How to read and compare loan estimates

Quick insights

• Loan estimates are standardized forms which provide critical information regarding a potential loan, including the closing costs and disclosures from the lender.
• Lenders are required to provide these estimates to applicants within three business days of receiving complete loan application.ec-cf-loan-est
• Loan estimates are important tools for comparing loans and may be useful for negotiating better terms.

If you’re preparing to purchase a home soon, you may be collecting loan estimates to help make your plans a reality. In this article, we’ll explain how to decipher the estimate(s) you get, how to compare loan estimates and provide tips to negotiate for better terms and rates.

What are loan estimates?

A loan estimate is a standardized document lenders are required by law to provide within three days of receiving a loan application. This document was introduced in 2015 by the Consumer Finance Protection Bureau (CFPB) to replace older formats and clarify the process for consumers.2 As it exists today, a loan estimate is three pages long. You’ll find basic information about the borrower, property in question, along with detailed estimates regarding the loan terms, projected payments and closing costs.

Why loan estimates are important

The main purpose of a loan estimate is to provide homebuyers with information to make a strategic home financing choice. This document can also help with:

• Transparency: This standardized form makes it easy to see important information related to buying a specific home, at a glance.
• Comparisons: If multiple loan options are on the table for consideration, each loan estimate provides the information needed to compare them.
• Decision-making: Loan estimates that are delivered in time to help buyers make decisions and avoid stalls in the process.

How to read a loan estimate

Loan estimates have standardized format, which helps make them easier to review. In this section, we’ll describe what can be found on each page of the document.ec-cf-loan-est

Page one

This page includes some of the most high-level information about the loan terms, projected payments and costs at closing.

• Loan terms: Here, you’ll find the loan amount, interest rate and the monthly payment size (including principal and interest). These are the high-level financials which will carry throughout the repayment of the loan, as well as the potential for them to change over time (for example, the interest rate may change on an adjustable-rate mortgage). This section will also indicate whether the loan has a prepayment penalty or “balloon payment” clause.
• Projected payments: In this area, the monthly payment is examined more closely. There should be separate line items for mortgage insurance (if applicable) and estimated taxes, insurance and assessments.
• Costs at closing: This section provides two estimates for closing costs. The first is the upfront costs you’ll be charged to get your loan and transfer ownership of the property. The second estimate factors in the costs you’ve already paid, such as appraisal costs and survey fees, which are detailed on the following page.

Page two

The “costs at closing” section from page one is shown in more detail on page two, with each line item organized into sections A–J. At the bottom, a final calculation reiterates the closing totals from the first page, “showing the work” to get to those figures.

• Section A: This section includes origination charges that will apply to this loan (the charge you will pay to start the mortgage).
• Section B: Here, you will find “services you cannot shop for,” which are third-party services which will be selected and required by your lender to get the loan. These detailed costs include appraisal fees, credit report fees, flood determination fees and so on.
• Section C: “Services you can shop for” are accounted for in this section. These are services which are still required by the lender, but whose providers can be personally selected by the borrower.
• Sections E–J: Found on the right-hand side of page two, these sections add in taxes and government fees, prepaid premiums, homeowner insurance fees and the owner’s title policy (optional). In section J, all closing costs are totaled together for an ultimate closing costs number.

Page three

Additional information about the loan can be found on this page, including useful details for comparison and other considerations:

• Comparisons: This section provides how much you’ll have paid in five years, assuming you maintain consistent payments, along with the principal that would remain. The annual percentage rate (APR) for the loan and total interest percentage (TIP) will also be shown, important factors for fair comparisons with other loans.
• Other considerations: Here you can find important disclosures regarding appraisals, assumptions, homeowner’s insurance, late payments, refinancing and servicing will be handled during the course of the loan.
• Confirm receipt: The final section of this document includes space for the loan applicant to indicate when they received the form. Signing here does not imply you’re accepting the loan, only that the form was provided to you.

For a loan estimate example, visit the CFPB website to view a sample form that’s been filled out and enhanced with further explanations.

How to compare mortgage loan estimates

While all information provided with loan estimates can be helpful for comparisons, the top-line details you may want to pull include:

• Interest rates and APR: The interest rate on a loan estimate indicates the percentage you will pay to borrower; APR includes your interest rate, plus any additional costs which may apply.
• Type of loan: Choosing between an ARM or fixed-rate mortgage is a major decision. It could be easy to skim right past it, but the loan terms on page one include essential callouts about the variability of the loan’s rate and any balloon payment inclusions.
• Lender fees and closing costs: Two different loan estimates, especially from different lenders, may have significant monetary differences in terms of origination fees, application fees and other lender-imposed costs.
• Features and penalties: Loan estimates lay out important details about how they will handle your loan, including rules regarding late payments and whether or not they will allow assumption of the loan.

How loan estimates can be used to negotiate

To try and secure more favorable terms and conditions, some borrowers could use loan estimates from different lenders as a negotiation tool. Having a picture of costs can help borrowers make pointed requests, such as asking to reduce an origination fee, which vary by lender. After receiving a loan estimate, you can also reach out to a lender to ask for a rate lock, which can prevent your rate from changing between the time of the estimate and closing.

In summary

Receiving a loan estimate is a meaningful step forward in the home purchasing process. With this information in hand, it’s important consider how each detail may impact your long-term experience as a homeowner. If you have questions about home financing, consider getting in touch with a Chase Home Lending Advisor.