Looking for a mortgage loan? When evaluating your mortgage options, you may want to review loan amounts, rates and fees before committing. You can get all of this information in a federally-mandated disclosure after you apply for a loan.
In the past, this itemized summary of expected mortgage costs was called a Good Faith Estimate (GFE). These days, it’s referred to as a Loan Estimate. We’ll break down the components of this important document in this article.
Looking for a mortgage? Newrez offers a wide selection of loans to fit your needs.
What Is a Loan Estimate and When Is it Issued?
The Loan Estimate is a legally required three-page disclosure provided by lenders within three business days of receiving a loan application. It details the loan’s estimated interest rate, monthly payments and estimated closing costs.
When you receive your Loan Estimate from your lender, the standardized form will include:
1. Basic Information
The top of the form includes standard information such as the applicant’s name and address, as well as the address of the property to be purchased and its sale price or general property value.
Then come the loan basics:
- Loan Term: Length of time (30 years is common)
- Purpose: Purchase, refinance, construction or home equity.
- Product: Whether the rate is fixed or adjustable, and anything that could change the payment (for instance, balloon payments or negative amortization).
- Loan Type: Conventional, FHA or VA loan
- Loan ID: Stays the same for the life of the loan
- Rate Lock: Whether the rate at the time of application is locked, and how long
2. Loan Terms and Rate Structure
This section outlines the basic structure of the mortgage, including the loan amount, the interest rate and the monthly principal and interest. It also indicates whether any of these can change after closing and, if so, explains the limits and frequency of adjustments.
This section also defines whether or not the loan carries a prepayment penalty, which is a fee for paying off the loan early (most Newrez loans do not carry this). Lastly, whether the loan carries a balloon payment structure (most Newrez loans do not carry this). If the answer is yes for either, it defines the limits of these payments. (as much as $X,XXX in year X).
3. Projected Payments
This section details how your payment could change over time. In addition to your principal and interest payments, it includes an estimate of your initial escrow payment. This portion of your payment will typically shift over time. (Learn more about escrow here.) If your loan includes mortgage insurance, this will be listed here.
If your mortgage payment bears an adjustable rate, an interest-only period or another feature which will affect your payment, this section will outline the parameters of these structures.
4. Costs at Closing
This section is critical because it shows you how much money you’ll have to bring on closing day. It includes:
- Estimated Closing Costs: Fees for services like appraisal, title and lender charges.
- Estimated Cash to Close: The total amount you must bring to closing, including down payment and closing costs minus any credits.
Keep in mind, sometimes sellers cover some of these charges—it depends on negotiations.
5. Loan Costs
Loan Costs are broken down into three sections:
- Origination Charges: What the lender charges to underwrite and process your loan. This includes origination fees, discount points, the underwriting fee and more.
- Services You Cannot Shop For: Required services chosen by the lender, such as the appraisal and credit report fees.
- Services You Can Shop For: Fees for services you can choose, such as fees for title insurance or survey fees. Shopping around can save you money.
6. Other Costs
This is an estimate of other costs you’ll have to cover that aren’t charged by the lender such as:
- Taxes and Other Government Fees: Recording fees and transfer taxes as assessed by a government entity
- Prepaids: Any prepaid amounts for homeowners insurance, property taxes or interest
- Initial Escrow Payment at Closing: Funds that set up your escrow account in anticipation of property taxes and homeowners insurance
- Other: Miscellaneous costs like HOA dues or title insurance
7. Calculating Cash to Close
This section breaks down the estimated cash to close laid out on the previous page of the disclosure. It includes:
- Total Closing Costs: All lender fees, third-party services, taxes and prepaid items.
- Closing Costs Financed (Paid from Your Loan Amount): If you’ve rolled some closing costs into your loan instead of paying up front.
- Down Payment/Funds from You: The amount you’re putting toward the purchase price.
- Deposit: Any earnest money you’ve already paid to the seller, reducing what you owe at closing.
- Funds for Borrower: Shows whether the borrower receives money back at closing. For most purchase loans, this will be $0. For other loan types (refi etc.) lenders calculate if the borrower gets cash back. If so, a negative amount appears here.
- Seller Credits: Any amount the seller agreed to pay toward your costs appears here.
- Adjustments and Other Credits: Includes lender credits, prorated taxes or other adjustments that could reduce your closing costs.
8. Comparisons
This section provides a few data points you can use to compare this loan to other loans you may be exploring. It includes:
- In 5 Years: How much you’ll have paid in principal, interest and mortgage insurance after five years, plus how much you’ve reduced the loan balance (assuming you adhere to your payment schedule).
- Annual Percentage Rate (APR): The cost of your loan expressed as a yearly rate, including interest and certain fees.
- Total Interest Percentage (TIP): The total interest you’ll pay over the life of the loan as a percentage of the loan amount.
9. Other Considerations
This section addresses concerns you might have outside of the hard numbers, including:
- Appraisal: Tells you if you’ll get a copy of the home appraisal.
- Assumption: Lets you know whether someone else can take over your loan in the future.
- Homeowners Insurance: Confirms if you’re required to carry insurance.
- Late Payment: Outlines the late fee policy.
- Refinance: Reminds you that your ability to refinance isn’t guaranteed, and depends on several factors.
- Servicing: Lets you know if the lender will service your loan or transfer it to a different servicer.
How a Loan Estimate Protects Borrowers
The Loan Estimate plays a critical role in consumer protection by:
- Offering early disclosure of total loan costs
- Preventing undisclosed or surprise fees at closing
- Enabling comparison of lender offers
How to Use a Loan Estimate
To use your Loan Estimate most effectively:
- Look at the total origination charges, not just the rate
- Evaluate total estimated cash to close
- Confirm whether the interest rate is locked and for how long
- Don’t be afraid to ask clarifying questions about any unclear line items
It might be simplest to focus on one number such as the interest rate, but the Loan Estimate allows you to get a fuller picture of your loan. Take advantage of the detail offered in this critical document.
Looking for a loan? Newrez mortgage experts are ready to help you find a product that suits your lifestyle. Reach out today.
