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Loan Estimate Explainer for First-Time Buyers (with Examples)
Once you get pre-approved for a mortgage, comparing rates is important. However, what’s even more important is how you compare mortgage rates. You can do that with a loan estimate.
When it comes time to get a loan, every lender will provide you with a loan estimate. These estimates will help you decide which loan to choose. Don’t rely on banks to make the best decision for you.
Since everyone is different, we will break it down section by section and show you what is essential and how to compare rates.
What is a Loan Estimate?
A loan estimate is something that you get from a lender that lists essential information about your loan. It includes information such as the lender’s contact info and factors like the estimated interest rate, loan costs, closing costs, and other costs associated with a home purchase. The Consumer Financial Protection Bureau (CFPB) provides this standard, three-page document.
Once you have this information, you can compare rates from different lenders.
What is Required to Get a Loan Estimate?
To get a loan estimate, here is what is required:
- Social Security number
- property address
- estimated value of the property
- desired loan amount
To get a more detailed estimate from your loan officer, you can also provide information like your debt information, specific loan type, and down payment amount.
How to Read a Loan Estimate
Below is a screenshot of a loan estimate sent to everyone. The sample we’re using exists on the CFPB website.
Tip: Before you start, ensure that your loan estimate has the same fields as the example above. You should request a new one from your lender if it does not.
We’ll start right at the top.
There is general borrower information at the top of the loan estimate. Ficus Bank is a fictitious bank with a fake address.
Below that, on the left, you’ll find your name. Then the address of the property you’re looking to buy.
On the right, you’ll see the loan term, or how long it will take you to pay it back. The loan term will typically be 15 – 30 years.
Here’s what each of the items means:
- Loan Term is how long it takes to pay off the loan with regular monthly payments.
- Purpose is what you’re using the loan to do (buy a home)
- Product refers to if the loan has a fixed rate or an adjustable rate
- Loan Type is the type of loan used
- Loan ID # is a reference number used by the lender in their systems
- Rate Lock is whether the interest rate has been secured or is still subject to daily market changes
Below the opening section, you’ll see your loan terms.
- Loan Amount is the amount you’re borrowing or the amount you’re pre-approved for
- Interest Rate is how the amount of interest you pay to the lender
- Monthly Principal & Interest is your mortgage payment, not including property tax or insurance
- Prepayment Penalty is if there is a fee for paying off the loan early
- Balloon Payment is if there is an outstanding amount to be paid at the end of the loan term
Next is the Projected Payments section. This section gets broken into two sub-sections, Years 1-7 and 8-30. It is in two parts because it can vary based on whether or not a mortgage insurance payment is involved.
It is listed 8-30 because this example is a 30-year loan, as shown in the section above.
Let’s take a look at some of the terms in this section:
- Principal covers the amount of your monthly payment that goes towards paying down your loan balance
- Interest covers the amount that goes towards paying interest fees to the lender
- Mortgage Insurance is a monthly payment needed that allows buyers to purchase a home with a down payment of less than 20%
- Estimated Escrow is your monthly payment for property taxes and homeowners insurance
- Estimated Taxes, Insurance & Assessments account for property taxes, homeowner’s insurance, and homeowner’s association dues
The payment structure gets broken down into estimated monthly payments, including the mortgage insurance of $82. This fee will get paid every month until paid enough for you to have 20 percent equity or an 80 percent loan to value in your property. In this case, it would be every month for seven years.
Then you’ll see the total of years 1-7 and the 8-30.
Costs at Closing
These estimate closing costs and cash to close refer to totals listed on page two. The Estimated Closings Costs include loan costs, other costs, and lender credits.
The Estimated Cash to Close total refers to the amount of cash you will need up-front when closing on your home. This includes your lender fees, third-party charges, and down payment.
Tip: The majority of page one is estimated. Moving forward, we’ll point out what is most important.
The second page is a breakdown of all closing costs and prepaids. We’ll start at the top left.
Loan Costs – A. Origination Charges
The first section is the Loan Costs, and the subheading gathers your Origination Charges, which is the most crucial section on this entire form. Origination Charges combine your Points, Application Fee, and Underwriting Fee.
These origination charges can be called different things by different lenders.
In this case, Loan Amount (Points) refers to an origination fee charged as a percentage of your loan amount. In some cases, you may see a negative number here called a “lender credit.” This credit refers to what the lender receives to help pay closing costs.
- Application Fee is a cost associated with processing your mortgage loan and can vary based on the lender.
- Underwriting Fee covers the costs associated with verifying the financial information required to get your mortgage.
