The mortgage process can be confusing and overwhelming sometimes. We get it. Luckily, there are plenty of resources and tools available to make the process easier and less stressful for everyone who did not attend the University of Mortgage.
One of the most important resources available to you is a document called a “Loan Estimate.” This document, which you will receive at the early stages of the mortgage process, is an invaluable tool that helps you understand the terms of your mortgage.
A Loan Estimate is a document prepared by a lender based on your personal information and tailored to your unique situation.
Want to know more? Let’s dive into what a Loan Estimate is and how to read one.
Buying a home is one of the biggest financial decisions you’ll make in your life. Before you start seriously looking at homes and making offers, it’s crucial to understand the difference between a mortgage loan estimate and preapproval – and get both from your lender.
I made the mistake of confusing these two documents when my wife and I were first-time homebuyers. We ended up disappointed when the loan amount we were actually approved for was less than the estimate. Don’t make the same mistake we did!
In this article, I’ll explain the key differences between loan estimates and preapprovals, why both are important, and how getting each sets you up for success as you search for your dream home.
What is a Loan Estimate?
When you apply for a mortgage, the lender provides you with a Loan Estimate document within three business days. This form gives you an estimate of costs and terms if you move forward with that loan
Here are some key details included in a Loan Estimate
- Interest rate
- Monthly principal and interest payment
- Loan origination charges
- Services you can shop for (like home inspection)
- Other costs like taxes and insurance
- Closing costs
- Cash needed to close
The Loan Estimate helps you understand what to expect from a particular lender and loan program. It is not an approval or commitment to lend.
I made the mistake of thinking the loan amount on our Loan Estimate was guaranteed. But an estimate is exactly that – an estimate.
When we actually submitted all our documentation and went through underwriting, we were approved for a lower amount than the initial Loan Estimate due to our debt-to-income ratio.
So while the Loan Estimate is helpful for comparison shopping between lenders, it should not be relied on as your definite approved loan amount.
Why Get Preapproved for a Mortgage?
Preapproval involves submitting documents to verify your financial history, income, employment, assets, debts, and credit.
If you meet the lender’s requirements, you’ll receive a preapproval letter with key details:
- The loan amount, type, and terms you are likely to be approved for
- Conditions you need to meet for final approval
Preapproval is almost essential in today’s competitive housing market. Sellers want to see a preapproval letter to know you can get financing.
However, preapproval still does not guarantee a loan. There are further steps required for final loan approval:
- The home must appraise for equal to or higher than the purchase price
- Underwriting reviews all documentation again
- Title search confirms no other claims on the property
So while a preapproval gives you more confidence in your ability to get a mortgage, final approval is still subject to these additional requirements.
Loan Estimate vs. Preapproval: Key Differences
Now that you understand loan estimates and preapprovals individually, what are the major differences between them?
Here’s a quick rundown:
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Loan Estimate: This estimates loan costs and terms based on limited application information. It is not an approval.
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Preapproval: Lender confirms your creditworthiness by verifying income and assets. Provides a preliminary commitment letter for a loan amount.
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Timing: You can get a Loan Estimate right when you start shopping lenders. Preapproval takes days or weeks to verify documents.
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Uses: The Loan Estimate helps you compare options. Preapproval shows sellers you can get financing.
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Commitment Level: A Loan Estimate provides non-binding estimates. Preapprovals represent a strong commitment, subject to final underwriting.
- Loan Estimates help you shop and compare lenders
- Preapproval shows sellers you can get a mortgage
- Preapproval is still preliminary until final underwriting
Why You Should Get Both
The best practice is to get both a Loan Estimate and a preapproval letter before seriously looking for a home. Here are some key reasons why:
Understand Your Options
Loan Estimates from multiple lenders help you understand available rates, costs, and programs. You can use these side-by-side comparisons to choose the best overall loan for your situation.
Strong Buying Position
Preapproval letters hold more weight and show sellers you are a serious buyer. This gives you a competitive edge in today’s market.
Know Your Budget
Between the Loan Estimates and preapproval letter, you’ll have a clear picture of your price range, down payment needed, and monthly payments you can afford. This helps focus your home search.
Mortgage Shopping Protection
If you secure Loan Estimates within a 45 day period, you are protected from multiple hard inquiries impacting your credit score. This allows you to get estimates from multiple lenders without worrying about credit damage.
Speed Up Final Approval
Since you already submitted documentation for preapproval, the final underwriting should go faster when you’re ready to move forward with a purchase.
Bottom Line
As a homebuyer, one of the most important things you can do is educate yourself about the mortgage process. Learn the difference between Loan Estimates and preapprovals. Get both from your lender so you start your home search armed with the information you need.
Following this advice will help you set clear expectations, understand your budget and buying power, shop lenders efficiently, and put yourself in the strongest position to get an offer accepted!
You’ve got this! Now go get the keys to your dream home.
Cost at Closing:
The section lays out how much your estimated closing costs will be and how much cash you will be required to pay to close on the loan. However, depending on your loan, you may not be required to provide money when your loan closes. This section does not break down how these costs are calculated (that appears on the next page of the form), it simply shows the total amount of each of those costs.
Now, let’s move on to Page 2, which provides details on the closing costs.
In section A of this segment, which appears in the top left section, details your origination charges, which are the fees you will be paying to the lender for originating your mortgage. These fees may include the application fee, underwriting fee, and whether you are paying any points on the loan.
Points are fees you can pay to lower your interest rate. One discount point is equal to 1% of your total loan amount.
