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Mortgage Loan Estimate: How it works and how to read it
Before committing to a mortgage loan, you need to understand exactly what terms, conditions, costs, and rates you are agreeing to. Lenders provide this information with the standardized Loan Estimate form, which breaks down the essential details about the mortgage so the borrower can make an informed decision.
Since every lender is legally required to use the same Loan Estimate template, borrowers can easily compare loans from several lenders. It’s a good idea to request a Loan Estimate from multiple lenders to help you find the best mortgage lender and mortgage type for your situation.
Read more: Best mortgage lenders for first-time home buyers
In this article:
When was the Loan Estimate introduced?
Before August 2015, borrowers applying for mortgages would receive two documents from the lender: a Good Faith Estimate (GFE) and a truth-in-lending disclosure statement. The Loan Estimate form, introduced in 2015, combined those two forms into a single, standardized document.
Replacing the GFE and truth-in-lending statements with the Loan Estimate allows borrowers to understand and compare loan terms between lenders more easily.
What is a Loan Estimate?
The Loan Estimate is a three-page document provided by lenders to prospective mortgage borrowers. Receiving a Loan Estimate does not guarantee approval for a mortgage loan and does not lock you into a loan.
The Loan Estimate spells out the estimated costs and other basic information about the potential mortgage loan. It includes factors such as your estimated interest rate, projected monthly mortgage payment, expected closing costs, and estimated tax and insurance costs. If you are interested in a loan with variable interest rates, the Loan Estimate must also describe how the interest rate and payments could change in the future.
Dig deeper: How do adjustable-rate mortgages work?
The information included in a Loan Estimate
Every Loan Estimate contains the same information in the same order, no matter which lender issues it. Here is an explanation of the information in the Loan Estimate, page by page:
Page 1: Loan terms, payments, and costs at closing
The first page of the Loan Estimate gives the most basic information about the loan, broken down into separate sections:
Applicant and property information
This section includes the following information:
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Date the Loan Estimate was issued
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Applicant name
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Property address
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Sales price
Loan type and purpose
This section provides the basics of your mortgage loan with the following information:
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Loan term (30 years is most common)
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Loan purpose (purchase or refinance)
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Product (fixed-rate or adjustable-rate mortgage)
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Loan type (e.g., conventional, FHA, or VA loan)
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Loan ID number
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Rate lock information
Borrowers should pay close attention to the rate lock. If you have locked in your interest rate, the lock has an expiration date — which is listed in the Estimate. Being offered a rate lock means the interest rate listed on the Loan Estimate will remain the same if you close the sale before the expiration date. No rate lock means the interest rate could change anytime before closing.
Loan terms
This section tells you the specific amounts for the following aspects of your mortgage:
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Loan amount
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Interest rate
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Monthly payment toward your principal and interest
The form tells you whether or not each of these amounts can increase after closing. Beneath these numbers, this section also states whether the lender imposes a prepayment penalty — and if so, how much. Then, it specifies whether there will be a balloon payment.
Projected payments
This section spells out the amounts you can expect for your monthly mortgage payments, including:
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Principal and interest
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Mortgage insurance
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Estimated escrow
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Estimated taxes, insurance, and assessments
The projected payments section offers an estimated total monthly payment, which may change if you are paying private mortgage insurance (PMI) that elapses once you have reached 22% equity. You can also contact your mortgage lender when you have 20% equity to request the company remove PMI.
Costs at closing
The final section of the first page includes the estimated closing costs. It also offers the estimated cash to close, which includes closing costs and other money you must provide on closing day, such as your down payment.
Read more: How much money do I need to buy a house?
Page 2: Closing cost details
The second page of the Loan Estimate form spells out the separate aspects of closing costs you should be prepared for. These include:
Loan costs
Borrowing money is not free, and this section details the specific costs of taking out a mortgage.
