Is this Buyer’s Loan Estimate Good? (Full Walkthrough)

Certified Mortgage Advisor
NMLS 1701021
Published 
July 2, 2022

Loan estimate: Things we don't want to miss

Now, we're gonna walk through a loan estimate so you can understand your loan a little bit better. So someone on Reddit said, thoughts on the loan estimate need help understanding thank you in advance. And they added their loan estimate pictures here. So I'm gonna walk you through how to read this loan estimate and see if it's a good deal or not.

What is a loan estimate?

A loan estimate is a document you're legally required to get from your lender. Within three days of being under contract on a home. And it's gonna tell you all the details of your loan and give you other disclosures to help you understand your loan a little bit better. Please read through them. That's why the documents are there.  A lot of people don't read through them.

The Reddit post

So let's go through these numbers really quickly. Here's the link to the Reddit post for reference. So we can first see here properties blanked out, which is good.

We don't wanna share this information but I don't know what state they're in and the state can really change a lot of the quotes that you'll get. And I will make one quick note before we dive into this you can shop with multiple lenders when you're under contract and when you're looking, getting a preapproval to make sure you're getting the best deal at the preapproval stage, you're likely getting quotes from lenders, and when you're under contract. So you've had an accepted offer on your home from the seller. You can talk with multiple lenders to find the best loan estimate for a loan.

Then I've built a software called the Loan Clarity Advisor that will help you compare these loan estimates side by side to find which one is the best one for you.

Walk through

We can see the purchase price. It's $447,330 here. They have a rate lock. Now, this is really important with loan estimates. Because a lot of times you'll get a loan estimate and it will say it is not locked. And the way a rate lock works is if your rate is locked, it means that your interest rate will not change until closing. And then if you have a fixed loan, it will never change for the life of the loan.

Two before closing & two after closing

So there are four different terms. You need to know. There are two before closing and two, after closing the two before closing is locked and floating. And after closing it's fixed and adjustable. Most people are getting a fixed-rate loan. So that means after closing the rate never changes. If you have an adjustable loan, then that means after closing, the rate can change. Now before closing, you can have locked or floating locked means it will not change. Floating means it changes with the market until closing.

I know that can be a little confusing, but basically what happens is if this said Rate Lock, "NO", that means that the quote that you get can change up until closing. So if rates go up, you could have a higher rate for the rest of your loan. If it's locked, that means it will not change until the closing date. So we can see that they have a rate lock. Yes. Until 10/19. Now, this is really far in the future. The date of this post was let's see, six days ago and it's June 26th right now. So they have an extremely long rate lock, which isn't needed.

Long rate lock is expensive

This may be new construction or something along that lines of they're having such a long lock. if you don't need a lock that long, don't do it. The longer your lock is the more expensive the costs are going to be on the loan. So the shorter lock is always better.

Is your rate floating or locked?

And when you're comparing loans, you really want to make sure that you understand if your rate is floating or it's locked. Just to make sure what can and can't change. Here's the loan amount. So $424,963. You can very easily double-check your down payment by taking the sale price minus the loan amount. So we have 22367 divide that by the purchase price. And we can see they're putting 5% down. The interest rate is 5.5%.

The monthly principal and interest are $2,412.90. This is not your total payment. This is just the principal and interest. You'll also be paying things like any mortgage insurance taxes, homeowners, insurance, and homeowners association fees if you have any. So it's important to keep that in mind.

You can also check the section, it's going to say, Can this increase after closing, and these all say, "NO"? So this is a fixed loan. It cannot change in its interest rate, meaning the monthly principal and interest won't change either.

Now, a lot of people are wondering, is this a good interest rate? There are a couple of ways we can check this. I like to check it both online and then with multiple lenders. So I'll show you how to check it online.

Have options, shop with multiple lenders

What you wanna do though, is a shop with multiple lenders. And all that is you're just applying with multiple lenders and getting their loan estimate to see which is the best deal.

Find my Way Home

If you wanna be connected with a helpful loan officer who makes videos just like I do I've connected with Find My Way Home, which is a network of loan officers in the US that are extremely helpful and can guide you through this process.

