If you've applied for a mortgage in the past, you might recall getting two forms from your mortgage lender: a Good Faith Estimate (GFE) and a Truth-In-Lending Disclosure. The GFE provided basic information about your mortgage, such as the interest rate and term, while the Truth-In-Lending Disclosure detailed the costs associated with the mortgage. Recent changes in the mortgage industry simplified the paperwork.
Effective October 3, 2015, the GFE and Truth-In-Lending Disclosure were replaced with a single form called the Loan Estimate.
Purpose of a Loan Estimate
Getting a mortgage is a complex and often complicated process. There’s not only the stress of waiting to see if you qualify for the loan, you may worry about having enough in reserves to cover mortgage-related expenses like the down payment and closing costs.
It's important that you're clear about the mortgage terms and your out-of-pocket expenses. The Loan Estimate removes any guesswork, so you know exactly what to expect. There’s an opportunity to count the cost of getting a particular mortgage, and with this information, you can decide whether now’s the right time to proceed with a home purchase.
What Information Is Included on a Loan Estimate?
This three-page form is easy to understand and broken into sections. The first section of the document explains your loan terms, such as the loan amount, the mortgage rate and the total monthly principal and interest. What's interesting about the new form is that it also includes information about whether the cost of certain items can change after closing.
Some mortgage loans also include a prepayment penalty or a balloon payment, and it's in this section where you’ll learn whether these terms apply to your mortgage. With a prepayment penalty, the lender may charge a fee if you pay off the loan within a certain time frame. Prepayment penalties are designed to discourage paying off a mortgage early, Because of new regulations, mortgage lenders can only charge a prepayment penalty under certain conditions, and only up to the first three years.
In the case of a balloon payment, the mortgage does not fully amortized over the term, which means there’s a balance left at the end of the term. If the mortgage has a balloon payment, you can either make a lump sum payment to pay off the remaining balance or refinance the mortgage.
The next section of the Loan Estimate provides your projected payment so there are no surprises. Unfortunately, repayment of a mortgage involves more than repayment of principal and interest. Other costs are included in your mortgage payment, such as property taxes, homeowner’s insurance, and in some cases, homeowner’s association dues.
The last section of the Loan Estimate has information about your closing costs and down payment. Depending on the type of mortgage, the lender may require a down payment between 3.5% and 5%. Additionally, closing costs can range from 2% to 5% of the loan balance. Closing costs include the mortgage origination fee, the title search fee, prepaid interest, attorney fees, etc. The Loan Estimate breaks down your total costs, and estimates how much cash you’ll need to close.
How to Get a Loan Estimate
You’ll receive a Loan Estimate before the lender approves or rejects your loan application, and the information in the estimate is what a lender expects to offer if you decide to proceed.
To get a Loan Estimate, you have to provide the lender with six pieces of information: your name, your income, your Social Security number, the address of the property, the estimated value of the home and the amount you want to borrow. At this stage you don't have to provide the lender with information verifying your income. You can, however, volunteer this information. It's actually recommended because it’ll give a lender a better idea of what you can afford.
Once you submit the necessary information, the lender must provide a Loan Estimate within three business days. You then have 10 business days to decide whether to proceed with the loan. Allowing 10 business days gives you a chance to contact other lenders and compare multiple Loan Estimates.
If you decide to proceed with a mortgage, contact the chosen lender and express intent to proceed. You’ll then complete and sign an official loan application and provide additional documentation, such as tax returns to verify your income and bank statements. The loan officer will order your credit report and submit your loan package to the underwriter. The underwriter reviews your credit history, assesses affordability, and verifies your employment and information provided on your tax returns. If everything looks good, you’re approved for the mortgage and the lender begins preparation for closing.
You can start by getting a loan estimate today from a lender once you check out your mortgage options!