How to read a Loan Estimate
We could type up a long exhaustive page about how to go about this, but the good people at the CFPB (Consumer Financial Protection Bureau) beat us to it. So we are going to link to their interactive page below. Follow the link and browse what they have to say, it's all valuable, correct and useful to know.
The above page is a great resource, but there are a few things that it omits that could be useful when analyzing and comparing Loan Estimates (LEs):
- Make sure the applicants are identical. Everything on top of the first page is important, but too often we see clients trying to compare LEs with different borrowers, most commonly one borrower vs two borrowers. Its very easy to drop the borrower with the lower credit score in order to raise the qualifying FICO and offer better rates and costs compared to other lenders. There's nothing wrong with it, and it is very often a fantastic idea, just make sure you understand how that changes pricing.
- Compare the Loan Amounts. Lenders can have huge swings in pricing based on simply borrowing more or less money. For most lenders these adjustments occur at increments of $25k (e.g. $150k, $200k, $225k, etc.) Make sure you understand and discuss with with your loan officer what happens to the pricing if you decide to bring more cash to closing, or you have to roll in more costs than anticipated, and are forced to cross one of these invisible lines. It sounds silly, but a loan for $299k can be very different from one at $301k, and its better to understand what those changes look like before you get there.
- Divide the Loan Amount by the Sale Price and multiply by 100 in order to calculate your LTV. LTV is almost always priced with 5% increments starting from zero, meaning that borrowing 88% can be much different from borrowing 82% (crosses the 85% LTV mark, changing pricing)
- Pay attention to cash to close on the bottom right of page 2 of the LE. Make sure you and your loan officer are in agreement on what you will be bringing to closing and the Loan Estimate reflects that
- Understand what closing costs you care about. On a single loan estimate there are 6 separate places where you can see some form of "Total Costs" summed up, and they do not all match. When you're shopping for a loan these are important, and we have a separate page for how to compare costs