One of the most terrifying things about getting home and getting a mortgage is what are all the details? How much do I have to pay per month? What's my interest rate. How much interest am I gonna pay over this loan? What are the total costs? What are the hidden fees that might come up and when you're under contract for a home, you're going to get a document.
In fact, every single loan officer is legally required to send you a specific document called a loan estimate within three days of being under contract. So it's really important that you understand all the nuances of this document. So you can have a lot more clarity about what's going on. So we're gonna break down the entire loan estimate, everything that's going on in there so that you can have a better understanding of: This is what my rate is. This is what my payment is. This is how much everything's gonna cost.
So you can feel like you're more in control of the process and have a handle on what's going on. Instead of feeling like you're going into this a little bit blind. And even though this is a document that's required to be sent to you, there are a lot of people who kind of gloss over it and they don't actually know how to read it because it can be a little bit confusing.
So a little bit of a background of what the loan estimate is. It's three pages, and it's going to detail mainly the terms of your loan and the costs of your loan, and the goal for it.
The reason the government put this into place is it's supposed to be a good faith estimate. So the lender's best idea of how much this loan is going to cost. So think of this like a map of your loan. There are some things that the lender can tell you that is exactly true about your loan. For instance, the interest rate, the mortgage insurance you're gonna pay, and how much the lender charges.
However, there are also a lot of other things that the lender has to estimate. That's why this is called a Loan Estimate. It's a map. It tells us most of the details, but it's still the lender's best estimate about a purchase transaction. And the reason why it's an estimate is there are a thing there are things that are actually in your control, things like homeowner's insurance, how much the title company costs, depending on who you shop with for title insurance. So all these things can change and that's why this is an estimate.
So let's first talk about what is required in receiving a loan estimate. So there are rules, basically, six rules that trigger a need for a loan estimate. So if a lender receives your name, your income, your social security number, a property address, an estimated value of the property, and the mortgage loan amount or much loan you wanna get.
Then a lender is legally required to give you a loan estimate within three business days. This isn't an option. It's a legal requirement that they have to give this to you.
So below are the closing days aligning with when the disclosures have to be sent. So basically if you give all the information needed, this is when the loan estimate would be due to you and the same applies to a closing disclosure.
A closing disclosure is similar, but there are multiple different types of estimates. You're going to be getting through your home purchase.
So let's talk about this first section below and we'll cover this a little bit more in detail. So it says at the upper right corner of the page, "Save this loan estimate to compare it with your closing disclosure". So this is a loan estimate. This is the first disclosure that we're gonna get and there's a disclosure near the end of the process called Closing Disclosure.
Now in between loan estimate and closing disclosure, we might actually get multiple different loan estimates as things change. For instance, if your interest rate becomes locked instead of floating, you might get an updated loan estimate. So you could get several different loan estimates, but we're just gonna talk about the initial loan estimate.
Following up on loan estimates would be if anything changes during the process that would be called a change of circumstance. And we'll talk a little bit more about that, but the loan estimate, the closing disclosure is when we get closer to closing you're going to get a document that likely still is an estimate, but it should be a much closer estimate.
Likely you'll get one closing disclosure in the beginning, that's much closer to your final fees than the loan estimate. And then before you're closing, you should get a final closing disclosure that has everything locked. And I know it can be really confusing because you get under contract for a house and you're like, how do you guys not know how much I need to bring to the closing table?
And it's because there are multiple people who are charging different things when you're purchasing a home and not everybody has the exact numbers ready at the time that you sign your purchase contract. That's why it's really good to have a loan officer who can help explain the details of these fees to you. So you can have a really solid understanding of everything that's going on.
First, it's gonna talk about the date issued. Nothing too crazy. Who's the applicant. So just double check your name, and your address, also double check the property as well. So make sure that all the details are correct. The city is correct. Everything is like that because there can be some clerical errors that happen. Of course, we don't wanna purchase and get a mortgage on a house that we're not buying. So double-check the year.
