What is a Loan Estimate and why is it important?

A Loan Estimate is a crucial document provided to borrowers within three business days of applying for a mortgage. It summarizes the key terms and costs associated with the loan, including the interest rate, monthly payments, and any closing costs. This document is designed to ensure transparency and enable borrowers to make informed decisions by comparing loan offers from different lenders.

The Loan Estimate is vital because it helps borrowers understand the financial implications of the loan they are considering. It allows them to see a clear comparison of various loans and to identify any potential fees or costs that could affect their total loan amount or monthly payments. By providing this information upfront, the Loan Estimate promotes accountability in the lending process and helps to prevent surprises at closing.

While the other options discuss aspects of lending, they do not capture the comprehensive nature and purpose of a Loan Estimate. For instance, a report of the borrower's credit score is important for underwriting but does not summarize loan terms or costs. Similarly, a breakdown of potential interest rates gives context to borrowing costs but lacks the overview of the entire loan package. Lastly, a legal agreement between the lender and borrower refers to the closing documents, which are different from the Loan Estimate, as the latter is more informational and not a binding contract.