A. Origination charges, which may include
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Mortgage discount points, usually equalling 0.25% of the loan amount
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Application fee
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Underwriting fee
B. Services you cannot shop for, which may include:
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Appraisal fee
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Credit report fee
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Flood determination fee
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Flood monitoring fee
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Tax monitoring fee
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Tax status research fee
C. Services you can shop for, which may include
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Pest inspection fee
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Survey fee
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Title – Insurance binder
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Title – Lender’s title policy
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Title – Settlement agent fee
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Title – Title search
This section concludes with total loan costs, labeled Part D, where the total for Parts A, B, and C are added together.
Dig deeper: 7 ways to reduce your closing costs
Other costs
This is where the lender includes any expenses not covered in the traditional loan costs. Here’s what you can expect to see:
E. Taxes and other government fees, which may include:
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Recording fees and other taxes
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Transfer taxes
F. Prepaids, such as:
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Homeowners insurance premium
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Mortgage insurance premium
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Prepaid interest
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Property taxes
Prepaids cover the pro-rated costs of owning a home. For example, let’s say you buy your home on the 20th, and mortgage payments don’t start until the beginning of the following month. You need to pay the interest for those 10 days before payments kick in at closing.
G. Initial escrow payment at closing, which may include:
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Homeowners insurance
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Mortgage insurance
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Property taxes
H. Other costs, which may include things like the owner’s title policy, which is optional
The “Other Costs” section of page 2 ends with Part I, where the amounts for Parts E, F, G, and H are added together and totaled. Next comes Part J, where the total for Part D (total loan costs) and Part I (other costs) are added together to give you the total closing costs, including loan costs and other expenses.
Just below this is a line for lender credits. If your mortgage lender provides you with a credit, it means you are receiving a rebate to help you offset your closing costs. Whether or not you get a rebate is up to your lender's discretion.
Calculating cash to close
The final section on page 2 is where the form calculates the amount of cash you will need to close the sale. This calculation includes:
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Total closing costs (from Part J)
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Closing costs financed (which are paid from your loan amount)
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Down payment
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Deposit (This refers to any money you paid up-front with your earnest money deposit — if you’ve already made an earnest money deposit, that amount will be subtracted from your total cash to close on this line)
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Funds for borrower
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Seller credits
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Adjustments and other credits
The final line of this section tells you the estimated cash you will need to close.
Learn more: Seller credits — what they are and how they work
Page 3: Additional loan information
The final page of the Loan Estimate provides information for your lender, loan officer, and mortgage broker (if applicable). It also lays out the numbers to help you compare this loan with offers from other mortgage lenders. Here’s how the form breaks it down:
Lender and broker information
Under this section, you will find:
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Lender name and contact information
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Loan officer name and contact information
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Mortgage broker name and contact information
Comparisons
This section gives specific measures to help you compare this loan with other offers. The three comparisons in this section include:
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In five years: The total you will have paid in principal, interest, mortgage insurance, and loan costs; the total principal you will have paid off
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Annual percentage rate (APR), which is the rate that expresses what you’ll pay in both interest and costs annually
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Total interest percentage, which is the total amount of interest you will pay over the loan’s lifetime, expressed as a percentage of your loan amount
Other considerations
This section enumerates what the borrower can expect from the following borrowing considerations:
Confirmation of receipt
The final section of the Loan Estimate asks for the applicant and co-applicant’s signatures and the date to confirm receipt of the document.
Dig deeper: What is homeowners insurance, and how much will you pay?
Loan Estimate FAQs
What information do I need to provide to receive a Loan Estimate?
Under federal law, lenders are required to create a Loan Estimate for applicants who provide the following information: name of the applicant (and co-applicant, if applicable), annual income, Social Security number, property address, property’s estimated value, and expected loan amount. Once a lender has this information, it must provide you with a completed Loan Estimate within three business days.
Does receiving a Loan Estimate guarantee a loan?
No. The Loan Estimate does not indicate whether or not the lender will approve your loan application. This document is simply an estimate of the loan rates and terms the lender expects to offer if you decide to close on a mortgage.
How long is a Loan Estimate good for?
The top of the first page should include the expiration date for the Loan Estimate, which is typically 10 business days after the document is provided.
This article was edited by Laura Grace Tarpley.
