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Keys to Understanding the Loan Estimate: Part 1



Today, we're going to discuss page one of the loan estimate. This is a three-part series on the keys to understanding the loan estimate. I'm going to give you a more detailed loan officer explanation of this required lender disclosure, and I'll be going through the sample loan estimate as provided by the CFPB for this series. So let's go ahead and get started.

Loan Estimates Overview

First and foremost, the loan estimate, commonly referred to by your lender and others as the LE, is a form that you receive after applying for a mortgage. Again, they're required to give it to you within three business days of applying is the actual requirement. The LE replaced the good faith estimate, or GFE, on 3 October 2015, and the LE is used to break down all the numbers for your transaction and is typically compared to the final closing disclosure. So you get that what were you disclosed on the loan estimate, what's actually going to show up in your closing disclosure. So that gives the consumer two official look-sees before they sign on the dotted line, which is good.

When you complete a loan application online, this doesn't automatically trigger an LE to you as a consumer. This is because most online loan applications don't have the seven required pieces of information to compile an application. Before receiving a loan estimate, your loan officers probably sent you a detailed closing cost worksheet or some sort of thing outlining your estimated closing costs of the financing you're looking for. But once you get the loan estimate, let's go ahead and go through that.

The First Step: Spelling

The first step is that we're going to look at the spelling of your name. This is one of the biggest things that people just overlook. Maybe it's a typo in the loan application, but this should be your legal name as well. The second thing we're going to look at is your loan term, the purpose, the product, and the loan type. So just make sure all that's correct. The third thing is your rate lock. I want to provide a little bit more color here. The rate lock-in this example shows yes, and typically that's going to be the case. Before you get an LE, your interest rate should be locked. However, I have seen that for many reasons; maybe it was that the market was running rampant, and you had submitted your application, and the lender was not floating without your consent, but they just couldn't get it. They were waiting and you guys were discussing, hey, we should wait this out a little bit before we lock. That may be one reason why you do not see it saying it's locked. If you do see a no, and you do think you're locked, immediately pick up the phone and call your loan officer and say, "Why am I not locked?" I'm sure there's a reason for that.

The Second Step: Closing Date

So the second thing you should look at, by the way, regarding this closing date or this lock expiration date, is to make sure that you close in time because on refinances, you have to watch out not just for the closing date but the funding date. If your lock expiration date expires on the date that your loan is closing, that's not enough time because your funding date is actually what lenders go by. You have to have your lock expiration date extend at least three business days past the closing date. Extensions are very costly. Most lenders will give you a free one-day extension, but if you go beyond that, it's pretty expensive. So be sure that you can help your lender avoid any delays or whatnot by submitting your conditions immediately on your loan approval. So that's a pro tip.

The Third Step: Loan Amount

The next part is to check if the loan amount is correct. That may seem like, "Duh, Rick. Yeah. My loan amount's correct, or it's not right." Well now on a purchase, it should be exactly what you expect. Sales price minus your down payment should be your loan amount. Currently, there are some things that could increase your loan amount on a purchase. It could be a funding fee on a VA loan which is tacked onto the loan amount. It could be the MIP premium paid on an FHA loan, which digs into your down payment. But these should have been explained to you by your loan officer. 

But more the ones that show up at loan estimate are on refinances. I will tell you that sometimes there can be an increase to the loan amount based on the loan officer trying to make sure that the cash to close is about zero on your refinance. And that's because maybe the escrows were a little bit high or the taxes couldn't verify that your lender had paid your taxes, so we escrow enough money, and that increased your loan amount. So more often than not, any increase or decrease is due to things like the escrow's real estate taxes, which is simply the payoff of your existing loan. But again, purchase, you should be pretty spot on. 

Here's a little pro-tip. I wrote an article on this because this is a question I get every week is, why is my balance going up so much when I'm refinancing? you can check out the article that I wrote. It's an article called the Three Reasons Why Your Balance Goes up with Refinancing.

