Your Loan Estimate, Line by Line: How to Read It and Compare Offers
The short answer
- Your lender must send your Loan Estimate within three business days of receiving your application
- Compare estimates on the same day, for the same loan, using Section A, Section D, and the page 3 Comparisons
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Why this matters
The Loan Estimate is a standard three-page form every lender uses for most home loans, so you can see a loan's terms and costs and compare one lender against another on equal footing. It is not an approval and it is not a final bill, but it is the best early picture you will get. Here is how to read it.
When You Get It
A lender must deliver or mail your Loan Estimate within three business days after it receives your application. Under federal rules, you have applied once the lender has six pieces of information: your name, your income, your Social Security number (so it can pull your credit), the property address, an estimate of the property's value, and the loan amount you want. Before you get the estimate and tell the lender you want to go ahead, the lender generally cannot charge you fees other than a reasonable credit report fee. You can request Loan Estimates from more than one lender, and comparing them is one of the most useful things you can do.
Page 1: The Loan at a Glance
The first page shows the loan amount, the loan term, the product (for example, fixed or adjustable), and the loan type, such as conventional, FHA, or VA. The Loan Terms table tells you whether the loan amount, interest rate, or monthly principal and interest can go up after closing, and whether the loan has a prepayment penalty or a balloon payment. Projected Payments shows how your monthly payment may change over time, including mortgage insurance and estimated taxes and insurance. At the top, look for whether your rate is locked and, if so, until when. Costs at Closing gives the estimated closing costs and the estimated cash to close.
Page 2: Sections A Through J
Page 2 breaks the closing costs into lettered sections. Loan Costs: A is Origination Charges, the lender's own fees, including any points you pay to lower the rate. B is Services You Cannot Shop For, such as the appraisal and credit report, chosen by the lender. C is Services You Can Shop For, such as title and settlement services. D totals A, B, and C. Other Costs: E is Taxes and Other Government Fees, such as recording fees and transfer taxes. F is Prepaids, things you pay ahead, such as your first year of homeowners insurance and prepaid interest. G is the Initial Escrow Payment at Closing, the cushion your lender collects to start your impound account for taxes and insurance. H is Other, which can include items like HOA fees or an owner's title policy. I totals E through H. J is Total Closing Costs, D plus I, minus any lender credits. Below that, Calculating Cash to Close shows how your down payment, deposit, and any seller credits bring you to the estimated cash you will need.
Page 3: The Comparisons Page
Page 3 is built for comparing lenders. In 5 Years shows the total you would pay in principal, interest, mortgage insurance, and loan costs over the first five years, and how much principal you would have paid off. Annual Percentage Rate (APR) shows your cost of borrowing over the life of the loan as a yearly rate, including certain fees as well as interest. Total Interest Percentage (TIP) shows the total interest you would pay over the full loan term as a percentage of the loan amount. Lower numbers on these lines generally mean a less costly loan, but compare loans with the same term and product, since a shorter loan or an adjustable rate changes the picture. Other Considerations covers the appraisal, whether the loan can be assumed by a future buyer, homeowners insurance, late payment terms, and whether the lender plans to service the loan or transfer it.
How to Compare Two Estimates
Ask each lender for an estimate on the same day, for the same loan amount, loan type, and term, so the comparison is fair. Then line them up: compare the rate and whether it is locked, the points in Section A, the total in Section D, and the In 5 Years and APR figures on page 3. A lower rate with high points, or low fees with a higher rate, can come out differently depending on how long you keep the loan. Do not compare Sections F and G too closely; prepaids and escrow deposits depend on your closing date and taxes, not on the lender's pricing. If something is unclear, ask the loan officer to walk you through it; that is part of their job.
Which Costs Can Change Later
The estimate is a good-faith figure, and federal rules limit how much some costs can rise by closing. The lender's own charges, services you could not shop for, and transfer taxes generally cannot go up at all. Recording fees and services you shop for from the lender's list generally cannot rise more than 10% in total. Other items, such as prepaid interest, insurance, and services from a provider you chose yourself, can change. A lender can issue a revised Loan Estimate when something real changes, such as a lower appraisal, a change in the loan amount, or a rate lock you set later. Keep every estimate you receive so you can compare it to your Closing Disclosure.
Everything to remember
- Your lender must send your Loan Estimate within three business days of receiving your application
- Compare estimates on the same day, for the same loan, using Section A, Section D, and the page 3 Comparisons
- Sections A through D are loan costs, E through I are other costs, and J is your total closing costs
- Some costs cannot rise at all by closing, and others can rise only 10% in total
- A Loan Estimate is not an approval; ask your loan officer about any line you do not understand
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