You have been shopping for a residential mortgage for either a new home or to refinance your existing mortgage, you think you have found a good loan that fits your needs, and one of the first things your loan officer tells you is that you will be receiving a Loan Estimate document for your review and signature. What is a Loan Estimate and what are you committing to if you sign it?
What is a Loan Estimate?
When you apply for a residential mortgage loan, federal regulations require that your loan originator send you a Loan Estimate with three business days of your application. The Loan Estimate is a standardized document that outlines many of the important details of the loan for which you have applied. Such details include general items such as your loan amount, your annual interest rate, the number of years, the monthly principal and interest payment amount, as well as estimated monthly amounts due for escrowed property taxes, homeowners insurance and mortgage insurance (if applicable).
Also contained in the Loan Estimate document are estimated closing costs for the loan as well as an estimated amount of cash required at the time of closing. The Loan Estimate does not mean that your loan has been approved or denied.
Which Costs Comprise the Estimated Loan Costs?
When a borrower originates a mortgage loan, there are several professionals that are involved in documenting, processing, verifying, underwriting and recording the loan. Some of the costs that you might see on the Loan Estimate include:
Origination charges – These fees can be charged by the lender or your loan originator and represents their compensation for their work in gathering and verifying your qualification information. Origination charges can also include upfront loan costs, called points, for a lower interest rate.
Appraisal, certification and credit reporting costs – These are fees for services that you cannot shop for yourself and may be required to verify and document the property’s characteristics, estimated value and location requirements, as well as your creditworthiness.
Title and recording costs - Your lender will require that you obtain a title insurance policy which protects them against ownership claims against the property. The title company will also provide other documents necessary for underwriting and recording the loan, including government recording fees. This section includes those estimated costs as well as the title company’s compensation for performing those services on your behalf.
What Other Costs are Included?
There are other costs that are related to an escrow (or reserve) account that most lenders will require you to set up. These initial escrow amounts are estimates to cover the requirement to pay for homeowner’s insurance and property taxes. In this section you will find estimates required to establish those reserves so that your lender will have enough funds to pay those bills when they come due. (For example, In Utah, property taxes are typically paid in November, and the lender needs to make sure there is enough in escrow to pay those taxes.) You will also be required to prepay mortgage interest on your loan from the target day of closing the loan through the end of that month.
Keep in mind that these costs are NOT costs associated with establishing a mortgage loan, but rather the initial deposits to a “savings” account your lender will maintain on your behalf in order to pay certain expenses related to home ownership. As with most things on this Loan Estimate, these amounts are preliminary and your lender will determine their specific requirements for the number of days or months they require to be paid at closing.
If This is an Estimate, How Much Will It Change?
The federal government requires the Loan Estimate to include a reasonable estimate of costs based upon what is known about the loan at that time. If the estimate turns out to be too low, regulations require a new Loan Estimate to be issued.
However, since the Loan Estimate is issued at the beginning of the loan process, there are many line items that can and will be changed as more accurate information is collected and updated. For example, your lender may waive the appraisal requirement, which would eliminate that cost. Also, once actual property taxes, insurance costs and other fees are more firmly established, the escrow and prepaid amounts may change, for better or for worse.
What Happens When I Sign the Loan Estimate?
While it is important to read and understand the contents of the Loan Estimate, signing merely confirms that you have received the Loan Estimate. You are not binding yourself to this loan and you certainly do NOT have to accept or proceed with the loan simply because you have signed it.
As always, you should reach out to your loan originator if you have any questions.
Bottom Line
The Loan Estimate is just that – an outline and estimate of the loan characteristics and a all the costs that will likely be associated with taking out the loan. It is in a standardized form so that you can easily compare different loans to make sure you find the loan that is right for you. Signing a Loan Estimate merely indicates that you have received it, but does not imply that you have formally agreed to being bound by the terms.