What is a loan estimate?
It provides info about a mortgage you applied for, allowing you to compare offers
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If you’re in the homebuying process, or you’re applying to refinance your mortgage, you’ll come across a document called a loan estimate.
This document is required to be disclosed by lenders after you submit a mortgage application. It’s important to understand how a loan estimate works, as it can have a massive impact on your finances.
Key insights
- A loan estimate is provided by a mortgage lender within three business days of your mortgage application submission.
- Loan estimates provide information such as your projected monthly mortgage payment, closing costs and lender or seller credits.
- Loan estimates are not finalized, and numbers can change on the closing statement, so be sure to compare the two documents before signing.
How to get a mortgage loan estimate
A loan estimate is a three-page document you’ll receive after applying for a mortgage or mortgage refinance. This document is an estimate of your mortgage payments, taxes and insurance costs, as well as any associated loan costs.
“Loan estimates are required by law as part of the mortgage application process,” said Linda Schroder, owner and real estate investor at Cash For Houses. “The Consumer Financial Protection Bureau (CFPB) mandates that lenders provide borrowers with a loan estimate within three business days of receiving their mortgage application. This allows borrowers to compare loan offers and make informed decisions.”
There is no charge to receive a loan estimate, and all lenders are required to use the same standardized loan estimate form.
» MORE: How to apply for a mortgage
What’s included in a loan estimate?
A loan estimate gives very detailed information about your potential mortgage loan. Here’s what’s inside a loan estimate form and how to interpret each line item.
General information
- Date issued: Date the loan estimate was created
- Applicant names: Names of all loan applicants
- Property address: Address of the property being purchased or refinanced
- Sale price: Accepted price of the property
- Loan term: Length of the loan term (in years)
- P urpose: What the loan is being used for (purchase, refinance, home equity loan or construction loan )
- Product: Type of mortgage rate you are getting — typically a fixed or variable rate
- Loan type: Type of loan you are getting, such as a conventional , Federal Housing Administration or U.S. Department of Agriculture loan
- Loan ID: A unique identification number for your loan
- Rate lock: This indicates whether you’ve locked in your interest rate and, if so, the expiration date of the rate lock .
Loan terms
- Loan amount: This is the amount you have agreed to borrow. This number won’t equal the property’s purchase price if you’re making a down payment . Make sure the sum of the down payment and the loan amount equals the purchase price.
- Interest rate: Interest rate for the loan
- Monthly principal and interest : Estimated monthly payment amount for your mortgage, not including insurance or tax payments
- Prepayment penalty: The amount and terms of any penalties incurred for paying off the loan early
- Balloon payment: This indicates whether your loan has a balloon payment (usually after five, seven or 10 years) and, if applicable, its date, amount and terms.
Projected payments
- Principal and interest: Total principal and interest monthly payment estimate
- Mortgage insurance: Estimated costs of mortgage insurance (if any)
- Estimated escrow: This is the amount being sent to escrow each month for taxes and/or insurance payments (if you are using an escrow service).
- Estimated total monthly payment: The estimated monthly payment includes principal, interest, mortgage insurance, homeowners insurance and taxes.
- Estimated taxes, insurance and assessments: Estimated property taxes and insurance costs, plus any additional assessments
Costs at closing
- Estimated closing costs: Total amount of costs charged at closing
- Estimated cash to close: How much you’ll need to pay out of pocket at closing (excluding any deposits already made)
Loan costs
- Origination charges: Fees assessed by your lender
- Points: Mortgage points are prepaid interest charges that you can pay to reduce your interest rate.
- Application fee: Fee for processing your mortgage application
- Underwriting fee: This is a service fee for your lender’s underwriting team to review, assess and approve your loan application.
- Other services: These may include flood determination, flood monitoring, tax status research and survey fees, among others.
Other costs
- Recording fees: These are paid for recording the transaction in a government database to keep track of the deed and mortgage information.
- Transfer taxes: These taxes are paid to record the transfer of property from one owner to another.
- Prepaids: This is the total of prorated expenses that must be paid at closing, such as homeowners insurance , mortgage insurance, property taxes and prepaid interest.
- Initial escrow payment at closing: Total escrow amount that will be collected at closing for your upcoming insurance premiums and property taxes
- Other: Other (optional) charges that may be part of the loan costs, such as title insurance
- Lender credits: If your lender is giving you a rebate to help offset your closing costs, it will be listed here and subtracted from your total closing costs.
