From your first open house to finally getting your keys, home buying is an exciting experience. Less exciting, however, are the technical documents and legal processes that go with it. As you go through the process of securing financing for your home, you will receive two different documents from your lender that are closely related. One is called a Loan Estimate and the other is known as a Closing Disclosure. These documents list the costs and fees associated with closing on your home and setting up your mortgage.
As a home buyer, you should look through both of these documents and compare them to one another to check for major discrepancies. Here’s how to do it:
What’s the Difference Between a Loan Estimate and Closing Disclosure?
A Loan Estimate is a document given to you by your lender after you’ve applied for a mortgage. The Loan Estimate details all of the estimated costs and fees associated with your particular loan.
Your Estimate includes three main sections: loan terms, payment schedule, and closing costs.
- Loan terms: The loan terms section covers information about the amount of your mortgage, interest rate, and the monthly principal and interest payments.
- Payment schedule: The second section breaks down the payment schedule of your mortgage. Your payment schedule shows you estimated payments for things like homeowners insurance, taxes, and private mortgage insurance.
- Closing costs: The final section of your Loan Estimate gives you a detailed list of the different closing costs you’ll pay for your new home. Closing costs may include appraisal fees, escrow fees, and more. (For a breakdown of closing costs, check out our explainer here.)
The Closing Disclosure is given to you three days before your closing date and includes similar information to the Loan Estimate. However, the numbers and details on the Closing Disclosure are much more precise. Where the Loan Estimate provides you with an approximate amount for your closing costs and monthly payments, the Closing Disclosure provides finalized numbers for the cost of your mortgage. It’s designed to let you know exactly how much you’ll pay for your loan each month.
Costs That Can Change
Your Loan Estimate is intended to give you an idea of what you will pay monthly and at closing for your new home. Due to the flexible nature of the closing process, this estimate may fluctuate between the time you apply for a mortgage and when you actually close on the home. That’s why costs that are listed in the Loan Estimate may be different than those on the finalized Closing Disclosure.
Some of these costs and fees can change without limitations. The following are a few examples:
- Prepaid interest: Costs such as prepaid interest, or the interest you pay on your loan from closing till the end of the month, are likely to change. As your closing date may be changed, the amount of interest you’ll need to pay for your first month of home ownership will depend on how many days are left in the month.
- Homeowner’s insurance: Your homeowner’s insurance amount can also change between the Loan Estimate and Closing Disclosure. As the borrower, you’re in charge of choosing an insurance provider. When your lender gives you your Estimate, they can only estimate what your insurance company will charge in premiums.
- Appraisals and inspections: Other costs that may change between your documents are service fees for things like appraisals or home inspections. Some borrowers choose to have their appraisal or other services performed by a company of their choosing, which may or may not be on the lender’s approved list. You’ll then be responsible for any price increases your chosen service company charges, even if the service is required by your lender, such as a home appraisal.
Meanwhile, other home buying costs have limits on how much they can change between the Loan Estimate and Closing Disclosure, including:
- Government fees: These include fees paid to the local government to record the new mortgage, known as recording fees.
- Services completed by lender-approved company: Likewise, any services paid for, such as home appraisal, that are required by the lender and completed by a lender-approved company have limits on how much they can change between the Estimate and Disclosure.
The total cumulative amount of fees in this category cannot increase by more than 10 percent from the Loan Estimate and Closing Disclosure.
Costs That Cannot Increase
Barring specific circumstances, certain amounts on your Loan Estimate are not allowed to increase on your final Closing Disclosure. They include:
- Lender fees: Fees paid to your lender cannot increase from the amount listed on the Loan Estimate. These fees might include a loan origination fee or interest rate.
- Third-party service providers chosen by the lender: Additionally, if your lender doesn’t allow you to choose your own service provider for a required service, such as a home appraiser, the fee may not increase between your two documents.
- Transfer taxes: Transfer taxes, or a tax paid to the local government to transfer the ownership of the property, are also not allowed to be increased. This tax is usually paid by the seller of the home.
Looking for Differences Between Documents
Government regulations restrict lenders from increasing many of the fees listed in your Loan Estimate. Yet, you might notice that your Loan Estimate has much higher costs than your Closing Disclosure. Many lenders overestimate potential fees and costs associated with home closing to provide a safety net when creating a Loan Estimate. Even so, you should take the time to go through each item on both of your documents once you receive your Closing Disclosure.
Compare the fees and costs listed on both documents and look for discrepancies between the two. Keep an eye out for increases from the amounts listed in your Loan Estimate to the Closing Disclosure. If you find a fee that has increased and are unsure if it is correct, talk to your lender. A reputable lender will work with you to correct any mistakes and make sure you understand the differences between your documents so you are confident in your mortgage when you close on your home.
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