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The Loan Estimate and Closing Disclosure are two forms that you’ll receive during the home-buying process. The Loan Estimate comes at the beginning, after you apply, while the Closing Disclosure comes at the end before you sign the final paperwork for your mortgage.
Knowing how to interpret these standardized documents will help you get the best loan possible and avoid any unpleasant surprises at closing. Here’s a quick look at how these two forms compare:
Buying a home is likely one of the biggest financial decisions you’ll make in your life. Navigating the mortgage process can feel overwhelming, especially when it comes to understanding all the paperwork involved. Two key documents you’ll receive are the Loan Estimate and Closing Disclosure. While they sound similar, these forms actually serve different purposes.
As a homebuyer, knowing the differences between the Loan Estimate and Closing Disclosure is crucial. These documents provide important information to help you clearly understand the costs and terms of your mortgage before committing to a loan. Let’s break down what each one is, when you’ll get it, and how to make the most of it.
What is a Loan Estimate?
A Loan Estimate is a detailed 3-page form you receive after applying for a mortgage loan. This document provides estimates on important details like
- Loan amount
- Interest rate
- Monthly payment
- Closing costs
- Other fees and costs
You’ll receive a Loan Estimate from each lender within 3 business days of submitting a mortgage application. The key purpose of this form is to allow you to compare loan terms and costs across multiple lenders when shopping for a mortgage.
With Loan Estimates from at least 3 lenders, you can compare:
- Interest rates
- Loan types (fixed vs adjustable)
- Fees charged by each lender
- Monthly payments
- Total closing costs
Carefully reviewing and comparing Loan Estimates is crucial to choosing the best mortgage for your situation.
When Will I Get the Loan Estimate?
To receive a Loan Estimate, the lender needs your:
- Name
- Income
- Social security number
- Property address
- Estimated property value
- Mortgage loan amount sought
After providing this information on a mortgage application, the lender must deliver the Loan Estimate within 3 business days.
Keep in mind that a Loan Estimate is not a loan approval or denial It’s simply an estimate of what your loan terms and costs will likely be, You are not obligated to move forward with the mortgage until you’ve signed final loan documents at closing,
Reviewing the Loan Estimate Details
When you receive Loan Estimates, scrutinize each one carefully side-by-side. Pay extra attention to:
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Interest rate – This can vary significantly between lenders. Make sure you understand the type of rate offered – fixed or adjustable.
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APR – This reflects the total cost of the mortgage including interest, fees, and other charges. Use it to compare true costs between lenders.
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Closing costs – Itemized list of all fees and costs to close the loan. Compare these line-by-line on each LE.
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Monthly payment – Principal, interest, taxes and insurance. Verify if mortgage insurance is included.
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Cash needed to close – Total funds required for down payment and closing costs. Factor this into your home buying budget.
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Loan terms – Length of the mortgage (e.g 15 or 30 years), type of loan (conventional, FHA, VA, etc).
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Prepayment penalties – Some lenders charge this fee if you refinance or pay off the mortgage early.
Thoroughly checking the details on multiple Loan Estimates helps guarantee you get the best deal. Reach out to the lender with any questions or concerns about the terms and fees listed.
What is a Closing Disclosure?
The Closing Disclosure is another detailed form you’ll receive later in the mortgage process. This 5-page document outlines the final terms and actual costs of the loan you’ve chosen.
While the Loan Estimate provides estimates, the Closing Disclosure gives the real numbers you’ll be expected to pay at closing.
When Will I Receive the Closing Disclosure?
Federal law requires you get the Closing Disclosure at least 3 business days before your mortgage closing date.
The 3 day waiting period gives you time to review the final terms and costs, ask questions, and confirm everything aligns with your Loan Estimate.
If you don’t get the Closing Disclosure in advance, you have the right to delay closing until you’ve had 3 days to review it.
Reviewing the Closing Disclosure Details
It’s essential to thoroughly examine your Closing Disclosure and compare it to the Loan Estimate from the lender you’ve chosen. Key things to look for:
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Interest rate – Verify this matches the rate on your Loan Estimate or rate lock agreement.
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Loan terms – Confirm loan amount, length of mortgage, and type of loan product.
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Monthly payment – Double check principal, interest, taxes, insurance and any mortgage insurance.
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Closing costs – Review all itemized fees and compare them to your Loan Estimate. Some variation is normal but large changes must be explained.
