Buying a home is complicated process that involves many steps and documents to review, understand, and sign. Two key documents, especially for first-time homebuyers, are the loan estimate and the closing disclosure.
The former provides important details about your lender’s mortgage offer, while the latter finalizes those details for closing. Both contain crucial information, such as the interest rate you’ll pay, closing costs, lender fees, any discount points you’ve bought, and more.
Here’s what you need to know about these documents:
- Loan Estimates vs. Closing Disclosures
- What Is a Loan Estimate?
- What Is a Closing Disclosure?
- The Bottom Line on Loan Estimates vs. Closing Disclosures
Loan Estimates vs. Closing Disclosures
When you buy a home with a mortgage, your lender is required by law to provide a loan estimate and a closing disclosure. Each standardized form comes at a different point in the process, and each contains slightly different information.
Lenders will provide a loan estimate within three business days of receiving your mortgage application. It lists key details of the mortgage that the lender expects to offer to you, such as the loan amount, the loan term, the interest rate, and your expected monthly payment.
Keep in mind the loan estimate is exactly that: an estimate. Though the numbers can change, the estimate will help you understand in detail the mortgage you’re being offered. The standardized form allows you to easily and directly compare mortgage offers from multiple lenders, and choose the loan that’s right for you.
After you accept a loan offer, your lender begins underwriting. Your lender will provide the final details of its loan offer in the closing disclosure, which the borrower must receive at least three business days before the scheduled closing date.
The closing disclosure will include the final closing costs and monthly mortgage payment, and how much cash you will need on hand to close the sale.
Before signing your closing documents, it’s important to compare the loan estimate and the closing disclosure to be sure you fully understand the loan terms.
Loan Estimate vs. Closing Disclosure
|Loan estimate||Closing disclosure|
|– The lender provides a loan estimate within three business days of receiving your mortgage application.|
– The document clearly states which numbers may change before the closing disclosure is issued.
– Three pages long.
|– The lender provides the closing disclosure at least three business days before the scheduled closing date.|
– This document includes final mortgage terms.
– Five pages long.
What Is a Loan Estimate?
A loan estimate is exactly what it sounds like: an estimate of your mortgage and closing costs. Lenders will provide this document within three business days of receiving your mortgage application.
It’s a good idea to apply with several lenders and compare loan estimates to find the best mortgage for you.
How to get a loan estimate
To get a loan estimate, you need to contact a lender and apply for a mortgage. You generally need to provide:
- Your name.
- Your income.
- Your Social Security number, which is used to pull your credit report.
- The address of the home you plan to buy.
- The sale price of the home.
- How much you need to borrow to buy the home.
Loan estimates can be completely revised, and you’ll receive a new estimate if there’s a change of circumstances, such as an update to the loan amount, the loan type, or other terms that alter the estimate, says Joshua Westreich, branch manager at U.S. Mortgage of New Jersey, based in Hackensack, New Jersey.
A change of circumstances also can include adjustments to your income, credit score, or employment status.
Understanding your loan estimate
The loan estimate is a standardized form intended to make it easier for borrowers to understand the mortgages they are being offered and to compare offers.
Here’s a page-by-page guide to the standard loan estimate.
This page covers the basics of the loan you applied for, and includes the loan term, loan type, interest rate, loan amount, estimated monthly payments for the mortgage and escrow costs, estimated closing costs, and estimated amount of cash needed to close.
These are important areas to check, according to the Consumer Financial Protection Bureau:
- Borrower information: Verify your name and the address of the property you’re buying.
- Loan information: This includes the number of years you’ll be repaying the loan, whether you’re using the loan to buy or refinance a home, whether your loan has a fixed rate or adjustable rate, and the loan type.
- Interest rate: This is the interest rate you’ll be charged for the loan.
- Rate lock: If you chose a rate lock, this section confirms it and states when the lock expires.
- Loan amount: Make sure the amount you are borrowing is correct.
- Prepayment penalty and balloon payments: This section will say whether the lender can charge a penalty if you pay off the loan ahead of schedule. A balloon payment is a lump-sum payment — often quite large — that is required at the end of the loan term.
- Estimated total monthly payment: Confirm this is in line with what you can afford to pay on an ongoing basis. This total may include estimated taxes, homeowners insurance, and assessments that will be collected and paid from an escrow account.
- Estimated cash to close: You need to have this amount on hand to close the sale.
Page 1 clearly indicates which fees can and cannot change before closing.
Costs are broken down more thoroughly on this page. Estimated loan costs are listed, including which services you can or cannot shop for. Page 2 also breaks down taxes and other property charges, and itemizes the cash-to-close fees.
The final page of the loan estimate includes a comparisons section that details how much interest you’ll pay over the life of the loan, the annual percentage rate, and the total interest percentage.
It also includes a list of other considerations, including whether the lender will allow the loan terms to be assumed by another party, or whether the lender plans to transfer servicing of your loan.