Remember, the lender controls this section. Some lenders itemize a dozen different fees, and some include everything in one line item. Another term you may see is Origination or Origination Fee, which is a charge assessed by a mortgage lender to process your loan.
The main number you want to look at is the total, in bold at the top of the section.
Loan Costs – B. Services You Cannot Shop For
Down in section B, you have Services You Cannot Shop For. Those are services that lenders source for you. These include an Appraisal Fee, a Credit Report Fee, Flood Determination Fee, Flood Monitoring Fee, Tax Monitoring Fee, and Tax status Research Fee.
Here’s what they mean:
- Appraisal Fee is the amount paid to the home appraiser
- Credit Report Fee is the cost of your credit report
- Flood Determination Fee is for determining if the home is in a flood zone
- Flood Monitoring Fee is to monitor flood maps and make sure the house doesn’t fall into a flood zone in the future
- Tax Monitoring Fee is for tax account monitoring, so the proper parties get notified if there’s ever an unpaid tax bill
- Tax Status Research Fee is to verify the amount due each year and make sure property taxes get paid on time
Since you can’t shop for them and the lender sources those services to you, the most important number is in bold at the top of section B.
Loan Costs – C. Services You Can Shop For
Services You Can Shop For are good to know, but this is an estimate. These costs can vary from lender to lender based on how they estimate these fees for you.
Most are self-explanatory, but we’ll briefly break them down for you here:
- Pest Inspection Fee is to have the home inspected for hard to find pests
- Survey Fee is to confirm that the property lines match what is on file with the county
- Title – Insurance Binder is a temporary form of real estate insurance coverage related to the transfer of ownership
- Title – Lender’s Title Policy is to protect the lender against any title dispute that comes up in the future
- Title – Settlement Agent Fee is for your escrow or closing agent who gathers and disburses all documents and money from buyer and seller in the transaction
- Title – Title Search is to research and confirm that the property legally belongs to the owner and they have rights to sell it to you
These are important when comparing quotes if the total number varies by a lot of money. If they differ slightly, don’t worry. They’re just estimates.
All of those fees will be consistent across the board when you close on the house, no matter what lender you close.
Loan Costs – D. Total Loan Costs
This section adds up the totals from A, B, and C.
Other Costs – E. Taxes and Other Government Fees
The right-hand column lists your Taxes and Other Government Fees similar to your other costs.
The listed elements and what they mean are:
- Recording Fees and other taxes get paid to the county for recording the sale as public record
- Transfer Taxes go to the county for the transfer of the deed from the seller to the buyer
These costs will be the same when you close, no matter the lender.
Other Costs – F. Prepaids
Section F includes your Prepaids. These are estimated costs that you have to pay up-front.
- Homeowner’s Insurance Premium is the number of months of homeowners insurance payments that are due up-front
- Mortgage Insurance Premium is the number of months of mortgage insurance payments that are due up-front
- Prepaid Interest is the number of days of interest that is due up-front, accounting for the day you close until the end of the month
- Property Taxes is the number of months of property tax payments that are due up-front
Again, don’t worry about the exact dollar amount in this section because these are only estimates, and they’re going to vary from lender to lender.
Other Costs – G. Initial Escrow Payment at Closing
The Initial Escrow at Closing section is money due at closing, similar to the Prepaids in the previous section.
However, these are different than Prepaids because they go towards setting up your escrow account, which allows you to pay these costs monthly as part of your mortgage payment.
Escrow accounts ensure you won’t be surprised by significant lump-sum payments and make for easy budgeting.
Some of the line items you’ll see here include:
- Homeowner’s Insurance protects the home and its contents against unexpected damage and events. Flood insurance is separate from homeowner’s insurance and will also show up in this section.
- Mortgage Insurance allows you to buy a home with less than 20 percent down
- Property Taxes are the taxes paid to the county or state for owning your home
Other Costs – H. Other
The Other section includes costs that don’t fit in sections A-H. These might consist of title fees like the “Title – Owner’s Title Policy” that you see in the screenshot.
An Owner’s Title Policy protects the buyer against any title dispute in the future.
Other Costs – H. Total Other Costs
Your Total Other Costs section adds sections E-H.
When comparing quotes, make sure that this number is close. It doesn’t have to be an exact match because they are estimated. And when you close, all the costs are going to be the same no matter what lender you go with
That’s not something you’re going to negotiate over.
Other Costs – J. Total Closing Costs
The Total Closing Costs section is your Total Other Costs, plus your Total Loan Costs, minus any lender credits you may receive.
Calculating Cash to Close
Calculating cash to close will be different for every transaction. These differ based on the deposit that you have or haven’t put into escrow.
