As part of your mortgage transaction, the Consumer Financial Protection Bureau (CFPB) requires that you receive a Loan Estimate at the beginning of your application process. You’ll receive a loan estimate within three days of submitting your mortgage application. While companies may tweak Loan Estimates for branding purposes, they are all required to include the same components. The format required by the CFPB can be found here. Let’s dive into what each section means to help you better understand your Loan Estimate.
What does a Loan Estimate Include?
At the top of your Loan Estimate you will see details like your contact information and the property you are interested in purchasing. You will also see the type of loan you are applying for and the loan term. Pay special attention to the little checkbox that signifies whether or not your rate is locked, the interest rate makes the biggest impact on the amount you pay over the life of your loan.
The terms of your loan are broken out into:
- Loan amount
- Interest rate
- Monthly principal and interest
- Prepayment penalty
- Balloon payment
You’ll see a number next to each of these items as well as an indication of whether or not they could change. Unless you secure a special type of mortgage, your loan amount will likely not change but your interest rate could change if you apply for an Adjustable Rate Mortgage (ARM). This section also indicates whether you have a prepayment penalty, which is a fee you'll be charged if you pay back your loan ahead of the predetermined schedule (this only applies to certain loans).
The last area of the Loan Terms will tell you whether you have a balloon payment, or a lump sum owed to the lender at the end of a loan term after all regular monthly payments have been made. A balloon payment allows you to pay only part of the principal of your loan over its term, reducing your monthly payments in exchange for owing the lender a lump sum at the end of the loan term.
Projected payments are the estimated total amount you will have to pay monthly. This payment includes your estimated principal and interest. In other words, the portion of money you will pay back on your loan plus the amount the lender is charging you to borrow the money, along with any added costs for mortgage insurance (if applicable). Additionally, regulations require you to have an escrow account to pay property taxes and insurance, particularly if you put less than 20% down on your home purchase. You can find your initial monthly escrow payments listed along with other projected payments.
Estimated Total Monthly Payments= Principal Interest + Mortgage Insurance + Estimated Escrow
Costs at Closing
This section breaks down the costs associated with securing a home loan and the amount you’ll need to have ready at closing. These costs are covered in more detail on page 2 of the Loan Estimate.
The left side of your Loan Estimate will break down the costs of your loan. The Origination Charges refer to the fees associated with the loan application process. Below that, you will see services that you cannot shop for, such as the appraisal and credit report and those you can shop around for, like your title insurance provider. The final section here will total up your loan costs.
Total Estimated Loan Costs= Origination Charges + Services You Can’t Shop Around for + Services you Can Shop Around for
On the right side of this page, you will find additional costs that are not part of the lending costs such as taxes in your county. This section also includes fees you’re prepaying, such as homeowners insurance and property taxes, as well as any prepaid interest. Mortgage insurance premium will also fall under this section. Lastly, the total closing costs are calculated by adding taxes and other government fees, prepaids, initial escrow payments and lender credits (if given).
Total Estimated Closing Costs= Total Loan Costs + Total Other Costs – Lender Credits
Calculation Cash to Close
In this final section of the page, you will find the estimated amount you will need on the day you close. To calculate this, your total closing costs are added to your down payment, minus your earnest money deposit, any grants you receive and credits the seller has agreed to pay. This number is an initial estimate of how much you need to bring to the closing table.
Cash to Close= Total Closing Costs + Closing Costs Financed + Down Payment + Funds for Borrower + Seller Credits - Deposit
The final page of your Loan Estimate will include the details of your loan, the lender and loan officer and their contact information. If you are working with a mortgage broker, their information will also be included here.
This section displays the information you’ll need to compare this loan to other offers to help in your decision making process. It will show you how much you will have paid on your loan in 5 years, as well as the annual percentage rate, which is an expression of your interest rate plus additional charges such as mortgage broker fees. You will then see your Total Interest Percentage, or the interest you’ll pay at the end of the original loan term when the loan is paid off.
This section includes other considerations that may impact your decision about the loan that are not related to the financials. This includes whether the property will be appraised, what happens when you sell or transfer this property, whether the loan requires homeowners insurance, and what to expect in the instance of late payments or refinancing. This section will also disclose whether the lender will service the loan or if the mortgage will be sold to another lender.
Eagle Home Mortgage is here to help simplify the homebuying process. Questions about your Loan Estimate? Our experienced Loan Officers are happy to help break it down for you! Contact Eagle Home Mortgage today and take the confusion out of your journey to homeownership.