How to read a mortgage Loan Estimate?
Loan Estimates let you easily shop for mortgage rates
A Loan Estimate — formerly called a “Good Faith Estimate” — is the most important document you’ll look at when you shop for a mortgage.
The Loan Estimate lists everything you need to know about a mortgage. It includes things like the interest rate, upfront loan costs, and monthly payments, as well as a breakdown of your closing costs.
LEs always come in the same format, making it easy to compare rates and fees from different lenders side-by-side.
This lets you shop for a loan with complete visibility about how much it will cost from any given mortgage company.
What is a Loan Estimate or “Good Faith Estimate”?
A Loan Estimate (LE) is a standard document you’ll receive when you apply for a mortgage with any lender.
This document used to be called a “Good Faith Estimate,” but was updated in 2015. The new version, called a “Loan Estimate,” is easier to read and a more useful tool for loan shoppers.
LEs always follow the same format — making it simple to compare loan offers side-by-side and find out which company offers the best rates and fees.
Lenders are required to send you a loan estimate within 3 days of you applying for a mortgage.
What is included in a Loan Estimate?
The LE is 3 pages long, split into sections which outline the terms, closing costs, and fees associated with your loan.
Some of the items you’ll find listed on your mortgage Loan Estimate include:
A summary of your loan details, which include your loan amount, the term of your loan, and your initial monthly payment
Your escrow account information, which includes your pro-rated annual property tax and homeowners insurance costs
Your estimated loan closing costs, including your lender fees, your title fees, and whatever third-party costs apply
While it’s important to understand all the terms on your Loan Estimate, there are a few key sections you’ll want to pay special attention to. We walk through those below.
How to read a Loan Estimate: Page 1?
Page one of the Loan Estimate is an overview of your loan terms and costs. When you’re comparing lenders, you’ll want to pay special attention to:
Date issued — The LE is only binding to the lender for 10 days after this date. You should also try to get all LEs on the same day, as rates change daily
Loan term and type — Make sure these are the terms you wanted, and that all LEs you compare show the same information. Accidentally comparing a 15-year loan to a 30-year loan, for example, would give you a skewed rate comparison
Interest rate — Look for the lowest rate. But also pay attention to page two, which shows you how much you have to pay (in the form of “points”) to get that rate
Estimated total monthly payment — This shows you how much you’d pay each month with principal, interest, taxes, and insurance included
Estimated cash to close — This number shows how much money you actually need upfront, including your down payment as well as lender fees and third-party charges
How to read a Loan Estimate: Page 2 ?
The second page of your loan estimate breaks down the costs shown on the first page. To better understand your interest rate and fees, you should look at:
Points — This shows the dollar amount you have to pay to “buy down” your interest rate, and actually receive the rate shown on page 1
Application and underwriting fee — Lenders all charge different fees to process your loan. Consider what you’re paying the lender upfront as well as your interest rate
Services you can shop for — These are third-party services. They’re not set by your lender, but you’re free to shop for cheaper third-party providers
Calculating cash to close — This box shows you a breakdown of the “cash to close” shown on page 1
How to read a Loan Estimate: Page 3?
Page three of the Loan Estimate has a few more key numbers to help you compare offers from different mortgage lenders.
In 5 years — Shows how much you will have paid altogether, and how much you will have paid off toward the loan balance alone, in 5 years. This number is especially helpful if you don’t plan to stay in the house a long time, as it helps you understand the weight of upfront costs vs. interest rate in the short-term
APR — Another way to compare two lenders’ rates and fees combined. The APR represents your total loan costs over the life of the loan, including interest and upfront costs, expressed as an annual percentage
How many days is a loan estimate good for?
These terms on a Loan Estimate are valid and binding for a period of 10 days from issuance. That means a lender must follow through with the rate and terms offered on your LE if you move forward with the loan within 10 days — provided that there are no major changes to the loan or application.
Does a good faith estimate mean you’re approved?
Receiving a Loan Estimate or “Good Faith Estimate” does not mean you’re approved for a mortgage. As the CFPB puts it, “Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward.”
If you do move forward, you’ll have to provide additional documents proving your ability to repay the loan.
Remember, the Loan Estimate is issued based on an initial look at your application. You can get an LE after providing just:
The property address of the home you want to purchase/refinance
The property’s value estimate or purchase price
Your loan amount
Your Social Security number