- Estimated Cash to Close shows you how much total money will come out-of-pocket (including your down payment) when you’re buying the home.
Tip: Don’t get caught up in estimated figures. It’s good for you to know so you can have a ballpark of how much money it’s going to take to buy the house. But when comparison shopping, those estimates aren’t that important.
You’ll find additional information about the lender moving to the third page.
This page includes your mortgage expert’s company name, licensing information, and contact info.
Then there’s your Comparison section. This section shows you three items with simple explanations of each.
- In 5 Years is the total you have paid in principal, interest, mortgage insurance, and loan costs. Then, just the principal
- Annual Percentage Rate is your total costs over the loan term expressed as a rate. Note that this is not your interest rate
- Total Interest Percentage is the total amount of interest you will pay over the loan term as a percentage of your loan amount
Although this is the comparison section, they are estimated figures, so we don’t recommend using them in comparison shopping.
If you must use one of these fields, use the in five years field because that’s the most user-friendly and a decent barometer.
The Other Considerations section includes special information relevant to your loan. This will look different depending on the type of loan you choose or how much money you put down.
Based on this loan estimate example, here’s a breakdown of what each refers to.
- Appraisals help determine the value of your home and are required for any home purchase
- Assumption lets the lender specify whether or not this loan, and its terms, can be transferred to another person if you sell the property
- Homeowner’s insurance is usually required when buying a home so the home, and its contents, are protected against unexpected events
- Late Payment is like a phone bill or water bill; you’ll incur late fees if you do not pay on time. The specific fees might differ from what you see in the example
- Refinance is the process of replacing your current mortgage loan with a new one. There are certain elements that might affect whether or not you are eligible for a refinance, such as volatile market conditions, property value fluctuations or changes in your finances
- Servicing refers to collecting and tracking your loan payments. In the example, there are checkboxes with the option for the lender to service the loan or to transfer the servicing to a third party
Loan Estimate Example
You can see the full loan estimate example from the Consumer Finance site or look below.
What to Look Out For
In every loan estimate, there are some things to look out for. The most important is the aforementioned tip to make sure your loan estimate is formatted in the same way as Consumer Finance’s example. Also, these are estimates, so they may change.
And because these are estimates, be wary of the following:
Lenders might underestimate
Lenders out there may not be the most “borrower first.” Lenders may purposely underestimate these costs, especially taxes, insurance, and mortgage insurance.
Underestimating these costs can make their quote look far better than it will be when it comes to closing time.
Lenders might overestimate
Other lenders may purposefully overestimate these costs, knowing that you might ask for lower ones. That way, when it comes time to close the loan, they get to be the hero and provide some good news.
Both of those things are terrible for comparison shopping, and they’re even worse for your budgeting. You want accurate figures. At Homebuyer and plenty of other lenders, these costs get estimated as close to 100 percent accurate as possible.
Remember that numbers are never exact upfront. Don’t worry about any estimated fees that your lender doesn’t dictate.
How to Compare Mortgage Loan Estimates
Concentrate on the top left section of page two of the loan estimate when comparing rates. This section is what the lender has control over.
It doesn’t matter what the origination charges are. It doesn’t matter how they get itemized. It doesn’t matter what the lender labels them as. The only thing that matters is the total amount of origination charges you’re paying and the services you cannot shop for.
If you look above, you have $1,802 in origination charges and $672 in services you cannot shop for. That’s a total of $2,474. The $2,474 is how much the lender is charging to give a rate of 3.875%. That rate gets listed at the top of page one, in the Loan Terms section.
This $2,474 is what it’s going to cost you in loan fees. The lender doesn’t control the prices and costs for anything else.
How to Get Lower Loan Costs
It is possible to get $0 in loan costs, but your interest rate may be higher. Most lenders will give you the option to pay less money out-of-pocket in exchange for a higher interest rate. This option typically results in the buyer receiving a lender credit for the amount of their closing costs.
Conversely, you may be able to pay more money upfront for a lower interest rate and a lower monthly payment.
The choice is yours, and it comes down to your goals and preferences. Be sure to ask your lender if these options would be available to you.
We believe that you should be the most educated and prepared home buyer possible. To understand a loan estimate and compare quotes from different lenders, focus on the most critical variables: loan costs and interest rates.
Isolating these makes a loan estimate easier to read and allows you to make a confident decision when working with your lender.
We always recommend comparing rates from multiple lenders before committing to one. The first deal you find might not be the best one for you.
And remember, if you ever have any questions, ask them in the chat. We’re here to help.