 Personal Finance PowerPoint Presentation, Loan Estimate. Get ready to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Loan Estimate, which you can find online. Look up references, resources, continue your research from there. This is by Amy Fontenier, updated February 28, 2022 Loan Estimate. Do you know what purpose a loan estimate serves when you apply for a mortgage? We're thinking about the home purchase process. Usually we can't put all the cash down upfront, need some kind of financing. Obviously the loan comes into play there. Loan estimates come into play in that process. So checking the latest national average mortgage rates can only take you so far when you plan to buy or refinance a home. So you can take a look at the rates. You can do some comparative rates and take a look at what is happening on the market. But of course, when you get down to the actual specifics, you need to take into consideration your particular circumstances. To know what interest rate you might pay in real life, you have to get in touch with a mortgage lender and give them some specifics. So clearly the market conditions will give you some idea. They'll have an impact. But your personal information, of course, will have an impact on the loan as well. When you do, you'll get a loan estimate, an important document showing the key details of the mortgage for which you have applied. You'll want to review your loan estimate carefully before moving forward with the underwriting process to see if you understand the loan and can comfortably afford it. So remember when you're looking into the loan, you're not trying to look at the loan officer and say, give me an idea of my budget here. The loan officer is going to try to determine how much loan you can afford. But just this key point here, you're trying to get as much financing available to you as you can, and then you want to only take the amount of financing that you can afford. You're not dependent on the loan officer to determine how much you can afford. They're trying to do that on their side for the banking side of things, but they're not really doing it for your side of things. Other conditions, market conditions can have an impact on what they think they, you know, what the loan officers are going to do and so on and so forth. Because if they can sell the stuff on the secondary market, for example, they might be willing, as we have seen in the past, to give out loans that they know possibly people cannot afford as long as they can get the loans off of their books and sell it. So what you want is the ability to get the financing and then do your own estimate in terms of what you can afford. What is a loan estimate? A loan estimate is a three-page form that presents home loan information in an easy-to-read format complete with explanations. This standardization not only makes the information easy to digest, it also makes it easy to compare offers among lenders to see which one is offering you the best deal. So you get into the specifics on the loans here. You'll get a loan estimate within three business days of applying for a mortgage unless you don't meet the lender's basic requirements and your application is rejected. So you're going to get the information on it unless, of course, they're saying, hey, we don't offer a loan to you because you've got some bad qualifications or something like that, which is kind of depressing. So if that happens, the lender must give you a written notice within 30 days stating why your application was rejected. And the only fee you may have to pay to get a loan estimate is a credit report fee. So when you receive a loan estimate, it's valid for 10 business days. If you want to accept a loan offer, try to do it within that timeframe. The lender may change the terms and issue a new loan estimate if you take more time to decide. So clearly, you know, in normal kind of negotiation terms, if there's kind of like an offer, there might be a timeframe on an offer and then, you know, you got the counter. You can accept the offer or having a counter offer and so on and so forth. Obviously, if too much time passes, they're going to say, I need, we need to take another account of the current situation at this point in time and do another estimate. So you won't necessarily get a different offer or a worse offer, but things can change when the market conditions and your credit. So clearly, as time passes, they're going to want to do it again. So in fact, mortgage rates can change multiple times within a single day. So the market conditions, even aside from your personal conditions, are going to be changing often. These are things that are not static. Of course, it might take you longer than 10 days to identify a property you want to buy and make an offer and you should take your time with such an important decision. You're not going to basically rush within 10 days to try to buy the house, which could take longer than that to do. So these are two separate components. You can and should get a loan estimate before you find the property you want to buy, especially in a seller's market, wherein buyers often need to act quickly to make a purchase offer. So you'd like to have the money ready. You got the finger on the trigger as they say, not like a gun, like you're not actually shooting someone, but the trigger of the money. You trigger and the money shoots out and you purchase stuff. So you want to make sure that if things are tight, obviously the person that's selling wants to find someone who's ready to go. It has the finger on the money trigger so they get the money shot at them faster. You want to have mortgage pre-approval and maybe even pre-underwriting to be confident you could get financing. However, you do need a property address and purchase price to get a loan estimate. What's the solution if you haven't pinned one down yet? So you might be saying, okay, I would like to get this done. But I don't know exactly the property that I'm kind of targeting at this