The Fourth Step: Fixed or Adjustable Rates

Let's go and look at the next factor here, which is, is your interest rate fixed or adjustable? Well, you want to make sure the interest rate is correct. Part of what I see here sometimes is that if you've looked at several different options with your loan officer, just make sure this is the one you've chosen. Changing your mind later on in the process could cause delays in your loan closing, so just be careful ther

Some steps are typically abnormal to see on an official document, and that's the pre-payment penalty or balloon payment. These really don't exist anymore. You may see a pre-payment penalty on a second mortgage where they've paid your closing costs, and you pay it off within three years. You'll get hit with the closing costs. That would be a pre-payment penalty. But typical mortgages do have zero pre-payment penalties anymore, and they certainly don't have a balloon payment. A balloon payment would be your loan is actually due, all payable at one time after that initial fixed term expires. So just make sure both of those say no.

The Fifth Step: Calculation of Payments

Next is the calculation of your projected payments. One thing I wanted to discuss here was really regarding the estimated payments is to keep a close eye on your escrow numbers. There are many times that they could be higher than what you're currently paying, especially on a refinance, or possibly more than you've figured on a purchase. And the reason for that is that it has all to do with your taxes, or the taxes may have been updated since the last time you looked at it online or perhaps your escrow account. Your taxes have changed since the last time it was dispersed. One thing to mention, if you do have an escrow shortage, your lender is probably collecting more every single month into your escrow account. So in those cases, your escrow amount should be lower than what you're currently paying now. So keep an eye out for that.

The Sixth Step: Estimated Taxes, Insurance, and Assessments

The last couple of items here are the estimated taxes, insurance, and assessments. Again, this is really called escrow. We're going to get more of this into part two, but most borrowers let their lenders handle the payment of taxes and insurance for their mortgage. And they collect these and hold these funds in an escrow account. An escrow account is not money that's just going into lala-land. It's your money in your account with your name on it. It's your funds. And the lenders are required to every time there's a disbursement, do an evaluation. Do they have too much? Do they have too little? And if they've got too much, they are supposed to send you a check. Note that you can waive this requirement for the lender to handle your escrows. You can't do it on a VA or an FHA loan, but you can ask under specific criteria on a conventional loan, but there is a cost to it, 0.25% of the loan amount, to be exact. So typically, it's not worth it. Just let your lender handle it, but certainly an option for you.

The Last Step: Cost at Closing

And the last thing we want to discuss here is the cost at closing. Two quick items here. One is the estimated closing costs. You see that 8,054 number? Typically that number is significant, and unfortunately, I think this is a very misleading way to describe this section here because it's not really a cost. The number you're seeing is not the cost of your transaction. This figure includes prepaid items, setting up your escrow account, as well as the taxes that are being paid on your behalf. And this is listed under the other costs. These are not closing costs but rather monies that you would owe, whether you finance or not. And again, more on this in part two.

But simply put, the actual costs in that line on your estimated closing costs are to get a loan are your loan costs, which by the way, aren't just lender costs. These are the costs to get a loan. Add in a portion of your other costs because most of your other costs are simply your escrows and your taxes and your prepaid interest on the loan you're getting. And then you would minus out any lender credit. So it's loan costs, plus a portion of your other costs minus your lender credits. That is your actual cost to do a loan, not the number you're going to see there. So just keep an eye out for that.

A Quick Note on Estimated Cash to Close

The other thing to note is your estimated cash to close. Note the word estimated. On a loan estimate, the lender's at a little bit of a disadvantage on a refinance. On a purchase, and this should be pretty much spot on, so this is the amount that you have to close that you need at closing. On a refinance, just note, this is an estimate. More on this is important too, but the cash to close can be a moving target, things like a payoff. Verification of taxes as being paid hasn’t been confirmed, and by the way, they won't be. You won't get an accurate payoff, and you won't know if your taxes are being paid or not. You don't really see the escrow balance at the time of your loan estimate. So these numbers will be more than likely buffered a little bit too and be a little bit high. So this estimated cash to close in a refinance typically is going to be on the high side and will be reconciled more closer to closing at the closing disclosure stage.

Again, all of these numbers will be compared to the closing disclosure, and you will see on the disclosure itself, and we'll be doing another part series on that, the closing disclosure, as to how the loan estimate compares to that.

That is the first page of the loan estimate. I hope you enjoyed it. Please stay tuned for part two and part three coming very soon. If you're thinking about purchasing or refinancing and would just like some advice, go ahead and shoot us a note. Hope you have a great day!