An industry insider gives an inside look at the Loan Estimate, or LE, the mortgage shopper's secret weapon when comparing lender offers.
Brian Lenharth is a Loan Officer and Team Lead at Paddio Home Loans (NMLS #1907), a Springfield, Missouri-based full-service national lender whose mission is to help homebuyers find the right loan for their dream home. Equal Housing Opportunity. Paddio Home Loans is a registered DBA of Mortgage Research Center, LLC, an affiliate of Three Creeks Media.
Here’s a confession. I’ve bought a total of five homes in my life, all of them before I became a mortgage loan officer. Never once, with any of those home purchases, did I understand all the numbers.
I knew the big things, like the monthly payment and the interest rate. But as far as knowing all the nuances and how the costs interrelate? I never understood this.
Now, as a mortgage loan officer, my goal is to help my clients know exactly what they’re paying and why they’re paying it. Loan Estimates are super helpful tools for explaining this.
Loan Estimates put all the loan’s numbers down on paper, in one place, for the borrower to see and understand before they commit to the loan.
What Is the Loan Estimate (LE)?
Loan Estimates came out of the housing market collapse back in 2008 and 2009. During the Great Recession that followed, Congress passed the Dodd-Frank Act, part of which was that lenders must supply a Loan Estimate, or LE.
The LE is a standardized document that lenders must give the borrower within three business days of the official application for the loan.
Loan Estimates from different lenders look the same. They’re specially made to help borrowers compare loans to each other to find the best mortgage.
How Can Applicants Use the Loan Estimate?
But borrowers don’t always take advantage of their Loan Estimate. For borrowers who consult only one lender, the Loan Estimate might be reduced to a technicality. It doesn’t influence their decision about the loan because they’ve already decided to move forward.
To take advantage of the Loan Estimate, borrowers need to use it. Everybody values loyalty, but when they’re buying or refinancing a home, borrowers can and should shop around with different lenders. Borrowers should show their Loan Estimate from one lender to another lender. This is a great way to get the best mortgage you can get.
Putting together a Loan Estimate is not that much work for the lender, and it’s not a top secret document.
I like to compare Loan Estimates to cards in a deck at the poker table. Until you show your cards, they’re not doing you any good one way or the other. You’ll never know how they match up against another hand.
You’re buying what’s probably the biggest wealth building tool you’ll ever acquire. It’s worth taking some time and comparing more than one Loan Estimate.
Most Important Parts of the LE
Loan Estimates follow a standard format.
You might get a “disclosure package,” the stack of paperwork you get at the outset of the loan. One lender may give you 115 pages. Another one might be 62 pages.
But the three pages that matter most – the LE – will look the same from lender to lender. This includes the Summary Page which should come first.
Is the Rate Locked?
Before scrolling any further, check the Summary Page, at the top right, to make sure the interest rate is locked. Unless the rate is locked, all the other data in the summary could change. This box should also show when the rate lock expires.
All images of the Loan Estimate are from the Consumer Finance Protection Bureau (CFPB).
After that, on the Summary Page, find the Loan Terms box, which includes the:
Loan amount
Interest rate
Monthly principal & interest (P&I) payment
These basic facts are the foundation of the mortgage, based on the locked rate.
Projected Payments
Below the Loan Terms box, the numbers get a little less certain. You’ll see an estimate of the loan’s monthly payment. This estimate can’t be precise. It’s based on estimated property taxes and homeowners insurance premiums that will be due on the new home.
There’s no way the lender can know the home’s exact property tax and insurance charges each month. If a lender estimates low taxes or insurance, it could lead to a lower projected mortgage payment. This doesn't mean the loan is a better deal. And, the projected payment will probably increase.
The mortgage insurance listed in this section should be more accurate, especially for borrowers getting an FHA or other government-insured loan.
If a lender estimates low taxes or insurance, it could lead to a lower projected mortgage payment. This doesn't mean the loan is a better deal.
Costs at Closing
At the bottom of the Summary page, you’ll see the Costs at Closing box. This is important. This box shows how much cash the borrower will be expected to part with to close the loan.
These costs include buyer-paid closing costs and the down payment. It’s normal for borrowers to be drawn to lower numbers in this box, but be careful. As we’ll see in the next two pages, the numbers in this box could change.
Closing Costs Details
Turn over to Page 2. This is the most important page because it’s where everything happens. It’s where you can see an explanation for the Closing Costs that were listed on the bottom of page 1. These costs are broken down in several different boxes:
Box A: At the top left, you’ll see fees charged by the lender. The lender controls these fees directly and could lower them to match another lender’s fees.
Box B: Still in the left column, you can see fees charged by third parties. Neither borrower nor lender has control over these fees. They simply pass through the lender to the borrower.
Box C: This box at the bottom left shows fees for additional third-party services, but the borrower can influence these costs by shopping for different service providers.