CFPB Rate Checker

Then for checking online, I like using the CFPB Rate Checker. All you do is put in your scenario and it's gonna show you the average rates based on their scenario. I'm just gonna do Ohio because they didn't have a state in here.

We're at $447,330 as our purchase price, 5% down, this is a fixed 30-year conventional loan. So we can see the average is below 6%. So this person was getting quoted a 5.5% which seems pretty average, 6.25% is actually more common. But there's a pretty widespread. 

So basically what I'm wanting to see here. If this person was quoted a 6.5%, this is when I'd really make sure I wanted to shop around since this person is on the left all the way on the left of the list. This is a pretty solid interest rate so far. Now we wanna look at the associated costs with that here in just a second.

Projected Payment

Then we have the payment. So this is showing us in years, one through 11 Principal and Interest. Again, this is that same number. Mortgage insurance, $67 mortgage insurance is if you put less than 20% down on a conventional loan, it protects the lender. In case you don't make your payments. $67 seems pretty low. Not super out of the ordinary, but is low. I would just double-check that with a loan officer.

Estimated escrow. It looks like escrow doesn't exist on here. Escrow is where the lender is actually going to pay your taxes and insurance on your behalf because taxes are usually paid semi-annually twice a year. Homeowner's insurance is usually paid annually once a year.

Plan if you have it

So instead of you getting a surprise bill, two times during the year, or once during the year, the lender will collect a monthly payment from you, and then make those payments to insurance and taxes on your behalf. Usually, most lenders don't allow you to waive escrows unless you have 20% down, some will allow it at 5%. What I would wanna do is double-check with my lender and say, Hey, I see that escrows aren't being collected. Can you just confirm that escrows are being waived on this even though I'm putting 5% down because we don't want them to just not include it. And then we get a surprise on the other side.

That is something to keep in mind, is that even though the lender is gonna collect this number from you per month, estimated total monthly payment, they're gonna collect this every single month from you. You're also going to need to still plan for taxes and insurance or a homeowner's association fees if you have them.

You have to keep in mind that just because the lender's collecting this doesn't mean that's the only payments that you're gonna have to be making. All right. In year 12 mortgage insurance falls off because this person hit 22% equity at 20% equity. They could actually request the mortgage insurance come off but then their payment lowers to 2,412.90.

Estimated taxes, insurance and assessments

So we can see here. Estimated taxes, insurance, and assessments are $255 per month. Now, this seems really low for a $450,000 property, $255 that's supposed to include taxes and homeowner's insurance seems extremely low. I would wanna double-check this with my lender. Likely what's happening is this looks like new construction possibly. What happens with new construction is the tax bill only shows the taxes on the land and not on the constructed property. So just keep that in mind because a lot of people will buy a new construction home thinking their taxes are really low and then their taxes skyrocket once there is a home built.

So have that prepared, have that conversation with your real estate agent and with your lender. You can look at tax bills of homes that are already constructed nearby to get an estimate of those taxes. But please keep that in mind. So you don't get into hot water. You don't need an extra $300 added to your payment that you weren't expecting here.

And we can see on the right that says in escrow, "NO". Okay. So the lender is not collecting this. This means that. This person is responsible for paying the taxes and the homeowner's insurance bill when it comes due. So they need to budget that money to make sure they have that. This section here is a summary.

I don't think it's super helpful because it's going to explain all these numbers on page two of the loan estimate and all loan estimates are going to look the same, no matter which lender you get them from.

Section A: Origination charges

This is the lender's charge, the direct cost of getting a loan through this lender. Now, what's interesting is I saw this in the comments. People were talking about the broker compensation is extremely high and at first glance, it looks extremely high. This is 2% of the loan amount. So there are two different types of compensation from lenders. There's lender-paid and there's borrower-paid compensation. I don't wanna get into the details of it. They're basically the exact same. It's just, who is. What's being disclosed, and how's it being disclosed?

