Buying a home is exciting — but it can also be intimidating. You need to get a lot of details just right, especially when it comes to your financing. In fact, getting the right loan might be even more important than getting the right neighborhood or floor plan.
But trying to decipher pages of mortgage loan paperwork can add even more anxiety to an already unfamiliar process. That’s why U.S. lenders are required to provide home buyers with a Loan Estimate. Here’s everything you need to know about Loan Estimates and how to use them to compare lenders.
What is a Loan Estimate?
A Loan Estimate is a standardized document that details the features, costs, and risks associated with your mortgage. You get a Loan Estimate whether you’re getting a fixed-rate mortgage or an adjustable-rate mortgage — or if you’re considering both options.
You’ll receive a Loan Estimate from every lender you consider. Since each one contains the same information, comparing apples to apples is much easier when it comes to your different loan options. Lenders must issue this document to you within three days of receiving your mortgage application, and they are only allowed to charge you the cost of pulling your credit report and checking your credit score, usually $15–$30.
It’s important to understand that the Loan Estimate is meant to help you understand and compare home loan options. While it’s a lot more accurate than what you can figure out on your own with a mortgage calculator, it doesn’t mean your loan has been approved or denied. If you decide to move forward on any of the loans you’re considering, your lender will ask for additional financial information.
What is included in a Loan Estimate?
This document includes your estimated interest rate and monthly payment, plus information about how your interest rate and monthly mortgage payments may vary in the future.
The Loan Estimate also gives you information about closing costs, property taxes, third-party fees, homeowners’ insurance costs, and any features, like prepayment penalties, that are unique to that mortgage loan.
For a closer look at what’s in a Loan Estimate, go to the Consumer Financial Protection Bureau (CFPB) Loan Estimate Explainer, and check out their interactive sample document.
What to Watch for When Comparing Loan Estimates From Different Lenders
It’s a good idea to fill out a few mortgage applications from reputable lenders, so you can compare the loan terms and decide which one works best for you. While the Loan Estimate makes it easier to compare mortgages, you still need to be on the lookout for several things when you review your Loan Estimates. Here are some potential red flags:
- Third-party fees appearing on one lender’s Loan Estimate and not another’s can be a sign that one of the lenders is missing something. While the fee amount can vary, the types of third-party fees associated with a mortgage are fairly constant.
- Differences in loan amounts for a refinance could be a sign that one lender has created a “no closing cost” loan. That just means they’ve included closing costs in the bulk of the loan, thereby increasing the loan amount. For a true comparison, be sure to get Loan Estimates with identical loan amounts.
- Promises of credits after close that do not appear on the Loan Estimate simply defeat the purpose of having one in the first place. It’s best practice not to agree to any transactions outside the standard disclosure.
- Increasing costs during a change in circumstance may signal a “bait-and-switch” strategy. Some lenders may advertise attractive interest rates and fees for one product, then switch into something less competitive (bait-and-switch) later on. Be sure you understand all terms of the new product before you lock in the terms of your loan.
When getting a mortgage, brace yourself for all the associated paperwork. It can be a lot, but with the right ally, it’s manageable. A Loan Estimate can make comparing your loan options easier (and give you good insight into the cost of your monthly payment), especially now that you know what to be on the lookout for.