Finance Friday - What is a Loan Estimate?
For this week's finance Friday post I wanted to share with everyone what a Loan Estimate looks like and what it is used for during the home buying process.
When you first apply for a mortgage by going through a loan application and supplying the loan officer with all of your financial documents for a pre-approval, the loan officer is now able to give you an accurate estimate. This can either be done on a specific home, monthly budget, or your max purchasing power.
At this stage, all the numbers are not exact, but very close to what they will be when you settle on your home. Loan Estimates are also helpful in an "apples to apples" comparison of mortgage banks. We all use the same form and provide the same information, so if a bank provides you something different, it is illegal and you should ask for the Loan Estimate, as they could be hiding fees.
For this example, I used a purchase price of $280,000, FHA, 3.5% down payment, in Baltimore City, and a first-time home buyer.
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Page one gives the buyer a high-level overview of the terms of the loan, including interest rate and whether the rate is locked or not, the projected monthly payments including escrows for property taxes and homeowners insurance, and lastly, the cost to the buyer at closing.
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Page two gives the buyer a breakdown of all the closing cost details and the estimated cash to close.
Box A. - These are all our company fees associated with the mortgage.
Box B. - These are all the third-party fees associated with the mortgage.
Box C. - This box outlines the Title Fees. Per the CFPB, you can shop around for these devices. Since this is early in the process and we do not know who you will be using for title or what their fees are, I still must show you them. For this part, I tend to be quite conservative in my estimates as to not under estimate. I would rather you be comfortable with these higher number and be happy when they come in lower once the title company is chosen.
Box E. This shows you the recording fees and amount in transfer taxes you will pay.
Box F. This shows you the amount you will pre-pay for homeowner’s insurance and pre-paid interest. When buying a home, you pay for 1 year of homeowner’s insurance up front. As for the pre-paid interest, you pay interest from the day you settle until the end of that month. You will not have a mortgage payment the following month, as mortgage interest is paid in arears. Meaning, your first mortgage payment you are paying the previous months interest.
Box. H - Goes over a few other fees. The most important fee is the Owners Title Insurance. This is a form of insurance which insures the homeowner against financial loss from defects in title to your home.
Calculating Cash to Close: This box breaks down what you will need to bring to settlement. ***If you are receiving any credits from the seller it will show up here and reduce the cash needed as settlement. For this example, you can receive up to 6% of the sales price, but it cannot eat into your down payment - $12,000 would be your max.
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When comparing multiple lenders/same loan program, this is a good page to use to see the 5-year cost for purchasing the home.
If you have additional questions or would like to get pre-approved please contact us at 443-716-1237 or themattnadergroup@baycapitalmortgage.com