A loan estimate is a lender-issued form that breaks down the costs a potential borrower can expect to pay for a certain mortgage offer. Borrowers use it to compare different mortgage loans and select the one with the best terms for their needs.
Understand how a loan estimate works and the set of items that appear on one before you go shopping for a mortgage.
What Is a Loan Estimate?
A loan estimate is a form a lender issues to a loan applicant after they apply for a mortgage, to communicate how much the applicant can expect to pay for the loan if both parties agree to move forward with it.
The contents and format of the loan estimate are the same regardless of the lender. It contains estimates of the loan amount, interest rate, monthly payment, closing costs, and other loan charges, and is three pages long.
Loan estimates are not required for home equity lines of credit (HELOCs), reverse mortgages, and manufactured housing loans not secured by real estate, among other exceptions.
How a Loan Estimate Works
Borrowers should approach several lenders and do multiple loan payment calculations when shopping for a mortgage loan. Obtaining loan estimates can help you assess the costs of each loan and compare them with other loans so that you can choose the best one for your finances. With an estimated in hand from one lender, you may even be able to negotiate a better estimate with another lender, such as paying points to lower your interest rate.
Within three days of receiving your mortgage application, before they have approved or denied your requested loan, lenders will send loan applicants a loan estimate. Below are the sections and individual items that appear on the form, along with how to interpret them. When comparing several loan estimates, ensure they have similar general features, the same type of interest rate (fixed vs. adjustable), and, preferably, similar issuance dates. Interest rates can change daily, so getting your estimates a few days apart may impact your quoted costs.
- Loan terms: This important section on the first page of the form includes your loan amount, interest rate (how much you’ll pay to borrow the money), and estimated monthly principal and interest payment. It also informs you about whether you'll pay a prepayment penalty (a fee for paying off your loan early) or balloon payment (a large payment at the end of the loan term). Ensure that the loan amount plus your down payment equals the sale price.
- Projected payments: Also on the first page, you’ll see details regarding your expected monthly mortgage payment over the life of your loan. This amount should include principal and interest, taxes, escrow, insurance. Ask yourself whether you can comfortably fit this amount into your monthly budget.
- Costs at closing: This section on the first page contains the total closing costs you can expect, including prepaid insurance, appraisal fees, and title insurance, and the total you’ll need to bring to the closing table, including your down payment. Ensure you have enough cash accessible to cover closing costs.
- Loan costs: On the second page are the costs associated with underwriting, originating, and processing your loan. These all go toward your closing costs and cash-to-close numbers. Underneath this section, you'll see a list of "Services You Cannot Shop For" and "Services You Can Shop For." Pay close attention to the “Services You Can Shop For,” which might include pest inspection, the survey fee, and costs associated with the house title. Call up providers of these services independently and try to negotiate a better deal than what you see on paper and potentially offset your moving or furniture costs.
- Other costs: Also on the second page are things not controlled by your lender or title company—items such as taxes, transfer fees, prepaid interest, and homeowners insurance. These also contribute to your closing costs and cash-to-close totals.
- Calculating cash to close: The second page of the form also details the total of your loan costs, down payment, any seller credits, your deposit, and other adjustments.
- Comparisons: Use this section on the third page to compare different loan offers in terms of principal versus interest and other fee totals you will have paid off in five years. It also contains the annual percentage rate and the total interest percentage. The latter is the amount of interest you’ll pay over the entire loan term, expressed as a percentage of your mortgage loan amount.
- Other considerations: Finally, the third page contains statements about the terms of your loan, including the late payment, refinancing, and whether the lender plans to service your loan or transfer servicing. These terms vary by lender, so read them carefully.
To negotiate a better estimate with a potential lender, multiple loan estimates are your best bargaining tool. You can always return to a lender and ask for a better loan estimate.
How To Get a Loan Estimate
Your lender will provide you with a loan estimate once they've received six pieces of information about you:
- Social Security number (the lender will use this to make an inquiry about your credit)
- Property address
- Estimated property value
- Desired loan amount
That said, providing additional information, such as your desired loan type (conventional or FHA loan, for example) and down payment amount, can result in a more accurate loan estimate.
Remember: A loan estimate isn't a closing disclosure. If you don't like the terms on offer, take no action. But if you like the terms cited in a particular loan estimate and want to move forward, you must provide your loan officer with what is known as your "intent to proceed," or your agreement to move forward with the loan application, and quickly. Lenders are only required to honor the terms of a loan estimate for 10 business days. After you express your intent to proceed, your lender will request more information about your finances (such as your income) and will provide a closing disclosure with your finalized loan costs.
Loan Estimate vs. Closing Disclosure
A loan estimate shouldn’t be confused with a closing disclosure, which is a longer document detailing the actual costs you’ll pay when closing on a mortgage. However, it's useful to compare the disclosure to the original loan estimate you received, to ensure accuracy.
Loan estimates are only three pages, while closing disclosures are five. A loan estimate is meant to give you an estimate of the costs you can expect with the possible loan; in other words, it’s subject to change. A closing disclosure contains your selected loan’s final details, including the amount and interest rate, monthly payment, closing costs, and amounts of down payment and prepaid insurance, interest, and taxes. Any credits you’re receiving from the seller will also be noted.
Your lender only needs a few data points to process a loan estimate. But you’ll need a finalized sales contract and a fully processed loan application before you’ll get a closing disclosure.
You’ll get your loan estimate within three business days of applying for a mortgage. You’ll get your closing disclosure three days before your closing date (at the latest).
|Loan Estimate||Closing Disclosure|
|Requires basic information||Requires a sales contract and processed loan application|
|Provides an estimate of loan costs||Provides actual loan costs|
|Spans three pages||Spans five pages|
|Sent three days after receipt of a loan application||Send three days before closing|
- A loan estimate is a form that details the costs and other terms of a mortgage.
- Lenders issue these forms to potential borrowers within three days after receiving a mortgage applicant, and before they have made a decision to approve or deny the loan.
- The form spans three pages and details the loan amount, interest rate, monthly payment, and other costs, some of which may be negotiated independently to save money.
- Although borrowers can use the form to compare loans offered by different lenders, it doesn't reflect actual costs. Those are included in the closing disclosure.