Buying a home is significant step and a large financial transaction, so it’s important to compare offers from several lenders and understand the details of each of them. You may save thousands of dollars when you carefully evaluate your options.
How Do I Compare Offers?
After you’ve submitted a loan application, by law your lender must provide you with a Loan Estimate within three business days. The Loan Estimate outlines the terms of your loan, including estimated closing costs, interest rate, and monthly payments — which include principal, interest, taxes, and hazard/homeowner’s insurance — often abbreviated as PITI.
Some mortgage companies “brand” their Loan Estimates with fancy marketing names, but the Consumer Financial Protection Bureau (CFPB) mandates what information must be included in a Loan Estimate for a mortgage. Here’s a sample of the three-page CFPB document that we’ll look at more closely.
Page 1 – Loan Terms, Projected Payments, and Costs at Closing
On the top left, you’ll see your contact information, the sale price and address of the property you’re purchasing or refinancing. Read through this section carefully to avoid problems later.
On the right is a summary of the loan details, including the term, whether the loan is to purchase or refinance, the loan type (conventional, VA or FHA, for example), interest rate type (fixed or adjustable), and the loan ID. There’s also a check box to indicate whether or not the interest rate is locked and for how long. This is important because if you haven’t locked your interest rate it could change before your lender approves your application, which could significantly impact your costs over the life of the loan.
The “Loan Terms” section shows the loan amount, interest rate, monthly principal and interest, prepayment penalty, and balloon payment (if any). If these numbers have the possibility of changing, this section will indicate that. For example, if you have an adjustable rate mortgage your interest rate could change in the future.
The “Projected Payments” section shows your projected PITI payments along with any added mortgage insurance costs. If your mortgage company requires you to have an escrow account, it will also list your initial monthly escrow payments.
The “Costs at Closing” section breaks down the costs associated with getting the loan and the amount of money you’ll need to bring to the closing table. Page 2 explains these items in greater detail.
Page 2 – Origination Charges, Other Costs, Initial Escrow Payments, Total Closing Costs and Calculating Cash to Close
On the left, you’ll find more details on the total costs of the financing. The “Origination Charges” section details the fees your lender will charge you, such as administrative charges to process your application and setup your loan called origination fees or charges. The “Services You Cannot Shop For” and “Services You Can Shop For” sections make it easy to spot areas you might be able to save some money.
The “Other Costs” section shows the non-lender costs associated with your loan, such as fees to record the deed and transfer property taxes. There’s also a section for items you’re prepaying, such as property taxes, any prepaid interest, and your mortgage insurance premium, if applicable.
The “Initial Escrow Payment at Closing” section provides information on the payments you’ll need to make into an escrow account so the lender has funds available to make payments on your behalf, such as property taxes. The “Other” section shows miscellaneous optional costs. Finally, the “Total Closing Costs” section adds all the loan and other costs together.
At the bottom, the “Calculating Cash to Close” section shows your total closing costs added to your down payment, minus your earnest money deposit and any seller credits. This is an initial estimate of how much money you’ll need to bring to the closing table.
Page 3 – Additional Information About This Loan, Comparisons, and Other Considerations
The top of page 3 lists the name of the lender and your loan officer as well as their contact information, and that of your mortgage broker, if you have one.
The “Comparisons” section will be very useful for comparing loan offers from different lenders. In this section, you see how much money you’ll have paid on your loan in five years, and how much principal you’ll have paid. You’ll also see the annual percentage rate (APR), which factors the closing costs into your interest rate. The “Total Interest Percentage” section shows the amount of interest you’ll pay on your loan over its term expressed as a percentage of your loan amount.
The “Other Considerations” section is where lenders disclose their own policies, such as whether they allow assumption of your loan under the same terms by someone else, and how much they may charge for a late payment. This section will also indicate whether or not the lender will service the loan, which means they will collect your monthly payments and work with you if you are struggling to pay your mortgage. Because fees and policies can vary widely among different lenders, you should read this section carefully and ask the lender about anything you don’t understand or that doesn’t sound quite right.
You can sign the bottom of page 3 to acknowledge receipt of the Loan Estimate. Signing this document does not obligate you to use the lender, nor does it guarantee you will qualify for their loan — you’ll still need to go through the lender’s underwriting process.
We Can Help
If you have questions or need help, contact an AAFMAA Military Mortgage Advisor today.
AAFMAA Mortgage Services LLC, part of the longest-standing not-for-profit, member-owned association exclusively for servicemembers and Veterans, can help you understand how to strengthen your credit score and prepare for homeownership. We offer a wide range of low-rate and low-cost mortgages you need to build, buy or refinance a home.