So here it looks like $8,500 is the cost. However, this person is receiving a lender credit to offset it. Unfortunately by loan, estimates are made, is this just, it can be a confusing thing to look at, but if you're seeing this on your loan estimate, you're paying broker compensation and a lender credit, we have subtracted them to find the true cost of the origination charge.

So we would take $8,499 minus $3,162. This person is actually paying closer to $5,337 in broker compensation, $5,337. Now the way I like to think of this, I think it's helpful when you're shopping for loans is to think of this compensation just as a point in a prepaid interest or I like to think about it as prepaid interest.

More credit by increasing your interest rate

Think of it as a point here, because you can actually get more credit by increasing your interest rate or the opposite by lowering your interest rate. Okay. So we can take this amount in cost and divide it by our loan amount. To actually see, what would this be as a point cost?

This is about 1.2 5% of the loan amount. So then when you're shopping with other lenders, you would wanna see if you could get a better interest rate at that same point cost. So you can go to another lender. If I was this person, I go to another lender and say, could you show me what interest rate I could get with 1.25% and points?

And zero lender fees. You're basically wanting this section to equal 5337 across the board. So you can find what the interest rate would be between all the lenders. Otherwise, what ends up happening is you get one lender who says, here's a rate and this is the cost. And another one says, this is the rate, and this is the cost and they're all different and it's hard to compare.

So having them all have the same origination cost allows you to compare the interest rate on its own.

Loan Clarity Advisor

I also have software that does this. It's the Loan Clarity Advisor where you don't have to go have each lender do that. You can just plug in all the numbers and it will show you which one is the best option.

Section B: Services you cannot shop for

So now let's dive down. Everything else is a little less complex. Appraisal Fee, $720. In a more competitive market, this seems pretty fair. All of these are very common. These are gonna be charges associated with the loan things like the credit report, flood determination fee, flood, life of loan, coverage, the life of the loan, tax service, and MERS registration fee. These are common on almost all loans.

Section C: Service you can shop for

These are going to be services you get to shop for. You actually get to choose. In most instances, the title company that you're going to use, and this all looks very standard. But you can shop this if you want to. There are very few cost differences between different title companies.

Section E: Taxes and recording fees

Then over here, in Section E these are the taxes and recording fees. You're gonna be paying what looks like recording fees, $90. This is gonna depend on the county that you're in. Seems a little low around here. It's about 200, 225-ish. Transfer taxes in Ohio.

There are no, transfer taxes. The buyer has to pay. But in your area, this may be different. In some states, the buyer pays all the transfer taxes in Ohio. The seller pays the transfer taxes, and this is really just gonna depend on where you're located at. For some people, this can be multiple thousands of dollars for this person.

Section F: Prepaids

It was about a thousand Section F, 12 months of homeowner's insurance is paid on every loan. This looks great, prepaid interest. This looks normal as well. This is from the time that you close till your first payment is due. You're paying interest on your loan.

Section G: Initial payment at closing

Again, there was no escrow. If there was escrow there would be a few months of insurance and taxes collected here, which would increase the closing costs.

Section H: Others

Then Section H is an optional owner's title policy. This is offered by your title company. So loan estimates are so confusing. Even though it says other, and it is optional. It's part of the title, which I wish it would be in this section to make more sense, but it's not,  welcome to the wonderful world of real estate.

So this sums up these other costs. Then we take the total down here minus that lender credit, which offsets this broker's compensation.

How to make your lender follow the loan estimate

Now, before we calculate this cash to close. One thing to note is when you get a loan estimate, the nice thing about getting a loan estimate is there is an obligation that the lender has to follow this loan estimate.

What is not allowed to increase

One thing to note about these costs and if they can change is the nice thing about a loan. Is that there are rules about what can and cannot change when you get this loan estimate from a lender, meaning they can't just say here's the cost. And then it increases in the future.

So Section A everything in here and Section B is not allowed to increase. Once you see the numbers in Section A and B, it is not allowed to go up. It can only go down. If it goes up, the lender is the one responsible for the cost of it.

