What is a mortgage LE?
For most Americans, the third of October in 2015 was just another ordinary day, no different than any other. But for lenders, as well as people applying for a mortgage loan, that October day fundamentally changed the way mortgage requests are handled to increase transparency.
As you may know, lawmakers passed a number of regulatory measures to reduce the likelihood of another Great Recession. One of them was what is formally known as a Loan Estimate (LE). So what exactly is a mortgage LE, and why are they so important to the borrowers and lenders alike?
LEs come in threes
According to the Consumer Financial Protection Bureau (CFPB), a mortgage LE is a document that’s usually about three pages in length. Roughly 72 hours after a buyer selects a home to mortgage, that borrower is given an LE, which includes all the essential elements that are important for them to know about their loan.
Most notably, an LE provides details on the estimated cost borrowers can expect to pay should they decide to move forward with the loan. This includes the loan amount, the interest rate, APR, closing costs and a ballpark figure of their monthly mortgage payment. In addition, an LE frequently contains particulars on certain fees or penalties incurred if borrowers miss their payments or pay off their loans in a timeline contrary to what was originally agreed upon.
In short, LEs contain both necessary information as well as other details that the lender deems noteworthy to mention.
How does it differ from a GFE?
For those who’ve been through the mortgage process before, an LE may sound awfully similar to a Good Faith Estimate. As part of the Know Before You Owe mortgage disclosure rule, the LE replaced the GFE. Industry experts acknowledge LEs are better than GFEs because they’re easier to comprehend. LEs aren’t usually full of financial jargon, and they encourage borrowers to weigh all their options and compare loan costs and fees against those offered by other banks or mortgage entities.
No one likes to be surprised by hidden expenses, especially when it comes to mortgage payments. LEs aim to prevent this from happening. Loan origination expert Jonathan Dyer told MagnifyMoney that, under the changes implemented by Know Before You Owe, whatever fees loan originators originally discuss with borrowers often remain as they are, something that wasn’t necessarily true under the GFE system.
“Regulatory agencies have now prohibited any increase of disclosed fees without a significant change in the loan purpose or loan amount,” Dyer said.
An LE is not a mortgage approval
It’s important to understand, however, that an LE is not a formal indication that a loan has been approved, according to the CFPB. Rather, an LE is a complimentary service that lenders are required to provide, giving applicants an idea of what they can expect if everything checks out.
Applying for a mortgage can seem like a lot of steps. If you’re someone who is new to homebuying, the paperwork alone can feel like challenging. An LE is designed to simplify the process, not to mention provide and protect borrowers seeking financial support during one of life’s major milestones.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.