Whether you are buying a home or are refinancing
your current mortgage, you eventually have to apply for a loan and
compare offers. You will need to gather a lot of paperwork, satisfy
a list of credit requirements, negotiate the best possible loan
terms and make sense of the good-faith estimate.
You will be asked to supply a lot of paperwork when
you apply. Then you'll get some paperwork in return. Of the documents
you receive, the most important is the good-faith estimate of closing
costs. The lender might shorten that to "good-faith estimate"
or GFE. Here we will call it the good-faith estimate.
Before we dive into a detailed explanation of the
good-faith estimate, we will tell you about the difference between
prequalification and preapproval, the questions that lenders will
ask, and the questions that you should ask lenders. Near the end
of this chapter we will describe what you will find in the good-faith
estimate. That won't be the final word, though. The good-faith estimate
contains several categories of fees, and it will take this and the
following two chapters to explain them all.
If you already own a home and you're looking
to refinance, you can skip this chapter. If you plan to buy a home,
the first step is to determine how much house you can afford, and
then to start shopping for a mortgage. Your goal is to get prequalified
or, better yet, preapproved. Once you have done that, you can start
shopping in earnest for a home.
By getting prequalified or preapproved for a mortgage,
you will have negotiating leverage because the seller knows that
you already have a loan virtually in your pocket. And you won't
be tempted to buy an unaffordable house.
Prequalification acts as a dry run of the loan application process.
The mortgage lender will use details you provide about your credit,
income, assets and debts to arrive at an estimate of how much mortgage
you can afford. The whole process may take only minutes, or a few
hours at most, and is usually free.
While a "prequal" is nonbinding to the lender
(because the information you provide has not been verified), it
does serve as a good indication to potential sellers of your general
Preapproval takes prequalification one step further. The lender
will contact your employer, your bank and others to verify your
income, assets, debts and credit history, and then issue you a letter
stating that your mortgage is approved for a certain amount within
a certain time. You may be charged a small fee to cover the cost
of your credit reports and your application, often refunded at closing.
Gain the buying edge
The advantages of prequalification and preapproval are twofold:
You're more attractive to sellers, who needn't worry that they'll
accept your offer only to have your loan turned down, and you'll
save time closing when you find a home because the lender will have
already completed the necessary qualifying and underwriting steps.
Important note: Should your financial circumstances
change before closing, make sure to contact your lender, as your
prequalification or preapproval may no longer be valid.