As a consumer, you want to be able to make informed purchasing decisions, especially when it comes to big-ticket items like a house. That’s exactly why Loan Estimates and Closing Disclosures exist, which essentially help provide buyers with details about their mortgages before they formally commit to them.
After all, a home purchase is a big deal that involves a lot of money, so you want to make sure the mortgage you’re assuming is something that you can comfortably handle. At no point should any surprises pop up after the deal has been sealed.
Before closing day, you should receive your Loan Estimate and Closing Disclosure forms from your lender when buying a home. These forms will provide you with a detailed breakdown of all expenses related to your home purchase and mortgage and give you a clear idea of what the entire cost of the loan will be. In fact, lenders are legally obligated to provide such information to buyers to help them familiarize themselves with their mortgages.
Until recently, lenders have done this by providing buyers with a Good Faith Estimate (GFE) at the time of mortgage application and Truth-in-Lending (TIL) and HUD-1 documents a few days before the closing.
Since then, the Loan Estimate and Closing Disclosure have replaced the previous documents, which give buyers enough time to review the details of their mortgages and simplify all aspects for easier understanding. Essentially, these new forms consolidate the data from the previous documents and focus on the crucial loan terms that all buyers should be entirely familiar with before agreeing to a home loan.
So, what exactly are these two documents, and how do they differ from one another?
What is a Loan Estimate?
The Loan Estimate replaced what was previously known as the Good Faith Estimate (GFE) and Truth-in-Lending (TIL) documents, combining the two to detail the loan terms and closing costs. This three-page document – two pages shorter than the previous GFE and TIL combo – simplifies these details and makes them easier for borrowers to understand.
This important document is given to borrowers within three business days following mortgage application. It summarizes the important loan terms that borrowers should understand.
Within the Loan Estimate are different sections that explain all the costs associated with your particular mortgage. The first section includes an explanation of the loan terms, such as the amount of the loan, the interest rate, and the monthly principal and interest.
This section will also tell you whether or not there’s a possibility that such items may increase after the closing date. You’ll also be informed of any balloon payments or prepayment penalties associated with your home loan.
Your payment schedule will be outlined in the second section of the Loan Estimate. This section will explain how your payments will be reduced after private mortgage insurance is eliminated (if applicable) as well as the estimated payments related to taxes and insurance.
The third section outlines your closing costs. In addition to the total closing cost amount, you’ll also be given a detailed breakdown of all of your closing costs, which can include:
- Origination fees
- Appraisal fees
- Escrow fees
- Homeowner’s insurance
- Property taxes
You’ll want to pay close attention to these estimate as it will help you determine how much money you’ll need at closing.
What is a Closing Disclosure?
The Closing Disclosure is the second document that you will receive when taking out a mortgage, which you will receive three business days before the closing date. This form replaced the Final TIL Disclosure and HUD-1 Settlement Statement in order to simplify the terms and make it easier for borrowers to understand them.
This five-page form includes many of the same terms as the Loan Estimate, but with much more precise details regarding the finalized numbers of the sale. It also includes more information about the escrow part of your mortgage.
The Closing Disclosure is designed to help you identify exactly how much you have to pay every month. Within the five pages of your Closing Disclosure will be the following:
- Loan terms
- Projected costs at closing
- Cash required to close
- Summary of the transaction
- Loan calculations
- Disclosure information
- Any additional information about your mortgage
Buyers should take the time to fully understand the terms of this document in order to reduce any potential confusion or concerns before closing. It’s also essential that the Closing Disclosure is signed and submitted to the lender before these three days are up to avoid a delay in closing.
Why is it Important to Compare the Two Documents?
The main difference between the Loan Estimate and Closing Disclosure is the exact numbers that are detailed. The Loan Estimate is meant to give you an idea of how much your mortgage will cost you, and will break down these items and costs. The numbers in the Closing Disclosure are more precise and give you a more accurate picture of how much your loan will cost.
It’s crucial to compare the two documents to make sure there aren’t any major discrepancies between them. If there are, be sure to speak with your lender to get a thorough explanation about why such differences exist. If you’re not satisfied with the lender’s explanation, you have the right to cancel the mortgage any time before the mortgage documents are signed.
The Bottom Line
The idea behind the Loan Estimate and Closing Disclosure is to provide borrowers with the opportunity to identify all costs associated with securing a mortgage. Knowing exactly how much a home loan costs will help borrowers make more informed decisions so that they are not stuck with a loan they cannot comfortably afford.
With these documents, you’ll be able to determine how much your loan will cost and if any terms of the loan could change in the future. That’s why it’s so important to take the time to go over these items in great detail and ask any pertinent questions about them before your closing date arrives.