point in time. And if I need a property address, what am I going to do? Provided property address was a similar home and the purchase price for which you want approval. So if you're looking around a certain area and the homes are around whatever, 500,000 or something like that, then you might choose a similar home that's got around that price. And you would expect then if you change the address, hopefully the conditions will be much the same with regards to the loan and the financing. A loan estimate is not an official pre-approval, but it gets you moving in the right direction. The lender can issue a revised loan estimate after you have chosen a property. Reading a loan estimate, page one, the fundamentals, which items appear on a loan estimate, will walk you through it page by page and help you understand each one. So you can basically break down and take a look at what is on the loan estimate. So here's the loan estimate information, the issue date, the applicant's property, the sale price, the loan term, 30 year purpose for the purchase, product fixed rate loan type conventional here as opposed to FHA or VA loan idea and the rate lock. If we're going to lock it or not, and we're saying lock right now, which is probably the good idea in this current environment most of the time that we're recording here. Page one begins with the basic information, the lender's name and address, applicant's name and address, property address and sale price, loan term, loan and purpose, loan ID number, loan estimate date, rate lock information, loan terms. Next is a box with the loan's terms. So we've got the loan amount, the interest rate, the monthly principal and interest payment penalty, and then the balloon payment. If there is any that would be like a more unusual type of loan that has kind of like a balloon payment. So if you're doing the standard, then no on the balloon payment loan amount and whether it can increase after closing interest rate and whether it can increase after closing. So you is the rate locked for, for example, monthly principal and interest payment and whether it can increase after closing prepayment penalty, if any, and if so, how much and when it applies balloon payment, if any. These days, most loans don't have prepayment penalties or balloon payments. So those are kind of, you know, things that are still there from a from a previous time. They could, you know, you could have situations where they could apply but most likely standard loans possibly not. Also, your loan amount is unlikely to increase after closing. These three disclosures relate to features that were more common during the housing bubble of the early to mid 2000s. So that's when a lot of the kind of the craziness happened with the and you can blame you can blame multiple people in terms of the decline that happened after that recession and so on. But it's a good example to just note that when you're getting the financing on the loan, then it's not necessarily the same thing you want to do for your budgeting because part of what the financial institutions were doing was coming up with kind of these more unusual loans were more, you know, fixed flexible rate or adjustable rate loans going on less money down and so on. Part of the reason the banks were doing that is because it's not because they were dumb that because they know that the lenders wouldn't pay them back. It was because they could sell those on the secondary market to to like quasi government entities, right? So so that means that the bank, there could be market conditions where the bank. You can't depend on the bank to determine whether or not you can afford the loan. You would think that they would be in their self interest or it would be in their self interest, not to take on loans that they don't think the lender can afford, because if they take on too much risk, then they're going to lose out because some of the loans are not going to go through and so on and so forth. But if they can offload some of those loans or whenever you have government intervention really messes up the picture and messes up the risk allocation. So again, your goal with the financing is to basically try to get the loan that you can get and your personal budgeting, you still want to do to see if you could afford the loan. Because when they gave these loans out to people that couldn't really afford the loans, that wasn't beneficial. That wasn't helpful. They weren't doing a good thing. That was bad, right? Because so you don't want so you can't depend on the bank to make that decision. In any case, it's also unlikely that your interest rate or monthly principal and interest payments would increase after closing. If you are taking out an adjustable rate mortgage, they may, most people get fixed rate mortgages. So these days, most of the rates are going to be fixed rates. And at this point when the rates are going to go up, the fixed rate is looking more and more like what you typically would want. So we got the projected payments and closing costs at closing. So we got the payment calculations. So years one through seven years eight through 30 principal interest mortgage insurance estimated escrow estimated total monthly payments here. So that could be a key number estimated taxes insurance and assessments. So we have our amounts here this estimate includes property taxes homeowners insurance. They got those two checked off and others in escrow yes closing costs of closing estimated closing costs here and estimated cash to close. So includes $5,672 in loan costs plus $2,382 in other costs and so on. The second page on page the second box on page one goes into more detail about your projected monthly payment. In addition to your monthly principal and interest payment, it shows two items that are likely to apply if you're if you're putting down less than 20% your estimated monthly mortgage insurance payment and your estimated monthly escrow payment for homeowners insurance and property taxes. Finally, the third