Most mortgage lenders take the guess work out of applying for a loan by figuring out for you the amount you can afford to borrow. Then, they give you a printed document stating the maximum mortgage amount you qualify for based on your particular finances and income.
Mortgage pre-approval establishes your price range and strengthens your buying position by letting the Seller know that you have already been approved for the loan. It can also ease time constraints once the purchase agreement in signed between Buyer and Seller.
Getting That Perfect Mortgage
For most first-time home buyers, shopping around for that “perfect” mortgage can be a daunting and complicated task. Just as if you were to take your time purchasing a car or new large screen television, purchasing a mortgage loan takes patience and research so that you receive the best possible deal for you and your family.
There are various aspects of a mortgage loan that you have to be aware of so you fully understand the type of loan that you’re receiving. In addition, be certain that you know your credit records, income, debts and assets.
Maintaining a Good Credit Score
One of the most important things that you’ll have to maintain to receive a quality mortgage is your credit score. This includes credit card payments, bills, employment history, debts as well as assets . Your economic history is vital for your economic security, so if your history is unhealthy, then that may affect your chance of getting the loan that you wanted . If you have a poor credit score, then you may be inflicted with higher interest rates.
If you do have a poor credit rating, you may have to wait and save some money before getting a loan. However, if you have a mediocre to poor credit score, but have legitimate reasons of why you have that (ex. Illness, tragedy, and temporary loss in income) then you may not receive as high interest rates. As well, if the information on your credit rating is accurate but still slightly poor, then you may slightly be able to avoid higher interest rates.
There are multiple ways of receiving a mortgage. You get a mortgage loan from a lender, which typically is a bank. Contacting and discussing with multiple lenders will only help your research and your chances a getting that loan you want.
However, another method of finding a solid mortgage loan is through the assistance of a mortgage broker. As a separate entity, the broker will contact multiple lenders to try to find you the best deal through your application. However, if you have not signed a contract with the mortgage broker to be your agent then they are not required to give you the best possible deal .
Just as you would have contacted multiple lenders, make sure you search around for the most suitable broker, as well as understanding the policies of each one you visit.
Understanding the Information
Thoroughly understanding all the information lenders and brokers tell you is vital to your success of receiving a worthy mortgage. Be sure you also receive all the required information in order to compare the information of one broker and lender to another. And don’t just settle with knowing only the monthly payment or the interest rates – get all the information there is.
Here is Some of the Information That You’ll Need to Know:
- Rates: When you visit each lender and broker, understand their current mortgage interest rates and ask if the rates being quoted are the lowest for that week or day . As well, understand the difference between fixed and adjustable rate mortgages.
- Points: These are separate fees that you pay to the lender or broker that will go towards the cost of the interest rates. Typically, if you pay more and obtain more points, it might lower the interest rate for your mortgage . Make sure you see the points in a dollar amount instead of just the number of points you’ll need to receive a lower interest rate.
- Down payments and PMI: Some lenders – and even more now if the Qualified Residential Mortgages gets implemented – require the borrower to give a down payment of 20 percent. But some lenders, for borrowers who cannot put down such a hefty down payment, offer conventional loans of as little as five percent. If they were to take such a route, then they may be required purchase private mortgage insurance (PMI) to ensure that nothing too detrimental happens to the lender if the borrower defaults on their payments. Make sure you understand the costs, policies and repercussions of these two options.
The best thing for any new home buyer to do while looking for a mortgage is to take their time and to have multiple options. Don’t rush this process, it can be very severe and detrimental to you if receive a high interest rate loan. Just as if you were to take your time looking for a home, use the same amount effort when looking for a mortgage loan and consult with your Real Estate Agent, they have experience working with lenders and can refer you to a trusted professional.
Most mortgage lenders take the guess work out of applying for a loan by figuring out for you the amount you can afford to borrow. Then, they give you a printed document stating the maximum mortgage amount you qualify for based on your particular finances and income. Mortgage pre-approval establishes your price range and strengthens your buying position by letting the Seller know that you have already been approved for the loan. It can also ease time constraints once the purchase agreement in signed between Buyer and Seller.
Consider these Scenarios:
You’re out looking at homes. Your Real Estate Broker never mentions that you should get pre-approved and just ballparks what you can afford. Of course, the more house he shows you, the better he usually comes out. You find the perfect house and work out a deal with the Seller. Three weeks later, the lender informs you that the house is $10,000 over what you qualify for and does not approve your loan. The Seller has already bought another house. You’ve given notice where you’re renting and told all your friends about the great house you bought. And then, there’s the money you’ve already spent on inspections on a house you can’t own.
You and your REALTOR® have been working diligently finding that “perfect” home. A new listing comes on the market that’s priced right and has got everything you’ve been looking for. You write an offer. Your REALTOR® takes it to the listing REALTOR® and is informed that another offer is coming in and will have to present both offers simultaneously to the Seller. The other Buyer is pre-approved for his loan. Whose offer do you think the Seller will negotiate first?
Should You Get Pre-Approved for a Loan First? Most Definitely!
How Much Do I Qualify For?
When buying a home, it is helpful to determine the type of home you’ll like and how much you can afford before beginning your search. Monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses (PITH— Principal, Interest, Taxes and Heating). To get an idea of how much you can afford to pay each month for a home, multiply your gross monthly income by 32%.
When coupled with current outstanding loans, the total for your debt service should not exceed 40% of your gross monthly income. Some lenders may have slightly more liberal requirements or loan interest rates which may increase your purchasing power.
Mortgage interest, property taxes, loan fees or “points” are currently tax deductible (up to allowable limits). Points are generally deductible in the year paid. A point equals 1% of the mortgage amount. If you are in the 32% tax bracket, this is equivalent to receiving a 32% discount on your mortgage interest and property taxes. During the first years of the mortgage your tax savings are especially high because most of your monthly payment goes toward loan interest.