What Is a Loan Estimate?

A loan estimate is one of the most important documents you will be given during the home-buying process. This simple form tells you everything about a mortgage you are considering and allows you to shop around to make sure you land the best deal possible. Lenders are legally required to give you a loan estimate when you apply for a loan.

What is a loan estimate?

A loan estimate is a three-page document that spells out the details of a home loan. It includes the total amount you will pay, including interest, fees, and more. Getting a loan estimate can help you compare mortgage lenders and find the best rates.

Lenders are required by law to provide you with a loan estimate before you commit to a mortgage.

What does a loan estimate include?

A loan estimate includes the home loan's interest rate, term, and type. It also lists any closing costs and the total cost of the loan.

Comparing one estimate to another can be tricky. Here are a few things to pay attention to when comparing estimates.

Date issued

Mortgage rates change often. You can only accurately compare one estimate to another if you know when they were written. Even if your estimates are only one week apart, they may have different rates because of market changes -- not because of lender differences.

Loan term

Loan term refers to how long you have to repay the loan. Common terms are 30 years or 15 years. Longer loans often come with higher interest rates. When you're comparing interest rates between lenders, look at the loan term. If one interest rate is lower than the other, check to make sure they were written for the same loan term. Check the rates on a 15-year mortgage here.

Product

Underneath the loan term, you'll find the loan purpose and the loan product. An example of a loan product is a fixed-rate or adjustable-rate mortgage. Make sure the lender's product matches your expectations. If you're looking at loan estimates from two or more lenders, make sure they all refer to the same loan product.

Loan type

There are three primary loan types: conventional, VA, and FHA. The type of loan you are being quoted will be marked. They should be the same on any estimates you compare.

Rate lock

Grouped with the other information about your loan, you'll find a spot where a lender can mark "Yes" or "No" as to whether the offer is locked in place. If so, it will provide a date and time the offer will expire. You will often be charged for a rate lock -- make sure you know how long it will be frozen for.

Projected payment

In the middle of the first page is the "projected payment," including principal, interest, taxes, and insurance. Focus on principal and interest because they best represent a lender's offer. However, take all costs, including taxes and insurance, into account as you determine whether you can afford the full monthly payment.

Prepayment penalty

This section tells you if the lender charges a prepayment penalty for paying a loan off early. If so, it must tell you how much that penalty will be. If you move often, or you don't expect to be in your new home for long, pay attention to this detail. Carefully consider whether you are willing to pay a prepayment penalty. Not all lenders will require one.

Closing cost details

One entire page is dedicated to closing costs. Everything -- from the appraisal fee to title search -- is listed here. It will also tell you which costs are necessary and which are optional (if any). Look for lenders with lower required closing costs. Other than the interest rate, this may be where you see the greatest difference between lenders.

Comparisons

On the final page of the loan estimate form, you will find "Comparisons," a section that allows you to easily compare one loan with another. This section shows you how much you will have paid after five years in several categories, such as principal, interest, and taxes. It gives you the annual percentage rate (APR), which is the real cost of the loan, including fees. Finally, it indicates what percentage of your total loan amount you will pay in interest by the time the loan is paid in full.

Can loan estimate details change?

Lenders are not allowed to change some of the figures in the loan estimate, nor are they allowed to deliberately underestimate your costs. However, parts of the loan estimate can change, based on rising or falling interest rates, certain closing costs, the appraisal value of your property, and the amount of taxes and insurance the lender estimates you will owe.

It is important to note that a loan estimate is not a commitment by a lender to offer you a mortgage. It simply outlines the terms it expects to offer you if you move forward with the loan. Once you decide to work with a lender, a full credit check will be run. Terms can change based upon new information that arises. Be sure to watch out for any revisions to your loan estimate. Check to make sure it is still accurate before you commit to a mortgage.

How to get a loan estimate

When you submit a loan application, lenders have three days to give you a mortgage loan estimate. You will need to give the lender some details, including:

• Your name
• Your Social Security number for a credit check
• Your income
• The address of the property you're borrowing to buy
• An estimate of the property's value
• The amount you wish to borrow

You're permitted to provide more information, although mortgage lenders can't require it. The more details you provide about your financial situation -- and the type of mortgage you're interested in -- the more accurate your estimate will be.

When should I get a loan estimate?

Start requesting loan estimates from lenders after you've found a home you'd like to purchase.

You should have the following information ready when requesting a loan estimate:

• Your name
• Your income
• Your Social Security number
• The address of the home you hope to purchase
• The sales price of that home
• The amount you need to borrow

Can I get multiple loan estimates?