Also, double-check the sales price. This is what you agreed to on your purchase contract. How much are you buying the home for? It's gonna be listed right there. Then right beneath is our loan amount.
The difference between the sale price and the loan amount is normally what our down payment is. If you're using a loan like FHA or VA, and there's a funding fee, that's going to be included in your total loan amount as well. So it's important to keep this in mind.
But for most people, this is going to be what your down payment is the difference between the purchase price and the loan amount. Because what ends up happening is at the closing table, the lender provides the loan amount. You provide the down payment, and that money gets grouped and given to the seller as the sale price.
So then we have our loan term. How long is your loan for, 30 years is common? For most people might be a 15-year, might be 20 years.
What is the purpose? Purchase or refinance is also common.
Also, is this a fixed rate or an adjustable rate loan? So a fixed-rate loan means that after closing your rate will never change. Your principal and interest will never change for the remainder of your loan.
If it's an adjustable-rate mortgage, that actually means that the rate can change in the future. A lot of people before the housing crash were on adjustable rate mortgages, their interest rates went up so high, and their payments went up so high, that they weren't able to afford them. And that's why a lot of people had defaulted on loans before the housing crash.
Be careful that if you do get into an adjustable-rate mortgage, you are very certain and you understand all of the complexities and the details of an adjustable-rate mortgage fixed rate at the moment is likely going to be your best option.
Then what is the loan type? We looking at conventional, FHA, and VA. Another option could be something like USDA or maybe our portfolio loan.
This is just tracking your loan in a database, nothing too important to keep on track of there.
This one is really important. So the rate can be affected in two ways. There is the locking portion, and then there is the fixed portion, and these are references to what happens before closing and after closing.
So before closing your rate can either be floating or locked. So, if it is floating, that means it's changing with the market, right? If you look at when what are interest rates today, it's because interest rates actually change multiple times per day, depending on what's happening in global markets.
And so when it's floating, your interest rate might be given to you as a quote, but it's not locked in yet. And so what you wanna do is talk with your loan officer about when is the best time to lock it, locking it in means that it will then be fixed and will not change before closing. So it can either be floating, then it gets locked, then you have closing. Then after that, if you have a fixed rate loan, it will never change. If you have an adjustable rate loan, it may change depending on its terms of them.
So with a lock. Locks do expire. So it's important to keep that in mind. And so if your loan officer does choose to lock up-front, you need to make sure that that lock expiration date happens on or after the closing date, because, your rate lock can't expire before closing, you have to hit closing the closing date, actually, finalize the loan before your rate lock expires. And if you don't there often is an extension charge to extend the rate lock. So we covered our loan amount.
We also have our interest rate. This is one of the big numbers that most people are focused on. So we see on the slide above that it's 3.875. This is an older loan estimate from the CFPB. So we're gonna see some higher rates.
Something interesting about this second column is can this amount increase after closing is really helpful to look at as well, right? Our loan amount cannot increase after we close. That's great interest rate cannot increase after we close. If you had something like an adjustable-rate mortgage, that might be the case there.
Now we have our monthly principal and interest. This is important. One we wanna keep in mind. So this is what the lender charges us for the loan itself. This cannot increase after closing awesome.
Both of these options are what are called risky features. So prepayment penalty on this loan, it says, yes. So basically what that means is that if you pay off the mortgage earlier, there could be a penalty to it. Most loans today don't have a prepayment penalty, but it's good to just double check for this balloon payment.
This doesn't have one as well. Balloon payments are risky because a balloon payment basically would say you have the loan for five years, and then after five years, you have to pay the full thing off in one lumpsum.
That's a risky feature because you don't wanna get into this and then realize you don't have the money in five years or 10 years or whatever that bloom payment is to then be able to pay off this mortgage. So normally we want both of these to say no.
Then we go to our projected payments. What's happening in years of 1 through 7, and 8 through 30. So why would these be different?
