgages and loans with different lengths have different mortgage rates so make sure you are comparing the same loan program and term. For example, the initial mortgage rate for an adjustable rate mortgage is usually lower than the rate for a fixed rate mortgage. Additionally, a 30 year mortgage has a higher mortgage rate than a 15 year loan. Use the Loan Estimate to confirm the program and length for your mortgage to make sure that any comparison is meaningful.
- Closing Costs: Closing costs are the fees charged by the lender and numerous third parties to process and close your mortgage. The estimated closing costs figure is on the bottom of page 1 of the Loan Estimate. In general, the lower the closing costs, the better but in some cases the lender may charge or the borrower may elect to pay higher closing costs to receive a lower mortgage rate.
- Annual Percentage Rate (APR): In short, the APR represents what your interest rate would be if it included all upfront lender and closing costs so it is a way to use one figure to compare both the mortgage rate and closing costs for different loans. For example, if you have proposals from two lenders that are offering the same mortgage rate but one APR is higher than the other, then you know the lender with the higher APR is charging higher closing costs. The APR is on the top of page 3 of the Loan Estimate
- Use ourMORTGAGE COMPARISON CALCULATOR to compare multiple mortgage proposals
Although it is not required by law, you should also ask lenders for a Lender Fees Worksheet, which provides a detailed breakdown of mortgage costs and expenses. Along with the Loan Estimate, you can use this information to negotiate better loan terms with lenders. For example, if one lender is proposing higher closing costs but a lower mortgage rate, use the Loan Estimate or Lender Fees Worksheet to see if the lender will match the lower costs. Or you can attempt to negotiate lower costs for specific fees. The more proposals and information you have, the more leverage you have to obtain the best loan terms from lenders.
The Loan Estimate must be delivered by the lender to the borrower in-person, by email or mail within three business days of the borrower submitting a loan application to the lender. If the Loan Estimate is provided by mail, it may take longer than three days for the borrower to actually receive it. For example, the lender may put the Loan Estimate in the mail three days after the borrower submits an application and it may take an additional two-to-three days for the borrower to receive the document. If you are working with a mortgage broker either the mortgage broker or the funding lender may provide the Loan Estimate but the funding lender is legally responsible for the Loan Estimate document.
Lenders are not permitted to require the borrower to provide documents that verify the information on the borrower’s mortgage application before providing the Loan Estimate. Additionally, lenders cannot charge borrowers a fee for providing a Loan Estimate. The only fee a lender can charge the borrower before providing the Loan Estimate is a small credit report fee, which is usually less than $30. If a lender attempts to charge you a higher fee to provide a Loan Estimate, stop working with that lender, report the lender to the Consumer Finance Protection Bureau (CFPB) and shop other lenders for your mortgage.
It is important to highlight that regulators created the Loan Estimate to increase mortgage shopping. They want to make it as easy as possible for you to obtain the document from several lenders so you can compare loan proposals. That is why the cost and document requirements are relatively minimal. We recommend that you contact multiple lenders in the table below to request Loan Estimates. Shopping for your mortgage enables you to find the best loan terms.
The Loan Estimate must be provided to the borrower in writing -- a verbal Loan Estimate is not permitted. If the lender provides the borrower a written estimate of the mortgage terms other than the Loan Estimate, the estimate must include disclosure at the top of the estimate that indicates that the mortgage terms are subject to change. The Loan Estimate is a standard document so it should be clear to borrowers if they have received it.
Lenders generally may not issue a revised Loan Estimate because they made technical errors or underestimated fees. For example, if a lender makes a mistake on an Loan Estimate, such as omitting a fee, the lender is responsible for the error and the borrower is not required to pay that fee. Lenders can only issue a revised Loan Estimate when they receive new or updated information about the borrower, loan or property being financed that causes the mortgage rate or fees to increase.
Circumstances that may cause the terms of the mortgage to change include a revised credit report, receipt of the appraisal report, the borrower deciding to change the down payment or the borrower deciding to lock the interest rate during the course of the mortgage process. A revised Loan Estimate must be issued no later than three business days after the lender receives the updated information and no later than seven business days before the close of the mortgage.
Prior to your mortgage closing, you can compare your Loan Estimate with the Closing Disclosure document to ensure that your final, actual mortgage rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender. The Closing Disclosure is a document that the lender must provide to borrowers three days prior to mortgage closing that details your final loan terms.
Significant differences between the Loan Estimate and Closing Disclosure (e.g., an increase in mortgage rate or higher closing costs), may be a sign that you are not getting the mortgage you thought you were and you are possibly getting ripped off. Comparing the Loan Estimate to the Closing Disclosure helps you hold lenders accountable for the commitments they make at the beginning of the mortgage process and also helps you avoid a bait and switch by the lender.
Use our free mortgage quote form to compare personalized loan quotes from lending lenders. Our quote form is easy-to-use, requires minimal personal information and does not affect your credit. Comparing multiple proposals is the best way to save money on your mortgage.
Sources
“What is a Loan Estimate?” CFPB. Consumer Financial Protection Bureau, September 12 2017. Web.
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