Your lender is required to send you a loan estimate after you complete your mortgage loan application. This three-page form is important: It lists the important financial details of your mortgage loan.
The loan estimate will list your loan's interest rate and monthly payment. It will also estimate how much you'll pay in closing costs, the fees charged by your lender and other third-party providers to originate your loan.
The loan estimate will also list any penalties you might face for paying off your loan too early and provide an estimate for how much you might have to pay in homeowners' insurance and property tax payments.
Why does the loan estimate matter?
Once you receive your loan estimate, it's important to look it over carefully. Make sure you agree with the closing costs and interest rate listed. If you have any questions about how much your lender or other providers are charging, now is the time to ask.
After you review your loan estimate you can decide to move forward with your loan application. You'll then provide additional information about your finances -- such as copies of your recent paycheck stubs and bank account information -- to your lender. Your lender will review this information when deciding whether to officially approve you for a mortgage.
What is a closing disclosure?
During the approval process, your lender will send you another important form, the closing disclosure. This is a five-page form that lists the final costs of your mortgage loan. While the loan estimate was an estimate of how much you'll pay for your mortgage, the closing disclosure lists exactly what you'll pay at the closing table.
The disclosure will spell out how much you'll pay each month for your loan and how much you'll pay in closing costs. The disclosure will also list your loan's terms, such as its interest rate, the total amount you have borrowed and how many years it will take you to pay it off. Your lender must provide you with your closing disclosure at least three business days prior to the official closing date of your mortgage loan.
Why your closing disclosure matters.
Once you receive your closing disclosure, study it carefully, too. Make sure that the closing costs and loan information are the same or almost the same as what your lender listed on your loan estimate.
It's common for some closing costs to be slightly higher or lower than what was listed in the loan estimate. The key word here, though, is "slightly." If you see big differences from the loan estimate, contact your lender. If you are uncomfortable with the differences, you don't have to move forward with your loan closing.
The loan estimate and closing disclosure are both designed to make it easy for you to understand how much you’ll pay for your mortgage loan. Don’t pass up the opportunity to be an educated homebuyer: Study both of these documents carefully.