How financing works, in plain language

Pre-qualification and pre-approval are not the same thing

A pre-qualification is based on what you told the lender. A pre-approval means they have looked at documents and run it through underwriting. They sound similar and they carry very different weight with a seller.

Ask your lender directly which one you are being given, because the letter itself may not make it obvious, and a listing agent will know the difference even if you do not.

The words that come up and what they mean

None of this is complicated once somebody says it in normal English. It is mostly complicated because nobody does.

• Escrow: an account your lender holds to pay your property taxes and insurance on your behalf, funded a bit at a time with your monthly payment
• Points: money paid up front to lower your interest rate. Whether that is worth it depends entirely on how long you keep the loan
• Private mortgage insurance: an insurance premium some loans require when the down payment is below a certain level. It protects the lender, not you, and on some loans it can eventually come off
• Debt to income ratio: what you owe each month measured against what you earn, which is one of the main things underwriting looks at
• Closing costs: lender fees, title work, recording fees and prepaid items, paid at closing and separate from your down payment
• Rate lock: an agreement that holds your rate for a set period. Ask how long the lock runs and what happens if closing slips past it

The loan estimate is the document that matters

When you apply, your lender has to give you a standardized Loan Estimate. It is the only document that lets you compare two lenders honestly, because the format is the same for everyone.

Get one from each lender you are considering, on the same day if you can, since rates move. Compare the annual percentage rate rather than the headline rate, because the APR includes the fees. Then compare the lender fee section line by line. That is where the real differences hide.

What changes your rate and what does not

Your credit profile, your down payment, the loan type and the loan term all affect what a lender offers you. What does not affect it is who your real estate agent is, and if anybody tells you otherwise, be careful.

One practical warning: do not open new credit accounts, finance a car, or change jobs between your approval and your closing without telling your lender first. Underwriting is often re-checked before closing, and deals genuinely fall apart at the last minute over a new credit card.

Common questions