If you're looking to better understand a Loan Estimate (LE), this blog will help familiarize you with the information you will see on your LE. This form will arrive prior to the Closing Disclosure (CD) you will receive toward the end of your transaction.
The figures/amounts in your LE may be different than those in your final Closing Disclosures. Here are a few reasons that may happen:
• Lenders and escrow/title companies often overquote the fees due to the regulations that would make them pay for the underquoting fees.
• As we approach/reach the closing date, the numbers are fine-tuned for items such as prepaid interest, the amount collected for impounds, etc.
• Less commonly, we may come across additional liens on the property, or the way the title was originally held is incorrect. This can cause fees to go up, or add additional fees altogether.
Let’s take a look at each section of the LE to better familiarize you with the information you need to know moving forward.
Page 1, Section 1
- One of the most important items displayed here is your name and address. Please make sure the spelling and address are correct. This is how the info will be displayed on the title, so we want to ensure it is accurate.
- You will also see your Loan Term, Purpose of the Loan, Product (Fixed or ARM), Loan Type, Loan Number, and Rate Lock Status. Make sure all of these areas look correct compared to your previous conversations with your loan officer.
Page 1, Section 2
- Your proposed Loan Amount is in the first box above. The Loan Amount is often higher than your current mortgage balance due to the fees that are needed to pay off your existing mortgage and added interest that was not paid between the last payment of your old loan and the first payment of the new loan (also known as "trailing interest"). If you have chosen the option of no out-of-pocket expenses, some of the fees may be rolled into the Loan Amount, as well.
- The Interest Rate, and Principal and Interest Payment are displayed in the next two boxes.
- After the payment section, you will see two more boxes. These display whether you will be subject to a Prepayment Penalty or a Balloon Payment. Make sure these match your expectations.
Page 1, Section 3
- The first box will include the Principal and Interest payment previously shown in the last section, along with the Mortgage Insurance (if applicable) and the Estimated Escrow payment.
- The Escrow Payment is the monthly breakdown of your annual property taxes and homeowner’s insurance combined and held in an account to pay throughout the year. This could also include special assessments such as bond measures, Mello Roos, etc. This does not include the monthly HOA dues.
- If your loan from Page 1, Section 1 is a Conventional loan and you have monthly Mortgage Insurance, the lender is required to reduce and eventually remove the Mortgage Insurance after the specified time in your closing docs. The second set of boxes will represent what that will look like for you if applicable.
- The Estimated Total Monthly Payment will be the sum of all three of the previously mentioned items for your PITI (MI) (Principal, Interest, Tax, Insurance, Mortgage Insurance) payment.
- The Estimated Taxes, Insurance, and Assessments will signify exactly what's included in that payment with the “This estimate includes” check boxes and the “In escrow” Yes or No section.
Page 1, Section 4
- The Estimated Closing Costs section is your breakdown of two separate sections on page 2. We will go into depth about what these are shortly. If your Loan Purpose is “Purchase,” you will see all the fees listed regardless of who is paying for them, you or the seller. A “Seller Credit” will be listed on page 2 for the total amount of those fees the seller is responsible for per your purchase contract. There are a few important clarifications to be made on this section:
- “Loan Costs” refer to the actual fees accrued in the creation of a mortgage (title, escrow, lender costs, appraisal, etc.)
- “Other Costs” refers to a couple of items you will see broken down on page 2. Most of this is a cost, but not a fee for doing business. You will see a reference to any property taxes due or needed for your escrow account deposit along with your homeowner’s insurance. Also, prepaid interest is included here as, well.
- “Lender Credit” will be listed here and will reduce the overall amount of the costs. This amount is determined based on the interest rate you have chosen.
- Estimated Cash to Close is the total amount of money we are currently estimating you will need to close the loan.
- Purchase Loans: This amount will include all the closing costs you are responsible for along with your down payment.
- Refinance Loans: This amount may be more than you were expecting to see. Again, we want to point out that some of the fees listed here are a higher estimation of what they will end up being in the end. Also, if you feel like this may be too much for you, talk to your loan officer about rolling some of the cost into the new loan and if your value will allow for it.
