The loan estimate provides __ to explain key elements and risks of the mortgage loan. A creative budget Disclosures The note A final tally
The correct answer and explanation is:
The correct answer is Disclosures.
Explanation:
A loan estimate provides disclosures to explain key elements and risks of the mortgage loan.
When you apply for a mortgage, lenders are required to give you a Loan Estimate (LE) within three business days of receiving your application. This document is a standardized form designed to provide important information about the loan in a clear and understandable way. The primary purpose of the Loan Estimate is to help borrowers understand the costs, terms, and risks associated with the mortgage loan they are considering.
The Loan Estimate contains disclosures that cover several key areas:
- Loan Terms: The LE outlines the loan amount, interest rate, and monthly payment. It also details whether the interest rate can change over time (as in adjustable-rate mortgages), and what the consequences would be if the borrower misses payments.
- Estimated Costs: It shows an itemized list of estimated closing costs, including lender fees, third-party fees, taxes, and escrow amounts. This helps borrowers compare costs between different lenders.
- Risks: The Loan Estimate explains risks such as potential payment increases if the loan has an adjustable rate, prepayment penalties, or balloon payments. This transparency helps borrowers understand the potential financial impact of the loan beyond just the initial terms.
- Comparisons: The form is designed to make it easy for borrowers to compare different loan offers side-by-side, promoting informed decision-making.
- Other Important Information: It includes details about escrow accounts, whether the loan can be assumed by someone else, and the lender’s contact information.
These disclosures protect consumers by ensuring they have all necessary information upfront, preventing surprises later in the loan process. They are a critical part of the federal Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), which require lenders to provide accurate and timely information.
In contrast, the other options:
- A creative budget refers to personal financial planning, unrelated to mortgage disclosures.
- The note is a legal document outlining the borrower’s promise to repay the loan, not the disclosure document.
- A final tally refers to the final closing statement after all costs are confirmed, not the initial disclosure document.
Thus, disclosures are the correct answer because the Loan Estimate’s primary function is to disclose key loan information and risks clearly to the borrower.