Eight Steps to Home Ownership
We've started a new series of posts entitled "Eight Steps to Home Ownership." These are eight useful and systematic steps to help you purchase your home. This week we focus on Step Two: Obtain Loan Preapproval. To read our first post, click here.
Few people can buy a home for cash. According to the National Association of REALTORS (NAR), nearly nine of out 10 buyers in 1999 financed their purchase, which meant that virtually all buyers - especially first-time purchasers - require a loan.
The real issue with real estate financing is not getting a loan. Virtually anyone willing to pay lofty interest rates can find a mortgage. Instead, the idea is to get the loan that's right for you - the mortgage with the lowest costs and best terms.
REALTORS routinely suggest that consumers start the mortgage process well before bidding on a home. Many lenders (the sources of money) and programs, for example, are available through recommendations from The DeLois Smith All Star Team/Keller Williams. By meeting with lenders, either online or face to face, and looking at local options, you will find which programs best meet your needs and how much you can afford.
What is it?
"Preapproval" means that you have met with a loan officer, your credit files have been reviewed, and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which shows your borrowing power. You can visit as many lenders as you like and get several preapprovals, but keep in mind that each one carries with it a new credit check which will show up on future credit reports.
Although not a final loan commitment, the preapproval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail due to financing.
How do you get approval?
Real estate financing is available from numerous sources, including lenders in local banks and mortgage companies. We may suggest one or more lenders with a history of offering competitive programs and delivering promised rates and terms.
The loan officer will carefully review your financial situation, including your credit report and other information. The lender will then suggest programs which most closely met your needs. For instance, a first-time buyer may qualify for state-backed mortgage programs with little money down and low interest rates, while a repeat purchaser (someone who has purchased a home before) with more equity (money invested in the home) might want to get a 15-year loan and the lower overall interest costs it represents. Typically, first-time buyers opt for the traditional 30-year loan, with either a floating interest rate or a fixed rate of interest over the lifespan of the loan.
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