Understanding The Loan Estimate

Understanding The Loan Estimate

Understanding The Loan Estimate: What Is A Loan Estimate?

The first step in Understanding The Loan Estimate is to learn exactly what a Loan Estimate is, and what type of information you can expect to see on this document.  This is a required document that is to be prepared for every borrower where it will provide a description and details of all the different fees required in order for you to obtain the loan.  Even though the name of this document is an estimate, there are certain categories where the fees need to be exact or the lender can find them locked in to charging less than anticipated fees.  Other items that will appear include the estimated interest rate, your anticipated monthly payment, and any other closing costs that may arise.  Now what you need to know so that you don’t get confused is this document will come out within 3 days after your completed loan application but don’t take this as a loan approval.  As it says in the name, it is just an estimate and is in no way a binding deal for financing with the lender you are working with.  Since the end of 2015, Understanding The Loan Estimate went through a major change by the CFPB (Consumer Financial Protection Bureau) in the sense that the format of this document was standardized so that if you are shopping for a mortgage it is very easy to compare quoted rates and payments associated with your application.  Prior to this overhaul you were presented information in many different ways which made it complicated to see exactly what lenders estimating for your mortgage rate, payments, and costs in order to obtain the loan.  The old way of presenting data was through HUD’s (US Department of Housing and Urban Development) Good Faith Estimate or GFE.

Understanding The Loan Estimate: Tolerance Of Fees
Understanding The Loan Estimate: Tolerance Of Fees

There are also 3 categories of fees that can or cannot change when settlement/Closing Disclosure is going to take place.  This has been put into place so that the accuracy of the fees is controlled and that there aren’t any surprises from a lot of the third-party fees that are associated with a loan closing.  The 3 categories are Zero Tolerance meaning that once these fees are disclosed via the Loan Estimate or LE, the lender is locked into them, 10% Tolerance meaning that these fees can increase by 10% at closing, and Unlimited Tolerance meaning these fees don’t have limits to how much they can change.  Below you will find examples of fees from each category in order to help in Understanding The Loan Estimate:
Zero Tolerance:  Fees that are in this category cannot increase from the LE to the Closing Disclosure or the lender will be hit with a Tolerance Violation.  There is a reason why the following fees are put in the Zero Tolerance Section and that is because these fees are normally what the lender/creditor has control over so being provided an accurate amount is vital.

  • Lender Origination Charges
  • Cost or Credit of the desired interest rates resulting in Points purchased or a lender credit received
  • Transfer Taxes (Local and State government fees calculated by the loan amount)
  • Services you cannot shop for

10% Tolerance:  The fees located here are grouped together and their cumulative total can only increase up to 10% by the time the closing disclosure is issued and settlement is ready to take place.  You can have a certain fee that increases a lot, however, if the cumulative change is still within 10% there is no problem.

  • Title Services / Lender’s Title Insurance
  • Recording Fees
  • Third-Party Services you can shop for (provided by lender)

Unlimited Tolerance:  These fees are not subject to tolerance limits and are free to change.  Even though they can change drastically, the thought still is to be truthful and estimate using good faith.

  • Third-Party Services you can shop for (Not provided by lender)
  • Initial escrow deposit
  • Daily interest charges
  • Homeowner’s Insurance

What Is On Each Page?
What Is On Each Page?

When looking at Understanding The Loan Estimate you need to know that this document is 3 pages long and on these pages is different type of information.  For example, the fees we looked at above will all typically be found on page 2.  However, there is very important information located on Page 1 and Page 3.
Page 1: On this page you will see the borrower information, date issued, loan term, loan purpose, and loan type.  Below this you will see a section labeled Loan Terms which has: loan amount, interest rate, monthly principal and interest, prepayment penalty, and balloon payment if applicable.  Next is Project Payments section which has: principal and interest, mortgage insurance, estimated escrow amount to result in an estimated monthly payment.  Finally, the bottom section of Costs at Closing includes the total estimated amount of closing costs which you will see in detail on Page 2 and also the estimated amount of cash needed to close which will also be determined on Page 2.
Page 2:  This is the most important page of the entre Loan Estimate because it has all your closing costs details.  All the fees that were mentioned above and they are broken out into a certain format you’ll see below.

  • Section A: Origination Costs which are fees that cannot change and is an easy fee to compare various lenders by.
  • Section B: Services You Cannot Shop For which would be services that a lender requires you to use.
  • Section C: Servicers You Can Shop For where if you choose from a lender supplied list these fees cannot change more than 10%.  If you go outside the lender list, the fees have no limits on changing.
  • Section E: Taxes and Government Fees includes your Transfer Taxes and any other local or state taxes and fees associated with the mortgage.
  • Section F: Prepaids includes the interest, insurance, or taxes included with closing your loan which covers fees for the remainder of the month.
  • Section G: Initial Escrow Payment are the funds that the lender requires to be paid at closing in order to setup your escrow balance to start with.
  • Section H: Other includes any other fees not mentioned like owner’s title insurance.

Page 3: On this page you are going to find additional information that may be associated with your loan that was not mentioned in the first 2 pages of the Loan Estimate.  Just as on Page 1, there are different sections in order for your Understanding The Loan Estimate.  The Comparisons section on this page will give you details on how much you will have paid in 5 years, how much principal it paid, and the total interest paid for the life of the loan.  Next in Other Considerations you will see items that are either yours or the lenders responsibility.  These items include stating an appraisal may be needed by the lender, homeowner’s insurance will be on the property, the terms of late fees and charges, future refinancing option, and if it is the lender’s intention to service the loan and accept your monthly payments.  The final section is the Confirm Receipt section where you will more than likely electronically sign for receipt of this document by the borrower and co-borrower if applicable.

Understanding The Loan Estimate: Don’t Get Overwhelmed

If you have gone through this article and aren’t 100% confident in your Understanding The Loan Estimate there is no worries here as we can always walk you through this document and all the fees that coincide with the LE.  These days it is a lot easier to compare lender quotes so having an industry standard form will relieve the frustrations borrowers in years past may have run into.  If you are ready to get you mortgage you need to reach out today at 888-900-1020 or by email at contact@loanconsultants.org and we will be more than happy to help you!

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