Summary: A Loan Estimate document is a close, detailed likeness to what the charges, payments, and fees will look like when – and if – a proposed mortgage loan closes. It establishes good faith between borrower and lender by laying out the terms and costs within three business days following a submitted application.
A free-market economy can not long survive without at least some level of trust and confidence among consumers and those who sell goods and services. Parting with money and making contracts implies an expectation of performance on the part of any business. When the dollar figure is high — as when buying or refinancing a home — all parties must demonstrate sincerity in some form or fashion. Buyers must put forth earnest money, i.e. a deposit as a sign of good faith. On the seller’s part, that money is held in escrow by his or her attorney. Meanwhile, the mortgage lender presents a loan estimate. This gives borrowers a fair heads-up as to the price of a mortgage loan.
What Is a Loan Estimate?
The Loan Estimate (LE) is an official document mandated by federal law since 2015. It supersedes older versions known as the Good Faith Estimate and Truth-in-Lending disclosure. Every lender in Washington Oregon, Colorado and Idaho are therefore required to send a LE to each loan candidate within three days of a full application submission. This is important because it puts the bank or finance company on record as to what loan terms it will consider for approval. More importantly, the LE tells the applicant what costs will be associated with the loan.
Lenders must obtain certain information before issuing a Loan Estimate:
- Borrower’s name(s)
- Subject property address
- Social security number(s)
- Total income
- Estimated property value
- Desired loan amount
With these rudimentary facts, a loan officer can generate a LE that conveys how expensive the mortgage will be. This estimate contains several distinct sections.
After basic borrower, property and loan product information is recapitulated at the top of the first page, the first section focuses on the loan terms. This includes the interest rate, the loan amount, the monthly p&i (i.e. principal and interest payment), and whether or not the loan features a prepayment penalty or final balloon payment. The LE also tells if the rate is locked or floating as well as if the loan is conventional or government-backed. Applicants can check these items against their conversation with the loan officer.
This second section of the Loan Estimate reiterates the principal and interest while informing the prospective borrower of any mortgage insurance premium to be added into the monthly remittance. It also estimates the monthly escrow payment that ordinarily embraces property taxes and homeowner’s insurance. On occasion, there are escrows for flood insurance or other recurring charges as well. It then tabulates the total monthly payment of principal, interest, mortgage insurance, taxes and homeowners coverage.
Closing Cost Details
This is the largest and most particularized segment of the LE, for good reason. Government rules allow modest tolerances for deviations above estimated costs. If the difference is too large, the Loan Estimate must be re-issued with more accurate figures, and three days must pass before a closing can occur. Lenders walk a fine line because some settlement expenses are beyond their control. The closing cost section puts the total estimated closing costs upfront, along with the estimated amount of funds the borrower(s) are expected to bring to settlement.
Closing costs can end up being about one to five percent of the purchase price. From there the costs are broken down and itemized:
- Section A. When comparing lenders this is the most important section. This section includes all lender charges, i.e. application fee, origination fees, Admin fees, underwriting fee, and any points purchased to discount the interest rate. If you compare two Loan Estimates with the same rate it is easy to compare section A to see which is a better deal. PRO TIP – Make sure you check Section J to see if there are any lender credits as this should be subtracted from the total in Section A to get your total lender fees.
- Section B. Services the borrower can not shop for, meaning the lender has selected and approved the particular service providers: appraiser, credit reports, flood certification, and monitoring, tax monitoring and research. These are fees third-party service providers charge and are needed to close the loan.
- Section C. Services for which the borrower can shop for: Mostly made up of third-party title related fees, including Title Insurance and Escrow Closing. As a borrower, you can shop these service providers but keep in mind on a purchase this was likely already specified on the Purchase and Sale Agreement you signed.
- Section E. Government charges like recording fees and transfer taxes.
- Section F and G. Prepaid items – This section consists of property taxes, daily interest, and homeowners insurance. These numbers will be specific to your property, insurance provider and the day of the month you close. While helpful in determining how much you need to come up with at closing this section should not be used when comparing lender costs as they have nothing to do with the lender. Unlike other costs in the sections outlined above lenders are not required to be within a tolerance range and these numbers will change to whatever the actual tax and insurance premiums end up being regardless of what is quoted on the initial Loan Estimate.
The final subsection summarizes how the borrower’s cash to close estimate is formulated and arrived at. Worth noting is the issue of prepaid amounts and escrows. A mortgagor’s first payment is due on the first of the second month following the disbursement of funds. So, if a settlement and disbursement occur on February 23rd, the first payment is due on April 1st. If property taxes or insurance premiums fall due on or before that date, they can not be escrowed for but must be paid for at closing. This is why lenders can only estimate: a closing date can change due to any number of occurrences. If there is a delay, for instance, the borrower can pay a premium outside of closing, thus altering the amount due on settlement day.
The final page of the Loan Estimate serves to supplement what went before by putting the loan into context. After listing the loan officer’s contact information — and indicating whether or not the application was made through a mortgage broker — the LE reveals how much is paid down in principal and in total after five years. Borrowers will also find the annual percentage rate (or APR, the total cost of the loan expressed as a percentage) and the interest percentage of the total dollar amount paid over the life of the loan.
Further context is given on page three with regard to the applicant’s rights to the appraisal; whether or not the loan can be taken over by another borrower at the same terms; if homeowner’s insurance is required; conditions for refinancing; and the future of loan servicing. The form ends with the applicant’s signature acknowledging receipt. This execution obligates neither the bank into making nor the borrower into accepting the loan. For the lender’s own protection, the applicant must affirm that the finance company or bank made these representations.
Why Are All These Representations Necessary to Applicants in Colorado, Idaho, Washington, and Oregon?
The purpose of a Loan Estimate is to provide a consumer with a uniform document that is easy to compare one lender’s offer vs. another.
When can your Loan Estimate change? The terms of the Loan Estimate can only change if there is a valid Change of Circumstance. These can include a variety of factors including the seller making concessions related to the total sales price; the appraisal comes in low; a judgment or lien against the applicant comes to light; material changes in employment; or parties to the loan must delay the closing. These are but a few examples. In every case, the loan estimate will be reissued to reflect new realities, e.g. amended loan amount, interest rate or escrows. As with the initial LE, the revision, based on changed circumstances, must be issued within three business days of the changes made.
Talk Before You Apply
The necessity of a Loan Estimate acknowledged, speaking with an experienced loan officer is the most ideal first step when thinking about a mortgage. The loan officer will show you the best loan product for your needs and will quote a rate according to those specifications. Establishing this relationship benefits applicants when that LE arrives…and questions over particular items arise. Best of all, settling the general parameters of a prospective mortgage in advance can preclude surprises — and the need for a re-issued LE — later on. Waste no time: the consultation costs nothing.
If you want a mortgage, you can’t go wrong with Sammamish. We have been around for more than 25 years and are happy to help you. Based in the Pacific Northwest, we offer high-quality loan programs in Washington, Oregon, Idaho, and Colorado.
If you’d like, you can Contact Us for a rate quote, where we can even explain the entire process to you. You can also View Our Rates on our website. If you’d prefer, you can Apply Instantly or get a Rate Quote.