Buying a home is one of the largest financial transactions you can make. That’s why it’s important to understand the details of your loan offer, and compare offers from several lenders. Doing so could save you thousands of dollars.
How Do I Compare Offers?
Once you’ve submitted your loan application, you should receive a Loan Estimate within three business days. The Loan Estimate will outline the terms of your loan, including estimated closing costs, interest rate, and monthly payments — principal, interest, taxes, and hazard/homeowner’s insurance, abbreviated as PITI.
Some mortgage companies apply a name brand to their Loan Estimate, but the content is prescribed by the Consumer Financial Protection Bureau or CFPB. Here’s a sample of the three-page CFPB document that we’ll look at more closely.
What You’ll See on Page 1
At the top left, you’ll see your contact information, the sales 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 an adjustable or unlocked rate can create changes that significantly impact the costs over the life of the loan.
“Loan Terms” shows the loan amount, interest rate, monthly principal and interest, prepayment penalty, and balloon payment (if any). If these numbers can change, that will be indicated — for example, your interest rate could change with an adjustable rate mortgage.
“Projected Payments” shows your projected PITI payments along with any added costs for mortgage insurance. If your mortgage company will require you to have an escrow account, your initial monthly escrow payments will be listed.
“Costs at Closing” breaks down the costs associated with getting the loan and the amount of money you’ll need to bring to the closing table. There will be a further breakdown of these items on page 2.
What You’ll See on Page 2
On the left, you’ll find more details on the total costs of the financing. “Origination Charges” details fees being charged by the lender, such as origination charges. “Services You Cannot Shop For” and “Services You Can Shop For” makes it easy to spot areas you might be able to save some money.
“Other Costs” 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 and any prepaid interest. Your mortgage insurance premium, if any, would be listed here.
“Initial Escrow Payment at Closing” provides information on the payments you’ll need to make into an escrow account so there are available funds for the lender to make payments on your behalf, such as for property taxes. “Other” shows miscellaneous optional costs. Below, the loan and other costs have been added together for your “Total Closing Costs.”
At the bottom, “Calculating Cash to Close” 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 you’ll need to bring to the closing table.
What You’ll See on Page 3
At the top, “Additional Information About This Loan” 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.
“Comparisons” will be very useful for comparing loan offers from different lenders. In this section, you see how much money you will have paid on your loan in five years, and how much principal you will have paid. You’ll also see the annual percentage rate (APR), which factors the closing costs into your interest rate. “Total Interest Percentage” is the amount of interest you’ll pay on your loan over its term expressed as a percentage of your loan amount.
“Other Considerations” is where lenders disclose their own policies, such as whether your loan can be assumed 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 help you if you are struggling to pay your mortgage). Because fees and policies can vary widely from one lender to the next, you should read this section carefully and ask the lender about anything you don’t understand or 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 the loan — you’ll still need to go through the lender’s underwriting process.
We Can Help
If you’re not certain about whether or not it’s the right time to purchase a home, or refinance your existing mortgage, please contact AAFMAA Mortgage Services LLC online today or give us a call at (877) 387-6856.