Loan Estimate and Closing Disclosure Forms
What are Loan Estimate and Closing Disclosure Forms?
Any time a potential borrower applies for a home loan in the U.S., the lender is legally obligated to send them a Loan Estimate within three business days of their application. A Loan Estimate can provide you with a variety of important information about the mortgage you’re interested in, including an estimate of the interest rate you’ll be charged, an estimate of your monthly payments, and an approximation of the closing costs you’ll face.
And, within a minimum of three business days before a mortgage closes, a lender is legally obligated to give the borrower a Closing Disclosure form. This explains the actual, real terms of the mortgage -- since they could end up being quite different than the information provided in the initial Loan Estimate.
What Else Home Buyers Can Learn from Loan Estimates
While projected monthly payments, closing costs, and your interest rate may be the most important information you can gain from a Loan Estimate, it’s not the only info this document provides. Loan Estimates also contain approximations of the amount of taxes and insurance you might have to pay, as well as loan features like prepayment penalties (fees if you make additional payments) or negative amortization (payments that don’t fully cover your loan’s interest, increasing the principal you owe).
How Much Can Costs Change Between a Loan Estimate and a Closing Disclosure Form?
According to the TILA-RESPA Integrated Disclosure Rule, also known as TRID, there are a series of rules that limit the amount which your mortgage costs can change between the Loan Estimate Form and the Closing Disclosure form. If a lender changes this amount beyond the rules, they are legally obligated to refund the costs to the borrower within 60 days.
Costs that are not allowed to change under TRID include:
Lender/broker fees
Third-party fees (i.e. credit reports, appraisal reports) if the borrower was not permitted to shop around
Transfer taxes (local government taxes paid during property transfer-- which are typically handled by the seller)
Costs that can change under TRID include:
Interest rates
Prepaid interest
Amounts of money placed in escrow
Third-party fees (i.e. credit reports, appraisals) if the borrower is permitted to shop around
Costs that are allowed to change by 10% or less under TRID include:
Recording fees (paid to local governments to “record” the loan)
Third-party fees (typically title insurance), in which the lender is not paid, and the borrower chooses a third party provider from a lender-approved list
Despite these rules, there are a few exceptions. For example, if the lender has been given inaccurate information about the borrower, or they find new information (like a credit score that has recently dropped), they can usually increase the costs beyond the predetermined limits.
What To Do If Closing Disclosure Costs Greatly Exceed Loan Estimates
If you liked what you saw on your Loan Estimate form, but feel that your Closing Disclosure form holds a nasty surprise, you may want to consider canceling the mortgage. While you’ll still have to pay certain fees, like the appraisal costs, getting out of a bad mortgage can be a big money-saver in the long run.
If you really like the rate on your Loan Estimate form, you may even want to consider getting a rate lock on your mortgage. Getting a rate lock may cost you a small amount upfront in the form of a slightly increased interest rate, but it might be able to save you money in the long term, especially if things change from the time you get your Loan Estimate to the time you close on your home.