box on page one shows your estimated closing costs and estimated cash to close. Page two will break down these costs in detail. So this is page two itemized mortgage costs. The loan estimates second page itemizes the loans closing costs and shows how much cash you'll need to finalize the loan. So we got the closing costs. We got the origination charges. You got the point to 5% of loan amount the points application fee underwriting fees. So origination charges, the typical payment origination fee is around 1%. It might be higher if you choose to pay points or lower lower your interest rate. So you could have an option to basically pay or choose points. I won't get into that at this point. So the loan underwriting and application fees are included here too. These fees compensate the lender for its efforts to qualify for you for a loan and get you the money so you can buy the home. They also vary by lender and can be a good place to save money. Now we have the B services you cannot shop for. We've got the appraisal fee, the credit report fee, the flood determination fee, the flood monitoring fee, the tax monitoring fee, tax status research fees for example, closing services for which you cannot shop. Many other vendors are involved in making your mortgage happen. Some vendors can choose while for others your lender gets to choose. So in other words, some of these services that we're looking up here, the question is who's going to choose? Who gets to do these services? Is it you or is it going to be the lender? You can see some of these items, the lender is going to want to have good assurance on such as an appraisal for example, and so on the credit report and so on these types of things. You can see why the lender wants to have some bit of control and hire someone that they trust to do those things as opposed to possibly letting the purchaser do them who might have an incentive to do something funny. So those fees, that would be the rationale in my opinion as to why they might be more locked on the vendor side of things. So your lender will order an appraisal to make sure the home is worth what you've offered to pay for it. The credit report tells the lender whether you have a history of repaying the money you borrow. So obviously the credit report, the flood determination and monitoring fees go toward finding out if your property is in an area that's a high risk for flooding or of flooding. If it is, you'll have to buy flood insurance of course because the lender is going to be concerned on the insurance side of things because they don't just like with the fire type of thing, they don't want the home to go down to a flood and then you can't pay back the loan and they can't foreclose because the home is underwater or destroyed. So which is separate from the homeowner's insurance. Homeowner's insurance doesn't cover flooding. So the tax monitoring fee and tax status research fee will go toward making sure you pay your property taxes in full on time every year. Number part C, we got the services you can shop for this. So these are the ones you get to shop for. That'll be fun. So we've got the pest inspection fee, the survey fee, title insurance binder, title lenders, title policy, title settlement, agent, fee, title, title search. So closing services for which you can shop. So we get to go shopping for the, I don't like shopping, but in any case, you'll pay a pest inspection fee to a professional who comes out and examines the home you want to buy for evidence of wood destroying insects such as termites and carpenter ants. Those little pesky bugs. Any significant damage will need to be reported before closing. The survey fee varies the property's boundaries. The survey fee verifies the property's boundaries. The four title fees go towards making sure you can take ownership of the property free and clear of claims by any third party such as previous owners, relatives, relative or a tax authority. So you want to make sure you got a clear title to it. You'll also have to buy a title insurance policy that protects the lender against claims that might arise later that weren't uncovered during the title search. Meaning there's a title search to make sure that no one else owns the property or has a claim to the property. I have a claim to this property and then even after that they could have a claim to it. So you want to make sure they still want to be covered in the event because some of the stuff can be somewhat complicated and so on. So the title company is also often the company that handles your loan closing. So there's a fee for that too. This fee might be listed as an escrow agent or settlement agent. It doesn't matter whether the cost of these closing services differs from one lender to the next. When you're deciding on a lender, they're just estimates and you'll be able to shop around for these providers and decide how much to pay. So some of these obviously they're putting in the numbers here, estimates. Other costs. Taxes and other government fees, recording fees and other taxes, transfer fees. F, prepays, homeowners insurance premiums, six months, mortgage insurance premiums, prepaid interest, property taxes. So taxes and other government fees, any fees or local government charges when a property is transferred and a new deed of ownership is recorded, go here. Prepaid, lenders require homeowners to have their homeowners insurance in place before the loan can close. So there's a charge for that here that will usually cover six or 12 months worth of insurance. You might have a prepay mortgage insurance premiums and property taxes and you'll probably have a charge for prepaid interest. It covers the days you'll have the loan between your closing and the first of the following months when you'll make your first principal and interest payment. So obviously we got some of these kind of payments that are going to take place during this process of the escrow process in the midst of the transaction here. And that's why there