The main reason is the change in mortgage insurance. So fixed rate loan principal and interest stay the exact same. What did change was mortgage insurance, mortgage insurance actually dropped because there was 20% equity in the home and that's where conventional mortgage insurance would fall off. Something like an FHA loan, you're likely not gonna see that fall off unless you put 10% down. VA loans won't have monthly mortgage insurance.
So these are gonna be things like your taxes and your homeowner's insurance. Now these can change, right? The lender does not charge you insurance. The lender does not charge you taxes. Those are set based on the insurance company you choose. And the county that you're in as well. And so sometimes people will say, oh my gosh, my mortgage payment went up. Why did the lender charge me extra money? It's not taxes went up. Those are things you have to take up with your county. The lender will not change your taxes for you.
So this then tells us our estimated total monthly payment. This is what the lender is going to charge you every single month. Either you put this on a recurring, payment, or you choose to pay by check or whatever each month, this is the number that you need to be really comfortable with, and make sure can I pay $1,050 every single month for my mortgage? Also, considering that I still need to pay things like utilities and any maintenance costs for my home. So again, this 206 number. This is breaking down. What's in 206.
So we have property taxes included in our escrow account. Homeowner's insurance included in the escrow account.
Escrow account is basically where the lender's going to collect these from you monthly, and they will then go pay off those fees for you because for instance, property taxes normally are paid semi-annually.
So instead of you having to pay a chunk of taxes twice a year, the lender will collect monthly payments from you. And they will then manage the twice-a-month or twice-a-year payments. Same with homeowner's insurance. It's usually an annual premium. Instead of you paying an annual premium homeowner's insurance, you know, the time comes around to pay your premium.
And you're like, I don't have all this money. The lender is collecting that for you each month. Normally you can waive the escrow account on a conventional loan if you have 20% down.
Below, we have a brief summary. However, I don't like looking at this section because it doesn't really tell us a ton. Page two is gonna break down all of our closing cost details. This is just a summary of page two. So let's look at our closing cost details. This is where everything is included. The only thing that likely won't be included for you is going to be your homeowner's inspection. Since it's an optional thing, you're not required to get it for a mortgage.
Usually, it's not included here. This can depend on the lender, but just keep in mind an inspection can run on average somewhere around $500. And this can change depending on if you need specialty-type inspections.
Now let's talk about origination charges. This is what the lender is going to change things in Section A are not allowed to change. So that's one of the main reasons why a loan estimate exists is so that a lender can't say, yeah, it's gonna cost this much. And then you get to closing and it's a bunch more. So if the lender says, Section A costs are going only gonna be $1,800, the lender can't come back at closing and be like, oh, actually it's 3000.
They're not allowed to do. They have there's a binding to the loan estimate when they create this and they're now bound to this charge. Okay. Let me erase that because this is in the way of everything else. So points. What are points, basically points are, think of it almost like prepaid interest in a way?
So you can pay extra money upfront to lower your interest rate. You can also do the inverse. You can receive credit and get a higher interest rate. So points can give you a lower interest rate. A credit can give you a higher interest rate. So sometimes people choose to pay points to lower their interest rate.
That way they can save some money on interest. Then you have the other fees that the lender might charge. So this lender is charging an application fee and an underwriting fee. So this is what they have here. Again, these cannot change in the future.
These are services you cannot shop for basically, they're services that the lender doesn't provide they're provided by another third party, but the lender's not letting you.
For that service. So same thing, the lender is held to these fees. These are not allowed to increase exponentially on you at the closing table. So if they say 6 72, now it can't be $1,200 in the future. They are stuck with these fees. So you have the appraisal fee. This is gonna be super common on most loans, and credit reports.
These are all very standard fees, flood determination, fee, flood monitoring, tax service, tax status, and research fee. These are all pretty common. And if you have questions about them, if he needs some explanation, talk to your loan officer, CBE, what are these fees being charged? Can't we understand why this is needed?
