When you buy a house and get a mortgage loan, you get an estimate on fees and charges . The loan estimate will be reflected on paper which you would receive within 3 business days.
As mandated by law, the lender is required to give you a three-page form containing the necessary information about the loan you applied for. If you have applied for a loan before October 3, 2015, or if you’re applying for a reverse mortgage, you won’t receive a Loan Estimate. Instead, a Good Faith Estimate will be provided.
What information is contained in the Loan Estimate Form?
The form shows the Loan Amount, which tells you how much you are borrowing. The form will also reflect the loan term and whether it is fixed-rate or an adjustable-rate loan.
The estimated interest rate, the monthly payment and closing fees are also broken down into clear parts.
The form is very comprehensive that even the monthly payment is further segmented into the (1) Principal & Interest, (2) the mortgage insurance and (3) escrow. It even goes further into explaining the prepayment penalty if it applies to your loan or if the loan has a negative amortization.
The form is standardized for all lenders. This is done so that comparing loan offers is easier. The Loan Estimate is accomplished before the lender denies or approves your application. This way, you can make an informed decision to continue to the next steps or not.
Receiving a Loan Estimate Form does not mean you have to take that loan. Shop for lenders and ask for loan estimates. The Closing Disclosure appears similar to the Loan Estimate. It is also easy to read and you can use the latter to see if the lender was able to deliver their estimates.
How accurate is the Loan Estimate Form?
It is relatively accurate. The Consumer Financial Protection Bureau has serious fines for lenders who purposely underestimate the fees for whatever purpose. With that being said, it has to be accurate. When you are finally at the settlement table, fees and charges cannot exceed the estimate when you applied. Loan origination fees and other services you can’t shop for must be accurate, or it cannot exceed the amount in the Loan Estimate.
There are charges and fees, however, that may exceed the Loan Estimate. These are services that you selected, that when added together, may exceed the Loan Estimate but should not exceed the 10% cap. These services must be in a written list of 3rd party service providers given to you by the lender. Those that don’t appear in the service providers list which you shopped for do not require accuracy.
The Loan Estimate does not only give you information, it also serves to protect the borrowers. The wisest thing to do is to approach at least three lenders and ask for a Loan Estimate. Compare these data and shop so you can find the best loan deals.