Section with no rule

In Section C since you're allowed to shop for this, there is no rule around it. It can increase because you're the one choosing the title company. So the nice thing about getting a loan estimate, is there are rules to what can and cannot change when you get this document. This means that the lender, can't just say, it's going to cost this much. And then you get to the closing table and it's double, okay. There are rules about what can change with these fees.

The Tolerance

So Sections A and B are not allowed to increase. And there's this thing in the mortgage world called Tolerance. Meaning how much did the final cost change from the estimate? Section A and B are zero tolerance. Meaning these cannot increase. If these increase, the lender has to cover the cost. So if the appraisal fee comes in at a thousand dollars, you are not allowed to pay the difference. The lender has to cover the difference.

Unlimited Tolerance

Section C is an unlimited tolerance because it's something you can shop for. You're choosing the title company. So this is the lender's best. On what the title cost would be. Since you get to shop for it, the lender's not responsible. If it comes in higher, the only exception to this is if the lender has to give you a list of title companies when they give you these documents, if you choose a title company that's on that list, then they're going to be held to a 10% tolerance, meaning it can't increase more than 10% of what they quoted you. I know it's a little confusing.

10% tolerance

Section E is a 10% tolerance as well. Meaning it can't increase more than 10% if it does, the lender has to cover it.

No Tolerance

Section F, G, and H do not have a tolerance for them. These have to be in good faith. The loan officer is going to estimate these for you. However, these can change, for instance, in homeowner's insurance, the lender's gonna do their best job to estimate what your homeowner's insurance is going to be. But they're not a homeowner's insurance company you're going to shop for homeowner's insurance and things change like if you have 15 Rottweilers, your insurance is gonna be higher than the loan officer probably thought it was.

Important to keep in mind

These are estimates, not quotes. Sometimes I've had people who were like, you quoted 960, but it came in at 1200. Why did you increase my insurance? I didn't you shop for insurance. And that was the quote that you got and you told me about it. We had to estimate the best guess of what your insurance would be.

Cash to close

So now what we do is we calculate the Cash to Close. We take all the numbers and try to make them make sense into a bottom-line number. So we take the total closing costs.

Minus any amount financed in this case is a conventional loan that doesn't have that. If you have something like an FHA loan or VA loan, or USDA loan, often the upfront mortgage insurance is going to be included here. Here's our down payment. So closing costs, plus the down payment minus the earnest might deposit.

This person puts $7,500 as an earnest money deposit or an escrow deposit on their contract. Meaning that a third party is going to hold that as good faith that they're gonna follow through on their offer. There are no funds for the borrower, no seller credits, and no other credits. So for adjustments and other credits what are often included here is tax proration.

How tax proration works

So the way tax proration works is that let's say you closed on so in Ohio, for instance, it's June 26th. Right now, if I closed on a house right now, There's gonna be a tax bill. That's going to be due in July and that tax bills for six months, half of the year. I didn't live in the home for half of the year. I only lived in the home for five, four, or five days.

So the tax proration is the credit that the seller will give you in taxes for that upcoming tax bill. So basically you're sharing the burden of the upcoming tax bill. They're paying basically prepaid taxes for the time that they lived in the home. And then you are paying the tax bill for the time that you lived in the home during that bill. So that one final bill is gonna come due that you're responsible for paying, and they're giving you the credit for the time that they lived in the home.

Often, this isn't included on loan estimates, but it will be included in your final amount. And that is gonna be a credit that you get towards your closing costs. So then estimated cash, you are close here. Is the final kind of bottom-line number that's going to be due. Usually, if it's over $10,000, you need to wire this money instead of having a certified or cashier's check for it.

So overall, this looks like a pretty fair loan estimate. All the costs look pretty normal. Again, I would just ask questions about Hey, do we need to lock this long? I think the interest rate is good, still worth shopping and figuring out what other options exist. Understanding the actual origination charges here is the 8,500 minus the 3,100 here.

My only other question would be about the escrow. But other than that, this looks really solid. Please shop around your loans to find the best deal possible. Use the software that I have, the Loan Clarity Advisor that will help you compare loan estimates side by side.

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Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.