These are services you can shop for. Mainly what's gonna be included in the title. So when you purchase a home, there's gonna be a company that does a title search of your home. Basically, they're going to be managing how clean your deed is, making sure there aren't what is called Title defects.
So just basically making sure that the chain of ownership is clear. And so when, when you own your home, when you sign to purchase that home, you're going to be the sole owner. No one else is going to. A claim to your property, that they then could contest in court. So you actually can shop for this.
Now, most people that I've run into don't actually shop for their own title insurance and most title companies. Aren't you, you're not gonna see huge differences in cost between them. So often they will rely on their lender's recommendation or the real estate agent's recommendation because it's good to work with a title company that could actually provide a title search report very quickly.
Sometimes I can see title companies that just take a long time and the longer that takes it can put your closing in jeopardy of taking too long and then you're out of contract. So if you do shop for your own title insurance, then the lender is not held responsible for these fees.
However, if you choose the one that your lender recommends or is on your lender's list of what are called settlement providers, which will be provided in a document similar to, um, at the same time as your loan estimate, then this is going to be held within a 10% tolerance, meaning it can't charge more than 10%.
So things might be like a pest inspection fee. So you can shop for this survey. And your title as well.
This is just going, to sum up everything that was in Section C.
Then we move on to other costs. So Section E recording fees and other taxes. Normally the county is going to charge money to be able to actually record the deed and the mortgage, just part of the county doing their charges.
Then we also have transfer taxes. This doesn't apply in every state. For instance, in Ohio, the buyer doesn't pay transfer taxes. However, in other states in your state as well, they might charge transfer taxes where you're actually paying the tax for the transfer of the property. That's up to your own county and your own state.
The lender does not have control of that. I think it's something really important to remember about your loan estimate your lender only is controlling Section A. Everything else, your lender doesn't control. This is why it's an estimate. They're estimating all of these other third-party things.
And so if things change, it's important to talk with those individual people and not get frustrated at your lender because if the title C fees come back different, we need to talk to the title company and not necessarily the lender about why those changed.
These are prepaid. So when you do purchase a home, normally you do need to pay a year's worth of homeowner's insurance upfront on this loan estimate, six months not sure exactly why 12 months is normally the standard that is going to be in there.
Then mortgage insurance premium, if there is any. Usually, that's not prepaid for most people, unless you take that choice, prepaid interest. This is from the time that you close until your first payment is due.
So what's really interesting about mortgages is there's always going to be a full month's worth of time that you don't make a mortgage payment and mortgage. Payment's always gonna be due on a first. So for instance, if today is the 15th of September, we're actually going to. All of October and the first payment would be due on November 1st.
So that's for the interim interest. So you're paying interest each day that you didn't make that mortgage payment. Some people like to think of it as skipping a first mortgage payment, which isn't technically true. When we do the full math, you're paying the full loan over 30 years. However, you're just not having to pay the principal during that first period. Then also property taxes. If that's being required, usually not required unless that's something required by your county.
This is your initial escrow payment at closing. If you're waving an escrow count, this will be all these numbers will be blank. However, if you do have an escrow count, normally there are a few months of homeowner's insurance and taxes put into an escrow account. So at minimum for most lenders, there's a requirement of two months of a buffer.
So the escrow account always has to have two months of each homeowner's insurance and property taxes. However likely you're going to see more months collected of each because what the lender is then doing is they're creating an adjustment to see homeowner's insurance would be due next year on this date.
And then the next property tax date is on in three months from now, and you know, the following. So if it's due three months from now, but there's a full bill due, what they need to do is have enough in the escrow count to make that full payment over three months. So that's why they would collect more.
And then usually you're going to get probation from the seller to make up the difference. So I hope that makes sense because if you only were in the home for three months, but they're giving you a tax bill for six months, The seller then owes you three months' worth of taxes and taxation. Hope that makes sense. Let me know in the comments if it doesn't and I can add some clarity to that.
Then you also have the owner's title policy. Now, this is included. This is part of the title, but why is it in the other section? And the reason why is because this is optional. All of these title fees are required on the loan. Every lender is going to require a title search.