Cash-to-close calculation
- Closing costs financed: The amount of closing costs that are part of the loan (if any)
- Down payment: Your agreed-upon down payment amount
- Deposit. This reflects any funds you deposited ahead of time. The amount is subtracted from your total cash to close.
- Funds for borrower: If you’re doing a cash-out refinance, this shows the amount you’ll get.
- Seller credits: If the seller is paying some of the closing costs , this amount is subtracted from your total cash to close.
- Adjustments and other credits: Any other adjustments or credits to your closing costs
Lender information
Comparisons
Other considerations
- Appraisal: If an appraisal comes in low , you can order an additional appraisal, but you’ll have to pay for it.
- Assumption: This indicates whether or not the loan (and its current terms) can be assumed by someone else in the future.
- Homeowners insurance: This shows whether homeowners insurance is required for the loan.
- Late payment: Late payment policy and fees
- Refinance: This note explains that you may not qualify to refinance your loan in the future with this lender. But this doesn’t mean you are legally unable to refinance.
- Servicing: This indicates whether the lender plans on transferring the loan’s servicing (the company to which you make your payment) to another company.
Confirm receipts (signature)
How to compare loan estimates
It’s wise to shop around and get loan estimates from several lenders. But it’s tough to compare loan estimates unless you know which numbers to hone in on.
“When comparing multiple loan estimates, it is crucial to focus on key elements such as the interest rate, loan type (fixed or adjustable), loan term and any upfront fees or points,” said Schroder. “These factors will affect the overall cost of the mortgage and the borrower's monthly payments. Additionally, it is important to consider the lender's reputation, customer service and any specific requirements or restrictions they may have.”
Here are the most important things to review when comparing several loan options:
- Total loan amount: Make sure you’re borrowing the same amount, and compare if the lender is wrapping any extra charges into the total loan cost.
- Interest rate/APR: The interest rate can have the biggest impact on your total loan costs over the life of the loan. See which loan’s rate is the lowest.
- Principal and interest: Compare the estimated principal and interest payments.
- Mortgage insurance: Check mortgage insurance rates to see which one is less expensive.
- Total monthly costs: The cost of your monthly payment will directly affect your budget. Compare the total principal and interest, mortgage insurance, property taxes and homeowners insurance, as well as any homeowners association dues (if applicable).
- Total loan costs: This is the bottom line of the loan. Compare the total loan costs to see which is the cheapest.
- Lender credits: Check if the lender is offering credits or not, as these can provide a significant amount of savings.
- Cash to close: Compare how much you’ll need to bring to the closing table out of pocket.
» COMPARE: Best mortgage lenders
FAQ
What loan product requires a loan estimate?
Mortgages, home refinances, home equity loans and construction loans all require loan estimates. A lender must provide the estimate within three business days of receiving your application.
What is a good faith estimate?
Before 2015, there were two documents required to be sent to applicants by lenders: the good faith estimate and the truth-in-lending statement. The loan estimate was launched in 2015. It combines and simplifies both of the previous documents to make mortgages easier for consumers to understand.
How many business days after you submit your application will you receive a loan estimate?
You will receive a loan estimate within three business days of submitting your loan application. This is required by law, and lenders must comply.
What information does the loan estimate provide to buyers under required disclosures law?
The loan estimate is required by law to provide consumers with important loan information, including the estimated loan interest rate, monthly mortgage payment (including principal, interest, taxes and insurance), total loan costs, total closing costs and estimated cash to close.
Bottom line
A loan estimate breaks down all of the costs and terms associated with your home loan. It’s important to review each line item carefully and compare multiple loan estimates from different lenders to get the best deal on your loan.
But keep in mind that a loan estimate is exactly what it sounds like: an estimate of loan costs rather than the final amount you might pay for your loan. Be sure to compare your loan estimate with your closing statement to ensure there are no surprises when you finalize your mortgage.
Article sources
- Consumer Financial Protection Bureau, “ Loan Estimate Explainer .” Accessed Aug. 24, 2023.
- Consumer Financial Protection Bureau, “ Compare your Loan Estimates .” Accessed Aug. 24, 2023.
- Consumer Financial Protection Bureau, “ TILA RESPA Integrated Disclosure .” Accessed Aug. 24, 2023.
- Federal Register, “ Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z) .” Accessed Aug. 24, 2023.
- Federal Reserve, “ Real Estate Settlement Procedures Act .” Accessed Aug. 24, 2023.
- Office of the Comptroller of the Currency, “ Truth in Lending .” Accessed Aug. 24, 2023.
