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.
The 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.
How do I read the Loan Estimate? What does it mean?
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.The 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. Click To Tweet
(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?
Daw your attention to “Services You Cannot Shop For” and “Services 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.”
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.