However, the owner's title policy is extra protection that you can get to help you against any future title claims that come against the home. So that's why that's optional in another section here.
Then we have the sum of E F, G, and H.
Then Section J shows us the total sum of all of the closing costs. Then there are also lender credits. So it can be a little confusing because lender credits and points work in an inverse relationship to each other. So if we're getting lender credits, then it would say something over that field.
So then what happens is we're doing the final math of cash to close.
So Cash to Close is this figure that basically cash to close means. How much do I have to write a check for and bring it to the closing table? How much does that number need to be? It's your cash to close. It's not your closing costs. It's not your down payments, cash to close.
Cash to close is the bottom line figure that does that factors in your closing cost your down payment and any other credits that you're getting all factored together.
So what it's gonna do is it's going to add everything in the left box. So total closing costs. Any closing costs are financed, so paid from the loan amount, this often will happen if you do have something with upfront mortgage insurance, like an FHA loan VA or USDA loan. Normally those closing costs will be listed out usually in Section B, but then the loan amount will be increased by the same amount. So that would actually be a negative figure.
So closing costs, the amount financed the down payment that we're paying as well. And if we remember this is actually the difference between our sale price and our loan.
So if you made, if you put an earnest money deposit that was money that you already paid, it applies as a credit towards your cash to close since it's money that you already paid.
If there are any funds for the borrower, which is usually not seller credit if you have a seller, credit negotiated in your contract, that will be here. In then adjustments or any other credits that seem to happen in here? This could happen. Uh, a good example of this would be if there's like a rebate for an appraisal what can also happen is I talked about how the lender.
Is locked into these fees. If the costs change above what the lender's allowed to change, there can be, what's called a tolerance cure where the lender actually has to pay for the overage. And you can see that listed here. So estimated cash to close is right. Here 16,054. This is theoretically how much this person should expect to bring to the closing table.
And it's important to always remember, that this is still an estimate. So if you're at the stage, you're under contract, you got your loan estimate and you're like, cool, 16,000. Sounds good. We're comfortable with that, but you also wanna make sure things don't change too much. It might be good to talk with your loan officer about, Hey, what could change on here?
So we have a better understanding of what. Expect. And if things do change, you should be getting corrected loan estimates as you go along, uh, while being under contract. So then we go to page three, this is just telling us some additional information. At this point, we already know what kind of loan we're getting, the purchase price, the rate, and the payment that we're making.
If we have an escrow account or not, how much is being included in the escrow, if there are dangerous features on our loan and what are the closing costs, both from the lender and from everybody else, how much do we have to bring bottom? we already figured out all of that. Now this tells us some additional information, like who is our lender, and who is our loan officer.
What you can actually do is you can look into your lender's NMLS number. So you can just Google search NMLS, consumer lookup type in their number, and actually, see if there are disciplinary actions against your loan officer. If those have been taken in the past.
Then what we can do is look at the comparison. So when you're under contract, if you get loan estimates from different lenders that you're talking to, you can use this section to compare which loan offs or which lender I want to work with. There's a really quick comparison table. In here. So we can see in five years, the total that you'll pay in principle, interest, mortgage insurance, and loan costs, and the principle that's paid off.
So that can be really interesting if we look at three different loan estimates, and what's changing between the two in five years' time. So we can take a shorter time horizon, and look at this, which loan is better because it's important to remember. You're probably not gonna have this loan for 30 years.
Most people refinance within five to 10 years, and usually don't hold onto the loan for 30 years.
Also, what's the APR as. So the APR is taking both the interest rates. So how much did we pay in interest, but it's also considering what did we have to pay to get the loan? So what were the finance costs? So things like, what did the lender charge? What did the appraisal cost? What were title costs along with things like mortgage insurance all included and expressed as a total rate of the overall costs of the loan?