Yes -- in fact, it's very important to get multiple loan estimates. The value of this document is the way it allows you to compare one mortgage to another and determine which one is right for you. The more effort you put into shopping for a mortgage, the better your odds of finding one that suits your needs and saves you money.

Your loan estimate will be based, in part, on your credit history. In order to offer you an accurate estimate, lenders pull a copy of your credit report. This inquiry drops your credit score by a small amount but is a necessary step when purchasing a home. Fortunately, home buyers are expected to rate shop, and credit reports pulled by multiple mortgage lenders within a 45-day window are recorded as a single inquiry. When you are requesting loan estimates, make sure you request all estimates within a short period of time to minimize the impact to your credit score.

How to read a loan estimate

Loan estimates are typically divided into different sections. Here's how to read each one.

Loan estimate

The document begins with the date it was issued, the applicants, the property address, the sale price, and the type of loan as well as the purpose. Watch out for:

• Applicants: Make sure the names and property address are correct.
• Loan term: Review the loan term. You have a choice of repayment timelines. A 30-year loan is common.
• Loan type: You'll have a choice of a government-backed loan or a conventional loan without a government guarantee. You'll also choose a fixed or variable-rate loan.

Loan terms

This details the loan amount, interest rate, monthly payment, and whether the loan has a prepayment penalty or balloon payment. Focus on:

• Loan amount: Whether the total amount borrowed is correct.
• Interest rate: A lower rate is better because it means you pay less to borrow. If you've chosen an adjustable-rate mortgage (ARM), payments could increase after a set amount of time.
• Prepayment penalty: If you plan to pay off your loan early, these should be avoided.
• Balloon payment: This would mean you'd owe a large lump sum at the end of your mortgage term. Mortgages with balloon loans are high risk.

Projected payments

This section breaks down your total monthly payment, including:

• Principal and interest: That's the amount you'll pay for the mortgage.
• Mortgage insurance: This protects the lender from loss in case of foreclosure. If you put down less than 20%, it's usually required.
• Estimated escrow: Many lenders require you to make monthly payments toward property taxes and homeowners insurance. This money goes into an escrow account and your lender pays these bills.

The form breaks out projected payments during the first few years and the remainder of your loan. Watch out for changes. Ideally, costs will remain consistent over time. If you pay private mortgage insurance, your payment may go down when you've paid enough of your loan to drop it.

Costs at closing

You must pay fees to close on a loan. This section will detail the total amount of fees; as well as the full amount of money you must pay to close on your loan. Pay attention to:

• Estimated closing costs: These are broken down in detail on page two.
• Estimated cash to close: Make sure you'll have enough cash to close.

Closing cost details

The next page of your form goes into greater detail about closing costs. You should see a breakdown of all the charges you'll have to pay to close. The form will also explain how the total amount of cash to bring to closing was calculated. The loan estimate breaks closing costs down into:

• Origination charges: Your lender may charge various loan origination fees to issue your loan.
• Services you can't shop for: These are standard charges you must pay your lender, such as an appraisal fee, for example.
• Services you can shop for: This lists things you must pay but can shop around for the best rate. It includes things such as title insurance or a home inspection.
• Other costs: This will include transfer taxes, prepaid escrow, and local fees.
• Initial escrow payments at closing: This is the amount you're required to pay into the escrow account up front. Remember, this is an account your lender maintains and uses to pay insurance and taxes.
• Estimated cash to close: A calculation of total closing costs, as well as the amount of cash to close. Total cash required may include a down payment.

Watch to make sure that the fees are reasonable for each of the services you can't shop for. And see if the down payment amount is correct and the amount is within your budget.

Additional information about this loan

If you want to quickly compare borrowing costs, this section provides the details you need to shop for an affordable lender. This includes:

• In five years: What will happen to your loan over time.
• Annual percentage rate (APR): This takes interest and fees into account to calculate your total annual borrowing costs.
• Total interest percentage: This is the total interest you'll pay over time. It's expressed as a percentage of the amount you borrow. Lower is better. It means borrowing costs are cheaper.

What to look out for on your loan estimate

When you review your loan estimate, the most important things to look for include:

• The information is correct and accurate. This includes details about the type of loan, your down payment, and the amount you want to borrow.
• The interest rate, APR, and total interest. This provides insight into the cost of borrowing.
• Whether your payments will change. If so, will the new monthly payments be affordable?
• The loan fees, including the origination fee and appraisal. This helps you see what your lender charges to get a loan.
• Whether there is a prepayment penalty or balloon payment. Either can make your loan costlier and riskier.
• How much cash you will need to close. This helps you understand what you'll have to pay out of pocket, including your down payment.