Obtaining a home loan is a normal part of the home buying process. Experts recommend getting prequalified before you even begin shopping for homes. That is sound advice. However, we believe there is something else potential buyers should do beforehand: learn about and understand the mortgage loan estimate.
A mortgage loan estimate is a document issued by a lender prior to making a formal offer for a home loan. Lenders issue the documents so that home buyers might have the opportunity to compare mortgage offers. Although a lender’s numbers are subject to change, mortgage loan estimates are supposed to be good faith estimates with fairly close numbers.
A Standard, 3-Page Document
Note that lenders are not allowed to do their own thing with mortgage loan estimates. Thanks to the 2010 Dodd-Frank Act, they must use a standard 3-page template to prepare their estimates. This makes comparison shopping a lot easier for home buyers. They can lay estimates side-by-side and compare them accordingly.
The document is split into several sections:
- General Information – The first section includes general information like the date the estimate was prepared and the name and current address of the loan applicant. It also includes a brief summary of the type of loan being applied for.
- Loan Terms – The loan terms section lists loan amount, interest rate, and projected monthly principal and interest payments. If a prepayment penalty or balloon payment are involved, they will be in this section as well.
- Projected Payments – The next section breaks down estimated monthly payments by principal and interest, mortgage insurance, and escrow payments. Estimated taxes and homeowners’ insurance are also included here.
- Closing Costs – This section contains information about closing costs. It tells a prospective home buyer what to expect in terms of total closing cost amounts and the amount of cash that will be necessary at closing.
- Closing Cost Details – While the previous section offers a general overview of closing costs, the next section spells them out in detail. This section takes up almost the entire second page.
- Comparisons – The next section offers three pieces of information home buyers can use to compare the details of the offer with others. It is essentially a snapshot for making comparisons easier.
- Other Considerations – The final section lists a number of additional things home buyers are expected to consider. It includes comments about appraisals, homeowner’s insurance, refinancing, etc.
The bottom of the document contains lines for dates and signatures. By signing a mortgage loan estimate, a home buyer confirms they have received the document. As long as the mortgage lender has used the standard template and followed the rules for disclosing information, it has fulfilled its obligation by providing the document to a prospective buyer.
A Lot of Information
It goes without saying that the mortgage loan estimate contains a lot of information. If you are new to real estate and home loans, much of the information might be foreign to you. We understand that. It can be difficult to grasp all the little details that go into buying a home with a mortgage.
One of our jobs as a mortgage lender is to help you understand all the finer details of obtaining a home loan. Should you choose us as your broker, do not hesitate to ask any and all questions you might have about the mortgage loan estimate. We want you to fully understand exactly what you are getting into when you select a particular home loan. We also want you to be fully equipped to compare multiple offers. That is why the mortgage loan estimate exists. Contact us today to talk through your loan options with a trusted Colorado mortgage broker.