Page 2, Section A
- In this section, you will see the fees the lender is charging to create the mortgage loan. There are multiple descriptions for some of these items and the terminology will differ depending on the lender. The one universal term is the Points for rate. If you are paying your interest rate down, you will do so in the form of “Points”. Points are a percentage of the loan amount charged so you receive a lower interest rate.
- Common items you will see listed here are, but not limited to Application Fee, Underwriting Fee, Processing fee, Lender fee, ETC. These are the actual costs associated with the lender creating the loan.
Page 2, Section B
- This section serves as a list of fees that are required to create the loan but are generated by third-party companies for the particular service. Each fee is based on the region the home is located, type of property, and use of the property.
- Common items you will see here are, but not limited to Appraisal Fee, Appraisal Re-Inspection Fee, Credit Report Fee, Flood Certification Fee, Tax Certification Fee, etc.
Page 2, Section C
- This section serves as the list of fees generated by third-party companies, but are not determined by the lender. While the title is, “Services You Can Shop For”, you personally may not have decided where these services are being handled due to other parties having selected them for this transaction, but ultimately the lender has not determined them. The common items you will see listed here are but not limited to: Escrow Fees, Title Fees, Notary Fees, Survey Fees, Pest/Home/Roof Inspection Fees, etc.
- We at RedDoor have shopped around for the “Escrow & Title” costs and have found some of the most competitive prices out there. If you have a reference for these services and your transaction allows you to make the decision, please let us know and we’d be happy to get a quote for comparison.
Page 2, Section D
- This section is the total of the sum of Sections A, B, and C.
Page 2, Section E
- This section will list all recording fees and city or county required fees. These are determined by the city and/or county you live in and will vary based on the same information. These fees are required for any reissuing of title for lender changed or title transfer when purchasing a home.
Page 2, Section F
- Section F will list money required to close a loan, however, these are not fees. This section will list the amount of interest (Prepaid Interest) charged from the date you close the loan to the last day of the month. This section will also include the amount of Property Taxes due at that time and/or Homeowner’s Insurance.
Page 2, Section G
- If you are required to have an Escrow Account (also referred to as an Impound Account) or have chosen to have one on your mortgage loan, an initial deposit will be required so you have enough money in the account to pay your Property Taxes and Homeowner’s Insurance when they are due. This amount is determined by the month you are closing your mortgage loan.
- If your loan requires you to have Mortgage Insurance, it is also paid out of this account. If a deposit is required by the lender, it will be listed here as.
- For refinance; any existing balance remaining from your previous loan's escrow account will be refunded to you, typically within 45 days.
Page 2, Section H
- This section is designated for fees connected to the creation of the loan but is not required by the lender to close the loan. The common items you will see listed here are, but not limited to Owners Title Policy, Home Warranties, HOA Transfer Fees, other inspections not required by the lender, payments made to a seller for the purchase of personal property, etc.
- Title – Owner’s Title Policy (Optional): While this fee is technically optional, it is highly recommended you leave this policy on your purchase transaction. This is an insurance policy to provides protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it.
Page 2, Section I
- This section is the total of the sum of Sections E, F, G, and H.
Page 2, Section J
- Section J is the total sum of Section D and Section I minus any Lender Credits you may have for your selected interest rate.
- Lender Credit: Much like the previously discussed “Points” in Section A, Lender Credit is the money you receive as a credit towards your closing costs for the rate you have chosen. There is a price attached to every interest rate we receive from the lender. Any rate above the lender’s set threshold of pricing will result in a credit. Anything under that threshold results in a fee you pay to get a lower rate. Both are paid as a percentage of the loan amount.
Page 2, Calculating Cash to Close
- A simple explanation for this section is the sum of all sections previously discussed — along with any amount of money needed for a Down Payment (Purchase) or to pay down your previous loan balance (refinance). If any money was Deposited with the Escrow company prior to the closing date, that will be listed here as well.
- One very important thing to note on a purchase transaction: The amount of each fee for a purchase transaction is listed as the total amount of that fee. The Seller Credit listed in this section the total of all the negotiated responsibilities of the seller along with any additional agreed-upon Seller Credits per the Residential Purchase Agreement.
- The Estimated Cash to Close amount is the expected amount of money you will need to bring to (In the form of a Cashier's Check) or send to (In the form of a Wire Transfer) the escrow company prior to the loan closing.