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Cash to close – Total amount you need to bring to closing. If very different from the Loan Estimate, ask why.
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APR – This re-calculates your true loan costs based on final terms. Compare it to the APR on your Loan Estimate.
Pay super close attention to the “Summaries of Transactions” on page 3. This section outlines how much money is going where in detail. Scrutinize who is getting paid and for what.
If you notice any major inconsistencies in costs or terms vs. your Loan Estimate, speak up right away. Big discrepancies could indicate a problem or even predatory lending practices.
How Can I Use These Documents?
The Loan Estimate and Closing Disclosure might seem tedious, but they provide critical insights. Use them to your advantage by:
- Comparing Loan Estimates from multiple lenders to find the best deal
- Using the 3 day period to verify your Closing Disclosure aligns with your chosen Loan Estimate
- Asking your lender to explain any fees or costs you don’t understand
- Negotiating a lower interest rate or closing costs using competitive Loan Estimates for leverage
- Clarifying errors early and ensuring you aren’t overcharged
While buying a home comes with mounds of paperwork, being well-informed about these two key documents takes some stress out of the mortgage process. Understanding the purpose of the Loan Estimate vs. Closing Disclosure and thoroughly reviewing the details allows you to enter your mortgage with greater confidence.
Comparing lenders using your Loan Estimate
Loan Estimates make it easy to compare the interest rates and fees different lenders have offered you. Here’s the information you’ll find on the second and third pages of your Loan Estimate.
Page 2
This page contains an itemized list of every closing cost you’ll pay, along with an estimate of how much cash you’ll need to close. One of the biggest fees is the origination charge. It consists of the lender’s fee to process and underwrite your loan, plus any discount points you choose to pay to lower your interest rate. It’s typical to pay around 1% of the loan amount in origination charges.
This page also shows “Services You Cannot Shop For.” These are closing costs that are determined by the lender or by law, such as the appraisal fee, credit report fee, and flood determination fee.
Page 3
This page of the Loan Estimate contains a “Comparisons” section. It shows how much the loan will cost you during the first five years and how much of that cost will go toward the loan principal. The loan’s APR is listed here as well.
Finally, the section also shows the total interest percentage (TIP), which tells you how much interest you’ll pay as a percentage of the loan amount if you keep your loan until it’s paid off.
Example:
If your loan amount is $200,000 and the TIP is 60%, then you’ll pay $120,000 in interest over your loan term. The shorter your loan term and the lower your interest rate, the lower your TIP will be.
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What is a Closing Disclosure?
The Closing Disclosure is a five-page form that presents all the information found in the Loan Estimate but in a finalized form. It shows how much you’ll actually pay if you go through with closing and take on the loan.
Tip:
To keep your lender honest, compare your Loan Estimate from the same lender to your Closing Disclosure to make sure all the key terms of your loan are as expected.
Every Home Buyer Will Get This Document (Your Loan Estimate Explained Line-By-Line)
FAQ
What is the difference between closing disclosure and loan estimate?
Can a loan estimate be sent after a closing disclosure?
What can change between loan estimate and closing disclosure?
Is a loan estimate legally binding?
What is a Closing Disclosure?
A Closing Disclosure is a five-page form providing final details about the mortgage loan you’ve selected. When will you receive it? At least three business days before you’re scheduled to close on your mortgage loan. Why is it important? It provides you with the actual costs of the mortgage loan you’ve selected, including:
What is the difference between Loan Estimate and Closing Disclosure?
While the Loan Estimate provides an estimation of projected home loan terms, the Closing Disclosure form has your official loan terms. This form is nearly identical to the Loan Estimate. The primary difference is that you receive this form once you are cleared to close. You’ll get it within three days of your closing day.
Why is my loan estimate more expensive than my Closing Disclosure?
Government regulations restrict lenders from increasing many of the fees listed in your Loan Estimate. Yet, you might notice that your Loan Estimate has much higher costs than your Closing Disclosure. Many lenders overestimate potential fees and costs associated with home closing in order to provide a safety net when creating a Loan Estimate.
Do you need a Closing Disclosure for a mortgage?
Rather than outlining the estimated cost of your mortgage, a closing disclosure details the actual costs once you select the offer you want and are officially approved for the loan. You should compare the closing disclosure to your loan estimate to make sure the terms of your mortgage are what you expected.