When you’re looking to finance a home there are several things you need to consider, including the loan estimate, which is key in understanding the actual terms of the loan. The loan estimate can be a good tool when comparing lenders if you haven't already finalized your financing with your bank or credit union.
What is a loan estimate?
The loan estimate explains the mortgage terms, costs, and interest rate. It is a three page document with a prescribed template; this ensures that you can fairly evaluate one lender’s proposal next to another. It contains details regarding the interest rate, closing costs, monthly payments, and other information you can use to make a final decision. It’s important to remember that the loan estimate needs to be signed and returned to the lender before it expires which is typically 10 days after it has been issued. Once the estimate is returned to the lender they will be able to work with you on the timeline for the rest of the loan process, including a closing date.
The Consumer Financial Protection Bureau (CFPB), a U.S. government agency, offers a checklist
to help you verify that all elements on your loan estimate are present and correct.
On average, most borrowers keep a mortgage for about five years before moving or refinancing. While your situation may be different, figuring out the total dollar amount you will pay in interest and fees over five years is a good way to compare loan offers.
Apples to Apples
Make sure the loan terms and figures are comparable across loan estimates from different lenders, and make sure that any costs are reasonably estimated. Remember, if one loan estimate shows significantly lower taxes and insurance, that doesn’t mean that loan is a better deal. Lenders don’t control your taxes and insurance. Also be sure to check that all the loan estimates show the rate is locked. If the one of the estimates is not locked the rate and fees could change. Watch out for lenders who send out a low rate and low fee loan estimate that isn’t locked as you could end up locking in a higher rate and fees later.
Reading the Loan Estimate
There are nine main elements in a loan estimate, which makes it simpler to evaluate proposals across lenders:
- Loan Overview
- Loan Terms
- Projected Payments
- Costs at Closing
- Closing Cost Details
- Additional Loan Information
- Details for Comparison
- Other Considerations
- Confirmation of Receipt
Each section contains required elements that allow you to easily compare offers from different lenders. One of the primary differences in fees on loan estimates would be located on Page 2, Section A, the lenders origination charges. You might also see a difference on Page 2, Section B regarding the third party providers the lender uses. These can vary based on the provider, but they are the real cost for the service and lenders aren’t allowed to inflate them. Additionally, you might see a difference in loan estimates from the lenders if based on mortgage insurance. One lender might be basing their estimate on a loan product that doesn’t have mortgage insurance while the other loan program does.
When you accept a loan estimate and proceed with the loan, you will receive another document called a closing disclosure, which shows what you will be paying at closing. The lender typically sends the closing disclosure (CD) close to your closing date. Make sure to compare the loan estimate to the closing disclosure, and if there are any major differences, ask the lender to explain the differences to your satisfaction. You may get an initial CD that doesn’t have the final fees so it is important to ask if the CD has the final fees. Often times lenders will send the initial CD that shows the same fees as the loan estimate, then closer to the closing the CD can change to include the final fees, like those from the title company. Make sure to clarify if you are viewing the final fees, if not the numbers may still change as they are balanced at closing.
Some differences between the estimate and the disclosure are permitted, but others are not. Your UHCU Loan Specialist can help you with specific questions regarding final costs and fees, and any other questions you might have in the mortgage process. Call your UHCU Loan Specialist at 512.435.4444 or visit our Home Loans page