Once upon a time... Buyers didn't worry about financing their home purchase until after they found the home. After the seller accepted their offer, they'd shop around for a mortgage. Buying has now become highly competitive. In order to compete, a buyers should get preapproved for the mortgage before they even start looking at homes to buy. If a seller receives two similar offers and one has a pre-approval letter attached, which one is he more likely to accept? Another benefits of preapproval is that you know exactly how much you can afford to pay for a home before you enter into a purchase agreement.
Mortgage preapproval is a process where the borrower is approved for a maximum mortgage amount. The approval is usually good for a period of time and is subject only to the borrower finding an acceptable property. Closing the transaction still requires approval of the property, based on an appraisal and a title report.
Make sure that your preapproval letter isn't simply a prequalification letter. A prequalification letter simply states that the lender is likely to give you a loan of a certain amount if the financial data you've disclosed to the lender is satisfactorily verified.
MORTGAGE CALCULATOR
Lender Checklist: What You Need for a Mortgage
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W-2 forms — or business tax return forms if you're self-employed — for the last two or three years for every person signing the loan.
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Copies of at least one pay stub for each person signing the loan.
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Account numbers of all your credit cards and the amounts for any outstanding balances.
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Copies of two to four months of bank or credit union statements for both checking and savings accounts.
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Lender, loan number, and amount owed on other installment loans, such as student loans and car loans.
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Addresses where you’ve lived for the last five to seven years, with names of landlords if appropriate.
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Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, such as a boat, RV, or stocks or bonds not held in a brokerage account.
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Copies of your most recent 401(k) or other retirement account statement.
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Documentation to verify additional income, such as child support or a pension.
- Copies of personal tax forms for the last two to three years.
Brush up on these mortgage basics to help you determine the loan that will best suit your needs.
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Mortgage terms. Mortgages are generally available at 15-, 20-, or 30-year terms. In general, the longer the term, the lower the monthly payment. However, you pay more interest overall if you borrow for a longer term.
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Fixed or adjustable interest rates. A fixed rate allows you to lock in a low rate as long as you hold the mortgage and, in general, is usually a good choice if interest rates are low. An adjustable-rate mortgage is designed so that your loan’s interest rate will rise as market interest rates increase. ARMs usually offer a lower rate in the first years of the mortgage. ARMs also usually have a limit as to how much the interest rate can be increased and how frequently they can be raised. These types of mortgages are a good choice when fixed interest rates are high or when you expect your income to grow significantly in the coming years.
- Balloon mortgages. These mortgages offer very low interest rates for a short period of time — often three to seven years. Payments usually cover only the interest so the principal owed is not reduced. However, this type of loan may be a good choice if you think you will sell your home in a few years.
- Government-backed loans. These loans are sponsored by agencies such as the Federal Housing Administration or the Department of Veterans Affairs and offer special terms, including lower down payments or reduced interest rates to qualified buyers.