Below that there are two important sections, especially if you are interested in shopping around. These are various fees for services that go towards to the origination of your mortgage. These are broken down into two categories: “Services You Cannot Shop For” and “Services You Can Shop For.”
One note before we dive into these sections, it’s possible that not all of these fees will appear on your Loan Estimate. Let’s just consider these to be examples of what may appear.
The first section is Services You Cannot Shop For. These included the Appraisal Fee (the fee paid to an appraiser to value the house you’re interest in buying or refinancing), Credit Report Fee (a fee for pulling your credit report), a Flood Determination Fee, Flood Monitoring Fee, Tax Monitoring Fee, Tax Status Research Fee, and mortgage insurance (if required by the loan program).
These fees are all part of the lender’s origination process and you are not permitted to shop around for these services. That’s because these fees are charged by the company the lender is using to provide these services, like the appraiser or the credit reporting agency.
The next section, on the other hand, contains services you can shop for.
This section includes a Pest Inspection Fee, Survey Fee, settlement agent fees and various title insurance fees. You are able to shop around for these services. If you choose to do so, use your Loan Estimate as a guide and compare the prices you are able to find to the ones provided by the lender.
These costs are added together and presented at the bottom of the left side of the page as the “Total Loan Costs.”
On the other side of the page is the Other Costs section.
This section provides details about various other costs that are part of your closing costs. Included in this section is information about taxes and government fees, any prepaid interest based on your closing date and any initial deposit that will be made to establish your escrow account.
Below this section you will find a total of these “other costs”. And below that, you will see the total closing costs, a figure reached by combining the total loan costs and the total other costs. In this section, you may also see a dollar amount listed in the Lender Credits section. Lender credits may be a rebate provided to you by the lender to offset some of your closing costs, but it is possible that you are receiving a higher interest rate as a result of these credits.
Below this is the Calculating Cash to Close section.
Calculating Cash to Close:
This section details the full estimated cash to close on the loan, including the total closing costs, whether you are financing any of your closing costs as part of your loan, how much of a down payment you would be providing as part of your loan, any other funds provided by the you, credits from the seller, or other credits.
Adding all these figures together equals the Estimated Cash to Close, which is the estimated amount of money you would be required to bring to closing. Again, we should note that depending on how your loan is structured, you may not be required to bring money to your loan closing itself.
Next is Page 3, which has additional information about your loan.
At the top of page 3, there will be information about the lender, the loan officer you are working with, and contact information for both.
Next up is the Comparisons section, which you can use to compare this loan to others.
The section has three pieces of information that you can utilize when comparing this loan offer to ones from other lenders. First, there is the amount you will have paid over a five-year span. Next is the Annual Percentage Rate, which will be different from your interest rate. Finally, there is the Total Interest Percentage, the amount of interest you pay over the length of your loan displayed as a percentage of the total loan amount.
You can use each of these three figures to compare your loan to others.
Next is the Other Considerations section.
Other Considerations:
This section features more information that can be very helpful when determining whether you want to agree to this mortgage or not. First, there is information about your right to receive a copy of your Appraisal. The next section discloses whether the mortgage you have applied for is assumable if you transfer ownership or sell your house. After that is a section about homeowners’ insurance and whether you will be required to have a policy as a condition of your loan.
The next section is an important one: late payment. This section details whether the loan has a late payment fee and how that fee is calculated.
After that is a section that advises whether the mortgage loan you have applied for permits refinancing.
The final segment of this section is an important one as well. The last line details how your loan will be serviced. Mortgage servicing is the collection of the mortgage payments themselves. What many people don’t know is that the company you end up making your payments to may not be the company you got your loan from.
In many cases, your lender will transfer the servicing rights (the right to collect your mortgage payments) to another company, which will then be the company you send your payments to. One thing to note here: you do not have control or say in which company takes over the servicing of your loan if the lender chooses to transfer servicing.
The last section of Page 3 details whether the lender intends to service the loan itself or transfer it to another company. Pay close attention to this section, especially if you like the customer service provided by the lender.
One thing that sets New American Funding apart is that we service the vast majority of the loans we originate since we believe in creating customers for life.
The last section on the page is the Confirm Receipt section, which you sign to provide proof that you received the Loan Estimate.
The Difference Between Pre-Qualification, Pre-Approval and Loan Estimate?- Sean and Kelly Price
FAQ
Do you get a loan estimate after pre-approval?
Does a loan estimate mean you’re approved?
What is the difference between a pre-approval and a mortgage estimate?
Does getting a loan estimate hurt your credit?
Is a loan estimate a pre-approval or approval?
A loan estimate is not a pre-approval or approval for a mortgage loan. It only shows you what the lender expects to offer if you decide to move forward with the loan. If you choose to move forward, formal underwriting will determine if you are approved for the loan.
Can I get a non-binding preapproval loan estimate?
However, you can request a nonbinding preapproval loan estimate from lenders you’re interested in working with. This may help you determine how much home you can afford and feel out your loan options. You can always comparison-shop again later, once you’ve accepted a contract.
What is the difference between a preapproval and a mortgage prequalification?
Prequalifying for a mortgage typically provides a ballpark estimate rather than a firm number, which makes it less reliable than a preapproval. A preapproval usually involves your lender checking your credit score and reviewing bank statements and other documents.
Does a mortgage preapproval require a credit check?
These might include bank statements and pay stubs. A preapproval will also require a hard credit check so your lender can see your credit score and other debt. Typically, you can apply for both a mortgage preapproval and a mortgage prequalification online. Home Loan Preapproval Vs. Approval A preapproval is helpful when you’re shopping for a home.