could be an issue generally. G, initial escrow payments at close, homeowners insurance. We got the mortgage insurance property taxes. This is so much per month and then we got H, the title owner's total policy. So we have the initial escrow payment at closing if the loan requires you to maintain an escrow account showing on page one of your closing disclosure also called an impound account. Then this section will show how much you have to fund that account to cover future homeowners insurance premiums, mortgage insurance premiums and property taxes. Lenders are allowed to keep a two month cushion in this account. So that's probably what they'll charge you here. Other, remember that lenders title insurance policy you have to buy. It doesn't cover you. It's a good idea to buy an owner's policy as well. And that fee will show up in this section. So now we've got I, total other costs, J, we got the total closing costs. We have a D and I added together lenders credits. We got the calculating cash to close total closing costs, closing costs, finance paid from your loan amount, down payment funds from borrower deposit funds for borrower seller credits adjustments and other credits. This is the estimated cash to close. So the total closing costs. This line sums up all of the above charges. It should match the estimate closing costs from the bottom of page one. If you're getting any lender credit, you'll see those subtracted here calculating cash to close. This section totals up your closing costs and down payment and subtracts any earned earnest money deposits you make. Then we got page three, we got the comparison and more loan characteristics additional information about this loan. We've got the lender got the loan officer email phone number and so on and so forth additional information about this loan. The top of page three says who your loan officer is what their license number is and how to contact them. You might also be interested to know how loan officers are compensated. Here's what else you'll learn on page three compensation. This box provides for numbers you can use to compare one loan estimate with another. They've got the comparisons we got in five years annual percentage rate the APR the total percentages to TIP use this use these measures to compare this loan with other loans. So again we got the in five years 56 582 total you will have paid in principal interest mortgage insurance and loan costs. Now it's nice to get to an actual amortization table. They're trying to give you kind of a quick number that kind of puts these stuff together so you can see it in a quick view. But it'd be nice to break these out will break some of them out like a loan amortization table and stuff in our practice problems. And then we got the 15773 principal you will have paid off. So this is how much of the principal you will have paid off as opposed to the interest. And then we got the annual percentage rate the APR which is going to be your costs over the loan term expressed as a rate. This is not your interest rate. So it's a little bit different than the interest rate. They're trying to roll everything into basically one rate. And the idea there is that you might be able to compare the APR to other loans even though they're doing kind of different stuff with possibly closing costs and other kind of things. You know if you were to kind of alter different loans then you might try to you can alter different things. Right. You can alter how much how much the closing costs are versus the interest rate and the loan terms and so on. So it would be nice if you could try to wrap that all into one percentage number to do a comparison. It's not perfect but that's that's an idea that's kind of like the idea. So total interest rate of the TIP also just note that the APR is going to be higher than just the interest rate on the loan because of that because they're trying to roll everything into the interest rate. So you got to keep that kind of separate. You're saying OK this is the interest rate I'm using to calculate on the loan that's different than the APR. The APR can be useful so I can do a comparison hopefully comparing apples to apples to other loans even though they might have some other conditions. But that's just one measurement that not the only thing I want to be reliant on. Total interest rate total interest percentage the TIP that total amount of interest that you will pay over the loan term as a percent of your loan amount. So you could take in all the interest that you're going to pay compared to divided by the loan amount. Again another kind of comparative term that you can use to compare loans. This these are just a few things you can use to compare loans you might want to break the loan out again in more detail possibly with an amortization table. Total principal interest mortgage insurance loan costs will have paid after having the loan for five years. Remember loan costs are on page two total principal you have paid off after five years or how how much equity you will have in your home. Meaning when you're paying the loan off the amount that's going to interest is like rent on the money. It's not paying down the loan balance equity represents the value of the home minus the loan amount assets minus the liability or here is your equity amount. If the value of the home stays the same if we assume that then then the amount that you're paying off the home for is going to increase your equity because it's going to increase the difference between your home value and the loan. Now of course hopefully we think that the value of the home is going to go up as well which would also be a beneficial thing. So once again total principal will have paid after five years or how much equity you will have in your home excluding any increase or decrease in its market value. Annual percentage rate a rate that accounts for the loans interest rate and fees combined total interest percentage a figure that shows how much interest you will pay over the