APR is an okay metric to compare loans, but it assumes that we're carrying the loan for 30 years, cuz it's only looking towards the very end of the loan. And so what can be a difficult measure about this is loans actually change in their cost over time. And so in the beginning 10 years, you might find one loan is cheaper, but in the following 20, another loan is cheaper than you're comparing APR. Doesn't take that into account. And so it's an okay metric, but don't just solely rely on APR.
This can be great to help look when you're comparing those loans. So this is the total amount of interest that you'll pay over the loan term as a percentage of your loan amount. They also put in some other considerations here that can be a little bit helpful, usually not make or break on loans.
So does specify, Hey, we can order an appraisal to determine the property's value, charge you for the appraisal and give you a copy of it. Even if your loan doesn't close, you can pay for an additional appraisal for your own use at your own cost. If you do that, it's not going to be considered by the lender. Only the lender can order the appraisal that they will then use for the property value.
Assumption if you sell or transfer this property to another person, we will or will not allow assumption on this loan under the original terms, there are some loans that allow you, um, to basically transfer your mortgage to somebody else. That's called an assumption, usually not available on most loans.
This loan does require homeowners insurance on the property, which you may obtain from a company of your choice that we find acceptable. If end up removing homeowner's insurance. The lender can actually force place homeowner's insurance and charge you a ridiculous amount of money for that. So you do have to maintain homeowner's insurance on your home, even after it closes.
So this is saying if it's 15 days late, we'll charge a late fee of 5% of the monthly. The monthly principal and interest payment. These are very common terms for most loans that I've seen refinancing this loan will depend on your future financial situation, property value, and market conditions.
You may not be able to refinance this loan. This is basically just saying, Hey, when you do get a refinance, it's not just an automatic thing. We're not just gonna give you a lower rate. You do have to requalify for a new loan in the future to get a refinance.
Then servicing, we intend to service your loan. If so, you'll make payments less or we intend to transfer servicing of your loan. This is when people talk, are they gonna sell my loan or not? And so basically what happens is once your loan closes, you then have to make payments to somebody. And that's not always the same company that you close with.
You may be, you may have closed with the lender and you've been paying them for a year. And then your loan then gets sold to lender B. The only thing that changed is who you're paying those payments to. So you're just paying them to lender B loan terms stay exactly the same. They will never change.
Then with the loan estimate, at the end there you do have to sign it to say, Hey, I received this. I recognize, uh, that I received this loan estimate. This is then what's going to allow everything else in the process to move forward along with another document in a very similar package of documents. So we'll get called an intent to proceed.
And so you do have to acknowledge the loan estimate and sign an intent to proceed before anything else in your loan can move. All right. So this is the loan estimate. This is everything that you need to know about your loan that can be detailed at this time. I know it can be frustrating. Say like, I wish they could just gimme one solid number.
Unfortunately, real estate doesn't work that way. There are a ton of people that you're going to be working with, who are gonna help you close on your home. not only do you have your real estate agent, but there's your lender and your appraiser, and the title rep. You have people at the county who are going to help record your ownership of your home.
You have an insurance agent you have an inspector there, and so many people helping you purchase a home. And that's why it's an estimate. As all those fees are unknown until invoices start coming in and things start to get more clear as we move through the process. At that point, you're going to get a closing disclosure.
It's likely still going to have things that are a little bit estimated, but should be much closer. And then you'll get your final closing disclosure before closing that tells you exactly how much you need to bring to the closing table. Normally, what happens is a loan estimate is quoted a little bit higher than normal.
Are higher than what actual closing costs will be. So it's a low loan estimate, maybe another loan estimate that you get closing disclosure, final closing disclosure.
Normally the costs are going to come down as you move through the process, but always feel free to ask your loan officer. Hey, what could change here? Could you help me understand what the difference is between these two loan estimates? Could you help me compare my loan estimate to my closing disclosure, cuz they're those documents are going to look different from each other. Feel free to ask questions to your loan officer. They're there to help you understand this document and to help you move through the process as smoothly as possible.