Get Pre-approved for a mortgage
Hey! Question: Which scenario would you choose? Go to your favorite store and simply window shop OR go to your favorite store with a wallet full of cash ready to instantly purchase the item you really want? I’m pretty sure I know you’re answer. When you get preapproved for a mortgage, you are telling the real estate world “I’m ready to buy my dream home and I am able to afford it!” This is the exact reason why obtaining financing is the first and most important step to the home buying process. This is perhaps the biggest purchase you will make in life…besides the yacht and private island you will have in the future. So what actually happens when you get preapproved? Your mortgage lender will take a look at your income, debts, and your down payment amount to assess how much “Home” you can afford based on your financial health. Once you are able to prove your income and credit history, your lender will then provide you with your preapproval letter that will be valid for about 90 – 120 days.
Mortgages can be an intimidating subject, especially to the first time home buyer. Once you receive your preapproval, you’ll need to take it a few more steps in order to make sure you are doing the best for your financial health. Read on in order to make sense of it all.
Mortgage Terms and Amortization
The term refers to the amount of time a lender is willing to lend to you. It is the “life span” of the loan. The typical life span of a mortgage is 6 months to 5 years. Once that term is up, the remaining balance is to be paid in full by the borrower unless you arrange new financing for the next term.
“How in the world are you going to be able to pay off your entire home in 5 years??”
The good thing is, lenders calculate the mortgage payments over a much longer time, as long as 30 years. They aren’t necessarily loaning you the money for (one) 30 year term, instead they’re just calculating the payments as if it were to take you that long to pay off your home. You will probably renew and refinance your home multiple times during your 30 year amortization. The longer the life of the loan, the lower your monthly payments will be. However, it also means you will be paying more of the interest accrued over the life span of the mortgage as well.
Just like there are various credit cards out there that offer benefits such as Travel Reward Points, 0 APR% financing, and Cash back on groceries/gas, there are various types of mortgages with benefits that are available to you to make the best financing decision. The most common types of mortgages are:
Conventional – This is the most commonly used type of mortgage. They generally require 20% of the purchase price as a down payment, while financing the remaining balance.
FHA – This type of mortgage has become extremely popular over the years. Primarily due to its 3.5% minimum down payment incentive which allows individuals who may not have a lot cash for a down payment to still have the opportunity to own a home. Be advised, because this type of loan will allow you to borrow more than the conventional 80% of the purchase price, the government requires that you pay PMI (Private Mortgage Insurance) which can add to your monthly mortgage payment.
I’m pretty sure you know how interest rates usually work, it is your cost of borrowing, simple. It increases and decreases in relativity to the economy. When shopping for a mortgage, you will generally have two options when it comes to addressing the interest of the mortgage.
- It’s exactly how it sounds, an interest rate that is fixed over the lifespan of the mortgage. This option can be extremely helpful in an economy that forces the interest rates to spike. You would benefit by having a rate locked in and avoiding paying more money
- This type of interest rate option is pegged to the prime interest rate of the economy and is allowed to float freely. It can increase and decrease with the flow of our economic health. Given the scenario before, if you had an adjustable rate mortgage, you would have been able to take advantage should the prime interest rate drop below your existing interest rate allowing you to save exponentially on interest payments. Obviously it’s not so glamorous should the opposite happen and you find yourself paying higher interest payments than before….ouch!
Where to get your preapproval
Finding an entity to provide you with your mortgage is one of the easier parts of the process. They’re usually right within your own network. The two most commonly used are:
- Your own bank or a local bank
- You’ve already invested in your bank by using some of their products and/or services such as checking and saving accounts, auto loans, CD’s, personal loans, ect. Your lender recognizes this and may be more inclined to give you a better interest rate.
- A mortgage officer
- Mortgage brokers are the liaisons between you and various lenders; they shop around for the best mortgage rate and term. This takes the pressure and leg work away from you which helps make the financing process a little bit easier.
Above all, getting preapproved is the first crucial step in your journey towards home ownership. Once you know how much you can afford, it’s on the fun stuff… House Hunting!