entire loan term as a percentage of how much you're borrowing. For example your total interest percent would be 50% if you paid 50,000 in interest on a 100,000 loan. You might say well that's a huge amount of interest right compared but if you're talking over 30 years right you've got a lot of rent that you're paying on the on the on it on the interest a lot of interest is going to take place there. Other considerations this section tells you six more things about the loan for which you've applied we have the appraisal assumption homeowners insurance late payment refinancing and servicing. The lender may order an appraisal to determine the home's value you'll you'll have to pay for the appraisal and you'll get a copy of it. If you sell or transfer the home to someone else you can take over your loan instead of getting their own. So in other words when you if there's a sale or something like that then the normal processes you've got the seller you've got the buyer and the seller has a loan out on the home and the buyer is going to need to get a loan. And so the buyer gets a loan so they can pay the seller the seller takes the money and then pays down their loan. You might say well is it possible for the buyer you could imagine it being structured so the buyer assumes the seller's loan instead of instead of as part of the as part of the transaction. So you might have an instance such as that or think about that as a factor or a circumstance that could be useful in some home purchasing situations. Usually the answer is no but some government guaranteed mortgages can be assumable. You're required to get homeowners insurance and you can choose the company as long as the lender approves of that company. See our beginner's guide to homeowners insurance if you need help. So if your monthly mortgage payment is late at what point will you have to pay a late fee and how much is the fee. Don't assume you'll be able to refinance this loan later because your free finance and the market might not allow for it. So in other words if you're going in to purchase a home and you're saying hey it doesn't really matter I'm just going to refinance it. I'm just going to update it in a few years and things will be better at that point in time. You got to be really careful of that especially at this at this point in time if you're thinking the interest rates are going to rise. At any point in time of course you would like to not get in this situation where you're going to get caught where you're stuck where you can't do anything where you basically planned that you're going to take some action in the future depending on of course that action depends on everything going well such as home values going up and the and that your income is going to go up and that the market stays good. Those are you know those are assumptions that may not be there. Sometimes we have to you know measure just like everything else we got to measure the risks versus rewards we got to take on some risks sometimes to do what we want to do of course but you want to make sure that that you're considering you know the possibility that things don't always go that way into the risk versus the reward calculation. So the lender you're applied with so the lender you've applied with plans to serve your loan meaning they will be the one to collect your monthly payments. You can manage your escrow account if you have one and send your monthly statements. Conversely they could plan to have another company service your loan after closing the bottom line the consumer Financial Protection Bureau the F the CFPB designed the loan estimate to help you understand any mortgage you apply for whether you're buying a home or refinancing one. So it should be somewhat standardized to that degree which is nice can help you to do some comparisons and possibly have some statistics that will help you break this stuff down a little bit easier. Although I can I still think it would be good to do your own kind of comparisons as well. Obviously work this into your projections and your tax projections your budgeting possibly build an amortization table and take a look at it on a year by year basis get a better understanding of what the APR means versus the interest rate and so on. And because any lender who wants your business is required to give you a loan estimate you can use this form to easily compare offers from different lenders and get a better deal. So clearly if you have a standardized set of formats between multiple lenders that's part of the goal because that helps with comparability from loan to loan so that could be quite nice. You can also make sure you aren't being overcharged for any services and that you understand all the loans costs and features. So clearly if you do your side by side comparison you might be seeing some differences in in the costs versus some other kind of components of the loan. Oftentimes if there weren't as as transparent comparabilities people will take advantage of people by by not having all the information meaning transferring some costs somewhere else possibly have a lower interest rates but higher costs or closing costs and so on and so forth. So the attempt to do things like the APR and have the cost on a form that's come side by side comparable makes it a little bit easier. It's still a little bit hard to compare those kind of differences. You got to drill down on it a bit but at least you can kind of see them spot them quicker and then possibly dive into a little bit more detail in terms of what that actually means with regards to the quality of each loan. So this important form is definitely one to review closely ask your lender questions about anything you don't understand. Clearly lenders are going to be working with this kind of documentation all the time so they're going to hopefully know it inside and out if you have a good lender and so any questions that you can direct to them they're going to be a good resource to get some answers on them I would assume.