A loan estimate is a form you receive after applying for a mortgage. Loan estimates are three-page documents, and a lender must provide you with one of these documents within three business days after they receive your application.

The loan estimate gives you details about the loan you’re requesting. The form took effect in 2015.

The Basics

When you receive a loan estimate, the information listed may include:

• • Monthly payments
  • Estimated interest rate
  • Total closing costs

You’ll also receive information about the estimated costs of taxes and insurance and how your payments and interest rates could change any time. The form will also inform you of your loan's special features. For example, if there’s a prepayment penalty on your loan, it will let you know about that. The loan estimate will also include negative amortization if that applies. Negative amortization increases your mortgage loan balance even if you make your payments on time.

If you have the negative amortization feature on your loan, it’ll be listed in the description of your loan product.

The information in this document, as the name indicates, isn’t final. It’s an estimate, but it can help you determine which loan you should choose and commit to.

More Details

A loan estimate will inform buyers of the funds they need to close the loan, and it can include prepaid interest, escrow items, third-party fees, and closing costs. It’ll also have a detailed estimate payment so that the buyer gets a complete picture of the costs of a transaction. Since all lenders will use the same document, it becomes an easy way to see and compare costs clearly.

Loan estimates make it hard for a lender to hide any fees, along with being a valuable comparison tool.

When Do You Get a Loan Estimate?

Once you apply for a mortgage, as mentioned, lenders are required to provide you with a loan estimate within three days of applying. You’ll need to provide some information before they can prepare your loan estimate, like your:

• • Legal name
  • Social Security number
  • Proof of income
  • Desired property address
  • List price
  • Desired loan amount

Reading a Loan Estimate

In the first section and page of a loan estimate, you’ll find:

• • Your loan term is the length of your mortgage, usually 30 years, but other terms are also possible.
  • The purpose is what you’re getting financing for, like a purchase.
  • The product, meaning the type of mortgage you’re applying for, like a fixed-rate or adjustable-rate mortgage.
  • The loan type, for example, is it a conventional loan? Maybe it’s an FHA or VA loan.
  • A rate lock is when your lender locks the interest rate on the mortgage and the lock's expiration date.

In the second section, information includes:

• The loan amount that you’re borrowing and whether it can increase
• Your interest rate, which is a percentage, and if it can increase
• The monthly principal and interest, which is the monthly mortgage payment excluding property taxes and homeowners’ insurance
• Prepayment penalty, which you could have to pay if you repaid your loan before the end of the term or you added additional payment
• Whether there’s a balloon payment, which is a large lump sum you have to pay at the end of your loan term

In the third and fourth sections of the loan estimate document, information includes:

• Payment calculation, breaking down your monthly mortgage payment including your principal and interest, private mortgage insurance premiums if applicable, and escrow amounts
• The estimated total monthly payment
• Estimated taxes, insurance, and assessments, and whether they’ll be in escrow
• Estimated closing costs of the mortgage
• Estimated cash to close, which are the closing costs and anything else you pay upfront

The second page of a loan estimate includes three main elements: the loan costs, other costs, and calculating cash to close.

On the second page, the most important things to look at are the origination charges and the fees you’ll be charged for things you can’t shop for. They vary by lender, so you need to use them to compare. The other charges don’t vary much between lenders. You can shop for services required to close a mortgage and how much they cost, like a title search and survey. The services you can’t shop for are things like the appraisal and a credit check, and you can’t choose your own provider for these.

Finally, page three of a loan estimate will include the name of the loan officer and lender and three valuable components for making comparisons. The first is how much of your loan principal you’ll pay off in the first five years of your loan, and it’ll also include your annual percentage rate (APR) and total interest percentage.

When you get your loan estimate, it’s an excellent time to go thoroughly over it and make sure that you ask any questions you have at the time.