What Is a Loan Estimate?

What is a Loan Estimate?

A Loan Estimate is a document that lenders are required to provide to borrowers within three business days of receiving a loan application. The Loan Estimate took effect on Oct. 3, 2015 and is a three-page form that you receive after applying for a mortgage that tells you important details about the loan you have requested. 

The purpose of the Loan Estimate is to provide borrowers with an estimate of the key terms and costs associated with their mortgage loan. The Loan Estimate is a standardized document that includes information such as the loan amount, interest rate, monthly payment amount, and any upfront costs associated with the loan, such as origination fees, appraisal fees, and title insurance. The document also includes information on whether the loan has any features such as prepayment penalties or balloon payments.

Why is it Important to Understand as a Buyer?

Understanding the Loan Estimate is important for several reasons. The main one is that it allows you to compare offers from different lenders and understand the costs and terms associated with each offer. This can help you choose the loan that is right for your financial situation.

Second, the Loan Estimate helps you avoid surprises at closing. By providing you with an estimate of the costs associated with the loan upfront, you can plan your finances accordingly and avoid any unexpected expenses.

Third, the Loan Estimate is a legally binding document. Once you receive a Loan Estimate from a lender, the lender is required to honor the terms and costs outlined in the document. This provides you with a level of protection and ensures that you are not subjected to any last-minute changes or fees.

How to Read & Review a Loan Estimate

When you receive a Loan Estimate, it is important to review it carefully. Here are some tips to help you read and review a Loan Estimate:

1. Check the loan amount and interest rate: Make sure that the loan amount and interest rate are what you expected based on your discussions with the lender.

2. Review the estimated monthly payment: Check that the estimated monthly payment is affordable and fits within your budget.

3. Look at the closing costs: Review the closing costs carefully and make sure you understand what each fee is for. If you have any questions or concerns, don't hesitate to ask the lender.

4. Pay attention to loan features: Check whether the loan has any features such as prepayment penalties or balloon payments that may affect your ability to pay off the loan.

5. Compare offers from different lenders: If you have received Loan Estimates from multiple lenders, compare them carefully to determine which loan offer is the best fit for your financial situation.

A Loan Estimate is an important document that borrowers should review carefully when buying or refinancing a home. By understanding the Loan Estimate and the costs and terms associated with the loan, you can make an informed decision and avoid any surprises at closing.

When you receive a Loan Estimate, the lender has not yet approved or denied your loan application. The Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward. If you decide to move forward, the lender will ask you for additional financial information.

See a sample Loan Estimate form with interactive tips and definitions