Whether you are buying a home or are refinancing your 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, or GFE, of closing costs.
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 start shopping for a mortgage. (Bankrate's mortgage calculator can help you determine what your monthly payment will be.) 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.
PrequalificationPrequalification 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 creditworthiness.