Understanding Your Loan Estimate and Closing Disclosure

The Loan Estimate (LE) and Closing Disclosure (CD) are standardized documents required by federal law that give you a detailed, transparent breakdown of your mortgage terms and costs. Understanding how to read them is essential for comparing lenders, catching errors, and avoiding surprises at closing. Since 2015, the Consumer Financial Protection Bureau (CFPB) has required all lenders to use the same standardized format, making it easier for borrowers to compare offers side by side.

The Loan Estimate (LE)

You will receive a Loan Estimate within three business days of submitting a mortgage application. It is a three-page document that outlines:

Page 1: Loan Terms and Projected Payments

• Loan amount: The total amount you are borrowing.
• Interest rate: Your quoted rate. Check whether it is locked or floating.
• Monthly principal and interest: Your base payment before taxes and insurance.
• Prepayment penalty: Whether the loan charges a penalty for paying off early (rare with today's loans).
• Balloon payment: Whether a large lump sum is due at any point (also rare for standard residential mortgages).
• Projected payments: An estimate of your total monthly payment including principal, interest, mortgage insurance, and escrow for taxes and insurance.

Page 2: Closing Cost Details

This page breaks down costs into three categories:

• Section A — Origination charges: Fees charged by the lender, including origination fees, points, and underwriting fees.
• Section B — Services you cannot shop for: Fees for services the lender selects, such as the appraisal, credit report, and flood certification.
• Section C — Services you can shop for: Fees for services where you choose the provider, such as title insurance, home inspection, and survey.
• Prepaids and escrow deposits: Prepaid interest, initial escrow deposits for taxes and insurance, and the first year's homeowners insurance premium.

Page 3: Comparisons and Other Considerations

• Cash to close: The total amount you need to bring to closing, including down payment and closing costs, minus any deposits or credits.
• APR: The annual percentage rate, which reflects the total cost of borrowing including fees.
• Total Interest Percentage (TIP): The total amount of interest you will pay over the loan term as a percentage of the loan amount.

Using the LE to Compare Lenders

The standardized format of the Loan Estimate makes comparison straightforward:

1. Compare APR, not just the interest rate: A lower interest rate with higher fees can cost more than a slightly higher rate with lower fees. The APR captures both.
2. Look at origination charges: These are the fees the lender controls. If one lender charges $2,000 in origination and another charges $4,000, that is a real difference.
3. Check the rate lock: Ensure you are comparing locked rates. An unlocked rate on the LE can change before closing.
4. Review total cash to close: This bottom-line number tells you exactly how much money you need at closing.

The Closing Disclosure (CD)

The Closing Disclosure is the final version of your loan terms and closing costs. By law, you must receive it at least three business days before closing. This is your last opportunity to review everything before signing.

The CD uses the same format as the LE, which makes it easy to compare the two documents line by line. Key things to check:

• Has the interest rate changed? If you locked your rate, it should match the LE exactly.
• Have closing costs increased? Federal law limits how much certain costs can increase between the LE and CD. Lender charges generally cannot increase at all. Third-party fees you could not shop for can increase by up to 10% in total.
• Is the loan type correct? Verify the loan program, term, and type match what you applied for.
• Are the names and property details correct? Errors in names, addresses, or legal descriptions can cause title issues later.
• Is the cash to close amount correct? Verify this matches your expectations and that you have the funds available.

What to Do If Something Looks Wrong

If you spot discrepancies between the LE and CD, or anything that looks incorrect:

1. Contact your loan officer immediately, before the closing date.
2. Ask for a written explanation of any changes.
3. Do not feel pressured to close until you understand and agree with all terms.
4. If costs have increased beyond the legal tolerance limits, the lender must either correct the CD or provide a credit at closing.

The Loan Estimate and Closing Disclosure exist to protect you. Taking the time to read them carefully is one of the smartest things you can do as a borrower. When you are ready to apply for a mortgage, the team at Home Financial Group walks every borrower through both documents line by line.