Loan Estimate & Closing Disclosures Explained: What first-time home buyers need to know about their LE and CD

What is a Loan Estimate (LE)?

After you get pre-approved for a home loan, complete the mortgage application, and choose a property you’d like to purchase, then your mortgage advisor will have all the information they need to write up a Loan Estimate.

The Loan Estimate breaks down the estimated costs of closing, your monthly mortgage payments, as well as the lifetime costs of your loan.

To view a sample Loan Estimate from the Consumer Financial Protection Bureau’s website, click the following link: 

https://files.consumerfinance.gov/f/201403_cfpb_loan-estimate_fixed-rate-loan-sample-H24B.pdf

Below is a list of the terms and costs laid out in your Loan Estimate:

• Loan Term (Ex: 15 year, 30 year, etc)
• Mortgage Type (Ex: Conventional, FHA, USDA, VA, etc)
• Loan Amount
• Interest Rate
• Monthly Principal & Interest Payment
• Cash To Close (IE Closing Costs and Down Payment)
• Annual Percentage Rate (APR)
• Total Interest Percentage (TIP)
• Origination Charges (Ex: Mortgage Points, Application Fee, and Underwriting Fee)
• Taxes and Insurance Fees
• Other Services (Ex: Appraisal Fee, Credit Report Fee, Tax Monitoring Fee, Pest Inspection Fee, Title Fees, Recording Fees, and Transfer Taxes)

What fees are subject to change after the Loan Estimate?

There are some pretty strict guidelines when it comes to estimating the costs and fees that go into your mortgage.

The reason why these guidelines are pretty strict is to protect you, the borrower, ensuring that there aren’t last minute fee hikes right before closing day.

Once your mortgage advisor writes up the Loan Estimate, a lot of the fees and costs laid out on that Loan Estimate are not allowed to change or increase before closing day.

For example, the Origination Fees, any fees that are paid to the lender, or any fees for a required service that you were not allowed to shop for, those costs cannot increase at all before closing.

And this makes sense, because your lender should know exactly what all those fees are, so there’s no reason why those fees should increase after the Loan Estimate.

But while certain costs and fees are more set in stone once they’re defined in the Loan Estimate, there are other costs that may vary depending on a couple factors.

Basically, if you shop around for certain services like Title Fees or the Pest Inspection Fee, then your lender can’t know exactly what those costs will be.

Also, taxes and insurance fees are subject to change. It’s possible that your monthly homeowners insurance will go up some time in the future, and your mortgage advisor can’t really predict that.

And as the government passes different tax laws, your property taxes are subject to change as well. So while your mortgage advisor has to give you their best estimate of what your taxes and insurance costs will be, there’s no way to know exactly what those costs will look like over the entire life of your loan.

What is a Revised Loan Estimate?

If there is a change in circumstance, then your mortgage advisor might have to write up a Revised Loan Estimate. And in that situation, all costs are subject to change. 

Some examples of change in circumstances that might lead to a Revised Loan Estimate include:

• If you change your mind about the terms of the loan.
• Your credit score drops significantly. 
• The underwriter was not able to verify your income.
• New information comes to light that affects your eligibility for the loan.

These kinds of changes may mean that your mortgage advisor has to create a Revised Loan Estimate.

Loan Estimate Summary

• After you get pre-approved for a home loan, complete the mortgage application, and choose the property you’d like to purchase, your mortgage advisor will have all the information they need to write up a Loan Estimate. 
• The Loan Estimate shows you ahead of time what you can expect to pay as far as closing costs, monthly mortgage payments, and all the fees associated with your home purchase. 
• And yes, this document is in fact an estimate, but think of it like a highly educated guess. 
• When writing up your Loan Estimate, your mortgage advisor is taking all the information available to them, and being as exact as possible when breaking down all the costs that go into your home purchase.
• If there is a change of circumstance, then your mortgage advisor may need to write up a Revised Loan Estimate.

What are the Closing Disclosures (CD)?

You should receive your Closing Disclosures at least 3 business days before closing on your home. The Closing Disclosures are a statement that breaks down the final loan terms and closing costs. This is like a finalized, more detailed version of your Loan Estimate.

Think of your Loan Estimate as a third or fourth draft of a novel, whereas the Closing Disclosures are like the final manuscript that gets sent off to publication.

To view a sample Closing Disclosures statement from the Consumer Financial Protection Bureau’s website, click the following link:

https://files.consumerfinance.gov/f/201403_cfpb_closing-disclosure_cover-H25B.pdf

The Closing Disclosures include all the same information listed out in the Loan Estimate, plus a highly detailed breakdown of the home purchase transaction

This transaction breakdown shows all the costs paid by you, the borrower, in addition to all the costs paid by the seller (as the seller might agree to pay for closing costs such as the appraisal, transfer tax, or realtor commissions).

It’s a highly detailed account of every last transaction that goes into the home purchase, what each fee is for, who paid it, and whether it was paid at closing or before closing. 

What fees are/are not subject to change from the LE to the CD?

Ideally, all the costs and fees listed on the Loan Estimate should match (or come close to matching) the costs and fees listed on the Closing Disclosures. However, some fees are subject to change. 

• Origination Charges, or any fees paid to the lender are NOT subject to increase. These fees listed on the Loan Estimate should match up with what’s on the Closing Disclosures. 
• Services You Are Not Allowed To Shop For: These fees should NOT go up between the Loan Estimate and the Closing Disclosures. Your mortgage advisor should know exactly what these costs are ahead of time, so there’s no reason why these fees should increase after the Loan Estimate. 
• Recording Fees and Transfer Tax: These costs are NOT allowed to increase from the Loan Estimate. 
• Services That You Can Shop For: These fees may change between the Loan Estimate to the Closing Disclosures. For example, if you shop around for a different title company, then those title fees may be higher than what’s listed on the Loan Estimate.
• Property Taxes and Insurance Fees: These are subject to change in the future, as tax laws may change, and it’s possible your homeowners insurance could change as well. Your mortgage advisor has no way to predict what those fees will be over the life of your loan. 
• Prepaids: It’s possible that your prepaid fees could increase after the Loan Estimate depending on how much you decide to prepay in homeowners insurance, mortgage insurance, or property taxes. Some homeowners prepay more than what’s required and therefore their prepaid costs increase from what’s listed on the Loan Estimate.

Closing Disclosures Summary

• You should receive your Closing Disclosures at least 3 business days before closing on your home. 
• Your Closing Disclosures are a finalized version of your Loan Estimate. This statement includes a highly detailed breakdown of every last transaction that goes into the home purchase: what each fee is for, who paid it, and whether it was paid at closing or before closing. 
• Fees that are subject to change between the Loan Estimate and Closing Disclosures include: Services That You Can Shop For, Property Taxes and Insurance Fees, and Prepaids. 
• Fees that are NOT subject to change after the Loan Estimate include: Origination Charges, Services You Are Not Allowed To Shop For, Recording Fees and Transfer Tax.