Loan Estimate & Closing Disclosures Explained: What first-time home buyers need to know about their LE and CD
Understanding Loan Estimates and Closing Disclosures
When you're getting ready to close on your home, you'll receive two crucial forms: the Loan Estimate and Closing Disclosures. These documents are designed to help you "Know Before You Owe," ensuring you're fully aware of all fees and costs associated with your home purchase before committing to a mortgage.
The Loan Estimate
The Loan Estimate is a detailed and educated prediction of your closing costs, monthly payments, and the total lifetime cost of your loan. Your mortgage advisor uses all available information to provide this comprehensive estimate.
The Closing Disclosures
The Closing Disclosures are a finalized, more detailed version of your Loan Estimate. Think of your Loan Estimate as the third or fourth draft of a novel, while the Closing Disclosures are like the final manuscript ready for publication.
Key Points to Consider
Loan Estimate Breakdown: After pre-approval, completing the mortgage application, and selecting a property, your mortgage advisor will create a Loan Estimate. This document outlines your estimated closing costs, monthly mortgage payments, and the total cost of your loan.
Fees and Terms in the Loan Estimate: The Loan Estimate includes the loan term, mortgage type, loan amount, interest rate, monthly payments, closing costs, APR, origination charges, taxes, insurance fees, and other service fees like appraisal and title fees.
Fees That May Change: Some fees listed in the Loan Estimate are subject to change, such as title fees, pest inspection fees, taxes, and insurance costs. These can vary depending on the services you choose and changes in laws or insurance rates.
Revised Loan Estimate: If there's a change in circumstances, such as a change in loan terms, a significant drop in your credit score, or new information affecting your eligibility, a Revised Loan Estimate may be issued.
Closing Disclosures
You should receive your Closing Disclosures at least three business days before closing. This document provides a final, detailed breakdown of all loan terms and closing costs, including any changes from the Loan Estimate.
What to Expect in the Closing Disclosures
Transaction Breakdown: The Closing Disclosures detail every transaction involved in your home purchase, including all fees paid by you and the seller. It specifies what each fee is for, who paid it, and whether it was paid at or before closing.
Unchanging Fees: Origination charges, fees paid to the lender, and fees for services you couldn't shop for should not increase between the Loan Estimate and Closing Disclosures.
Changing Fees: Fees for services you can shop for, property taxes, insurance fees, and prepaids may change. Your mortgage advisor can provide estimates, but actual costs may vary.
Summary
The Loan Estimate gives you an early, educated guess of your mortgage costs, while the Closing Disclosures provide a finalized version of these costs. Both documents are essential for understanding your financial commitment. Always review these forms carefully and consult with your mortgage advisor to ensure you're fully informed and prepared for closing on your new home.
For more details, you can view sample Loan Estimates and Closing Disclosures from the Consumer Financial Protection Bureau’s website:
By understanding these documents, you'll be better prepared to make informed decisions and ensure a smooth closing process on your new home.