The final section on Page 3 is for you to sign and confirm receipt of the loan estimate. Signing the loan estimate doesn’t mean you accept the loan.
How to compare loan estimates
Consumers who get loan estimates from multiple lenders save more money. Research shows that borrowers could save an average of $1,500 over the life of their loan by getting one additional rate quote, and an average of about $3,000 by getting five quotes.”
As you request loan estimates, it may be helpful to keep track of the figures in a spreadsheet.
Once you have several estimates, you can compare them based on factors such as:
- Loan type: This shows whether the mortgage is a conventional loan, a Federal Housing Administration loan, or a Veterans Affairs loan.
- Rate type: The interest rate type will be either fixed or adjustable.
- Loan term: The term indicates how long it will take to repay the loan.
- Loan amount: This should be the purchase price, minus your down payment.
- Discount points and lender credits: Discount points are a way to prepay interest on your loan to reduce the interest rate. Lender credits involve the lender reducing your closing costs in exchange for a higher interest rate.
- Rate lock period: This keeps your interest rate from changing for a set amount of time, typically 30 to 60 days.
What Is a Closing Disclosure?
After underwriting, your lender will decide whether to approve you for a mortgage, and the terms of the loan it can offer to you. Your lender will provide the details of that loan in the closing disclosure, and present it to you at least three business days before the scheduled closing date.
When you sign your closing documents, the terms on your closing disclosure become the contractual agreement between you and your lender to fund and repay the loan.
You may consider asking your real estate agent to look over the closing disclosure with you to ensure it is correct.
Understanding your closing disclosure
The closing disclosure is a standardized five-page document that includes all the final details of your loan offer. Each page contains information that needs to be reviewed and understood before you sign your closing documents.
Page 1 of the closing disclosure is dense with numbers and information, so you’ll want to pay close attention. According to the CFPB, pay special attention to these areas, many of which also are on the loan estimate:
- Borrower information.
- Loan information.
- Loan amount.
- Interest rate: This is the exact interest rate you’re agreeing to for the loan. It’s important to verify.
- Prepayment penalty.
- Balloon payment.
- Estimated total monthly payment.
- Estimated taxes, insurance, and assessments: These are one-time fees to cover any costs not included in escrow.
- Closing costs: These are loan costs, taxes and government fees, real estate agent commissions, and other fees that need to be paid to close the transaction.
- Cash to close.
Page 2 features an itemized list of closing costs. For loan costs, it lists lender fees, and services you shopped for and those you did not shop for. These services can include origination costs, the appraisal, home inspection, and title fees.
It’s important to go over these line by line to confirm they are accurate, and that you understand the fees you’re paying.
Page 3 is a rundown of the fees you need to pay at closing. It explains which fees changed from the loan estimate, and includes any seller credits you negotiated.
It also includes a summary of transactions for both the buyer and the seller.
Similar to Page 2, it’s important to go over this line by line to ensure all of the numbers are accurate.
Page 4 is for loan disclosures, which include details for making payments, when and how late fees are applied, and paying costs such as property taxes and homeowners insurance via your escrow account.
It’s important to verify the amount of funds going into your escrow account, as well as what the penalties look like if you’re unable to make a full monthly mortgage payment on time.
The last page explains the big picture of your loan. This covers how much you’ll pay in total over the life of the loan, including details on how much interest will be charged.
While the numbers are important to verify, it’s equally prudent to ensure all the information is correct.
“Check for lock expiration, as well as any points or discount charges being passed on from the lender,” Westreich says. These are important because they can make a large difference in the cash-to-close amount.
You sign the form to confirm receipt only, not to accept the loan.
This page also will have contact information for the lender, the mortgage broker, both real estate brokers, and the title or settlement company.
What to do if the closing disclosure vs. loan estimate is different
It’s important to compare your closing disclosure against your loan estimate. If they differ, contact your lender immediately and ask them to explain the changes.
However, keep in mind that even if you don’t have a change of circumstances, certain closing costs still can adjust by different amounts between the loan estimate and the closing disclosure:
- Prepaid interest, property insurance premiums, initial escrow account deposits, fees for services you have shopped for separately, and fees for optional third-party services can increase by any amount.
- Recording costs or fees for third-party services that the lender requires can increase by no more than 10% from the loan estimate.
- Interest rates can change at any time if you don’t have a rate lock.
Transfer taxes, fees paid for services required by the lender or mortgage broker, and fees for required services you could not shop for cannot be increased from the loan estimate.
If your costs have increased beyond the allowed limits, you are entitled to a refund of the amount you paid over those limits.
The Bottom Line on Loan Estimates vs. Closing Disclosures
The loan estimate and the closing disclosure are two of the most important documents to review when getting a mortgage to buy a home. The loan estimate comes early in the process to outline the loan terms and your obligations in paying back the loan. The closing disclosure finalizes the terms of your loan and the transaction. Be sure to review thoroughly each document, so you can be confident about finalizing the purchase of your new home.
- Freddie Mac (2018)