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Author: Hakim

loan estimate Perspectives

Understanding Your Loan Estimate

You’ve found your dream home and you’ve actually found a lender (or broker like STEM Lending) who’s going to do your mortgage; congratulations! Soon after filling out that broker or lender’s application, you’ll receive a document called a Loan Estimate. However, if you’re like most homebuyers, you still need someone to help you understand your Loan Estimate.

Wait – What Came Before The Loan Estimate? 

In the past, if you purchased a home, there were two documents you received called the Good Faith Estimate or the “GFE” and the initial Truth-in-Lending (TILA) disclosure. The GFE listed basic information about the terms of your mortgage loan offer. The Truth-In-Lending(TILA) Disclosure included your loan’s annual percentage rate (APR), the total amount of credit financed, total number of payments, payment schedule, and your total finance charges. Finance charges are really important to see visually, as they comprise the total interest to be paid over the life of the loan + your mortgage insurance premiums + any prepaid finance charges.

Essentially, the TILA disclosure was designed to help you understand the full economic effect of your loan, whereas the GFE helped you understand what you would be spending before closing & receiving your loan.

The Good Faith Estimate (GFE) and the initial Truth-in-Lending disclosure (initial TILA) were combined into a new form, the Loan Estimate (LE). If you applied for a mortgage on or after October 3, 2015, as we mentioned, you will now receive the Loan Estimate, instead of a GFE. Similar to those forms, the new Loan Estimate (LE) form provides disclosures to consumers that will help them understand the key terms, features, costs, and potential risks of their potential mortgage loan.

Ok – How do I read the Loan Estimate? What does it mean?

So now we know that the Loan Estimates replaces the GFE and TILA docs. The Loan Estimate is a three-page form that outlines every feature & detail of your mortgage financing. After submitting your loan application, by law, every lender is required to provide you with your Loan Estimate within three business days. In an effort to simplify the process, your Loan Estimate is only three pages; two pages shorter than the previous GFE and TILA paired documentation. Since October 2015, every lender is required to use the same three-page Loan Estimate form.

Image result for loan estimate doc

(source: Consumer Financial Protection Bureau)

There are different sections of the Loan Estimate so let’s start at the top:

  • The first section explains the loan terms (loan amount, interest rate, & principal and interest). To the right of these figures you will see YES or NO, highlighting whether each particular item can increase after closing.
  • The second section goes over your “projected payments.” The projected payments tab deconstructs the three core areas of a loan payment: (1) Principal & Interest, (2) Mortgage insurance and (3) Estimated Escrow. This section visually describes how your payments change once you are no longer required to pay private mortgage insurance (see ‘Years 1-7 vs. Years 8-30). What you should know here is that you’re building equity with each payment, and once you get to that 20% threshold of equity, your mortgage insurance will drop.
  • This third section is a review of your estimated taxes, insurance and assessments. It is important to remember that while this should be as close to accurate as humanly possible, this is only an estimate at the end of the day. Check with your lender to see if they require you to escrow & pre-fund items such as 3-months (1 quarter) of property taxes, 1-year of homeowners insurance and association fees in advance?

In the following sections, I really want to draw your attention to this:

“Charges you cannot shop for” and “Charges you can shop for (where you can potentially save thousands of dollars). If there’s one thing you takeaway from this blog post: Spend at least 5-10 minutes understanding the charges you can shop for and the potential variance in price that shopping may reveal.

Here’s an example of some services that will typically show up under the “Services You Cannot Shop For” as well as the “Services You Can Shop For.” 

Image result for services you can shop for mortgage

(source: Consumer Financial Protection Bureau)

Just yesterday, I was presenting STEM Lending to a group of college alumni, and in the crowd was a gentleman who was in the process of buying a home in Westchester County, New York. He described his frustration with such clarity, I’ll do my best to repeat it here. He said “It’s so frustrating because I’m sure this section (comparing fees he could’ve shopped for) was something I looked over, but it was probably the 80th or 90th page of documents I’d been reviewing with my wife, after a long day of work, and we were tired so we just went to sleep and never revisited it.” Don’t let fatigue keep you from saving your hard-earned cash! Come to STEM Lending and we’ll help you find those savings!

The last section of the Loan Estimate form shows the “Estimated Cash to Close” which is incredibly important. This dollar figure represents a combination of the closing costs and your down payment, so it includes the escrowed items like homeowners’ insurance and property taxes too. Use this “estimated cash to close” number & compare it versus other lenders you’re considering, or us.

Your Takeaways For The Loan Estimate

Ultimately, at STEM Lending we are hyper focused on ensuring you’re always getting the best mortgage for your needs. We’re here to help you sort through dozens of mortgage loan options, and we have the skills and experience to help you find thousands of dollars in savings every time. Give us a call at 646-798-1800, or email us at lending@stemlending.com if you have any questions!