The bottom of the left column totals the amounts from boxes A, B, and C.
Additional Costs
The right column on page 2 is where the Loan Estimate can become misleading. This column shows various charges needed to get the new mortgage started. For example, Box F shows interest that needs to be paid between the closing date and the first payment.
Lenders have been known to leave this box empty which artificially lowers the Cash to Close amount on page 1. Then the borrower shows up to close and learns they’re also responsible for this expense. By then, the lender believes, the borrower will likely stick with the loan anyway.
(This doesn’t have to be true. Until signing the papers, the borrower can always walk away from the loan.)
Same goes for the initial escrow deposit that will cover partial homeowners insurance and property tax fees. Lenders could lower this estimate to artificially lower upfront cost estimates.
When comparing Loan Estimates, make sure the Costs to Close total on Page 1 includes everything from Page 2. If numbers are missing or seem abnormally low, be sure to ask about them.
Notable Disclosures on Page 3
The first two pages of the Loan Estimate focus mostly on the immediate costs to open the loan. Page 3 discloses the long-term costs of the loan. These costs come, mostly, from interest due on the loan month after month.
This page can be confusing. For one thing, the interest rate quoted on Page 1 doesn’t match the APR (annual percentage rate) on Page 3. There’s a good reason for this. APR includes the interest rate plus other ongoing costs, like mortgage insurance.
For example, a 30-year FHA loan with 3.5 percent down charges 0.55 percent in mortgage insurance premium. This 0.55 percent gets added to the loan’s interest rate to create the APR.
The loan’s APR helps calculate the real long-term costs of the loan shown on this page.
Below is an image of this section with a box added to the APR section.
How to Use the Loan Estimate to Choose a Lender
So, the Loan Estimate shows immediate costs due at closing and it shows projected costs in the future, from interest after the loan closes. Which expenses are most important when it’s time to compare Loan Estimates?
In a perfect world, a single Loan Estimate will show lower upfront costs and lower long-term costs. This could happen. But reality doesn’t usually work this way. Often, paying less upfront requires paying more long-term — while paying more long-term allows less to be paid upfront.
Paying less upfront requires paying more long-term, while paying more long-term allows less to be paid upfront.
Which type of costs should you focus on? Long-term or immediate? The answer to this question depends a lot on the borrower’s plans for the home and the borrower’s budget.
The longer you keep a loan, the more its long-term costs will matter. Someone who plans to move and sell the home, or refinance the loan, within three or four years should pay more attention to the loan’s immediate costs.
On the other hand, someone who’s struggling to come up with cash for a down payment and closing may be willing to pay more month to month in order to cut costs up front. For these types of borrowers, paying more later allows them to become homeowners. It’s worth it.
The key is to find the Loan Estimate that best meets your unique needs. Again, getting more than one Loan Estimate opens up new ways to save.
Is it All About Costs?
I work to build relationships with my clients. Even if my Loan Estimate shows a slightly higher fee, many clients value this relationship enough to keep working with me.
After all, you’re spending hundreds of thousands of dollars on a life-changing investment for the future. Haggling over a few dollars probably shouldn’t be your main focus.
That said, if a Loan Estimate comes in drastically lower than all the others, take a really close look at it. There could be a mistake or something the lender isn’t disclosing.
Issues Borrowers Run Into
Overall, Loan Estimates have been helpful for borrowers, but sometimes they can give borrowers a false sense of certainty. This can happen because Loan Estimates look so official and absolute. They show concrete numbers.
Like I said above, sometimes lenders base these concrete numbers on less-than-concrete estimates. In the Projected Payment box on Page 1, for example, the lender could underestimate home insurance rates or property tax rates. This will result in a lower projected payment.
Trouble is, this estimate will go up to reflect the real costs of property taxes and homeownership. When these estimates are different on two different LEs, it’s best to compare principal and interest payments (P&I) from the Summary Page since those are the foundation of the monthly payment. Ultimately, a lower P&I payment should translate into a lower overall payment.
Same goes for the Cash to Close box on the Summary Page. Borrowers should always take a close look at Page 2 to make sure the lender has accounted for every charge that goes into the Cash to Close box.
'Fee Sheets'
One more thing: Borrowers should also be careful with fee sheets from lenders. These are a way for a lender to share costs without making the commitment that’s required for the Loan Estimate. Fee sheets can be helpful, but know that anything in the fee sheet is subject to change. Don’t use fee sheets to plan for the future.
Buying (or Refinancing) with Eyes Wide Open
Loan Estimates let you enter homeownership with your eyes open: to know what you’re paying and why you’re paying it, and to know who is getting the money and why they’re getting it.
Analyzing this knowledge from multiple Loan Estimates at one time enhances the power of this document and puts borrowers in the driver’s seat.
Equipped with this kind of knowledge, you can make the best decisions, even if that decision includes paying a few dollars more for one of the most important investments you’ll ever make.
