Karen Montgomery's Blog
If you’re a first-time homebuyer, odds are you’ve thrown the words “prequalified” and “preapproved” interchangeably. However, when it comes to home loans, there are some very important differences between the two.
For buyers hoping to purchase a home with a few missteps and misunderstandings as possible, it’s vital to understand the procedures involved in acquiring financing for a home.
Today, we’ll break down these two real estate jargon terms so that you can go into the mortgage approval process armed with the knowledge to help you succeed in securing a home loan.
Let’s start with the easy part--mortgage prequalification. Getting prequalified helps borrowers find out what kind and what size mortgage they can likely secure financing for. It also helps lenders establish a relationship with potential customers, which is why you will often see so many ads for mortgage prequalification around the web.
Prequalification is a relatively simple process. You’ll be asked to provide an overview of your finances, which your lender will plug into a formula and then report back to you whether or not you’re likely to get approved based on your current circumstances.
The lender will ask you for general information about your income, assets, debt, and credit. You won’t need to provide exact documents for these things at this phase in the process, since you have not yet technically applied for a mortgage.
Prequalification exists to give you a broad picture of what you can expect. You can use this information to plan for the future, or you can seek out other lenders for a second opinion. But, before you start shopping for homes, you’ll want to make sure you’re preapproved, not prequalified.
After you’ve prequalified, you can start thinking about preapproval. If you’re serious about buying a home in the near future, getting preapproved will simplify your buying process. It will also make sellers more likely to take you seriously, since you already have your financing partially secured.
Mortgage preapproval requires you to provide the lender with income documentation. They will also perform a credit inquiry to receive your FICO score.
Mortgage applications and credit scores
Before we talk about the rest of the preapproval process, we need to address one common issue that buyers face when applying for a mortgage. There are two types of credit inquiries that lenders can perform to view your credit history--hard inquiries and soft inquiries.
A soft inquiry won’t affect your credit score. But a hard inquiry can lower your score by a few points for a period of 1 to 2 months. So, when getting preapproved, you should expect your credit score to drop temporarily.
Once you’re preapproved for a mortgage, you can safely begin looking at homes. If you decide to make an offer on a home and your offer is accepted, your preapproval will make it easier to move forward in closing on the home.
Once the lender checks off on the house you’re making an offer on, they will send you a loan commitment letter, enabling you to move forward with closing on the home.
Ready to buy a home? You'll likely need a mortgage to ensure you can afford your dream residence. Lucky for you, many banks and credit unions are happy to help you discover a mortgage that suits you perfectly.
Ultimately, meeting with a mortgage lender may seem stressful at first. But this meeting can serve as a valuable learning opportunity, one that allows you to select a mortgage that is easy to understand and matches your budget.
When you meet with a mortgage lender, here are three of the questions to ask so you can gain the insights you need to make an informed decision:
1. What mortgage options are available?
Most lenders offer a broad range of mortgage options. By doing so, these lenders can help you choose a mortgage that meets or exceeds your expectations.
Fixed-rate mortgages represent some of the most popular options for homebuyers, and perhaps it is easy to understand why. These mortgages lock-in an interest rate for a set period of time and ensure your mortgage payments will stay the same throughout the duration of your mortgage.
Meanwhile, adjustable-rate mortgages may prove to be great choices for many homebuyers as well. These mortgages may feature a lower initial interest rate that rises after several years. However, with an adjustable-rate mortgage, you'll know when your mortgage's interest rate will increase and can plan accordingly.
2. Do I need to get pre-approved for a mortgage?
Pre-approval for a mortgage usually is an excellent idea, and for good reason.
If you get pre-approved for a mortgage, you may be able to enter the homebuying market with a budget in mind. That way, you can pursue houses that fall within a set price range and avoid the risk of overspending on a home.
On the other hand, you don't need to be pre-approved for a mortgage to submit an offer on a home. But with a mortgage in hand, you may be able to gain an advantage over the competition, one that might even lead a home seller to select your offer over others.
3. How long will a mortgage last?
Many mortgages last 15- or 30-years – it all depends on the type of mortgage that you select.
A lender can explain the length associated with various mortgage options and highlight the pros and cons associated with these mortgages.
Moreover, you should ask a lender if there are any prepayment penalties if you pay off your mortgage early. This may help you determine whether a particular mortgage is right for you.
When it comes to finding a lender, don't forget to meet with several banks and credit unions. This will allow you to discover a lender that offers a mortgage with a low interest rate. Plus, it enables you to find a lender that makes you feel comfortable.
If you need assistance in your search for the right lender, be sure to reach out to a real estate agent. This housing market professional can provide details about local lenders and ensure you can accelerate your push to acquire your dream residence.
Filling out a mortgage application may prove to be a long, exhausting process. Fortunately, we're here to help you streamline the mortgage application process so you can move one step closer to acquiring your dream house.
Now, let's take a look at three tips to help you approach the mortgage application process with confidence.
1. Be Thorough
A mortgage application likely requests a lot of information about you, your finances and your employment history. However, it is important to answer each mortgage application question to the best of your ability. Because if you fail to do so, you risk delays in getting approved for a mortgage. Or, perhaps even worse, a lender may decline your mortgage application.
In addition, be honest in all of your mortgage application responses. This will ensure that if your mortgage application is approved, you will receive a mortgage that corresponds to your finances.
2. Ask Questions
There is no need to leave anything to chance as you complete a mortgage application. Thus, if you're uncertain about how to respond to various mortgage application questions, reach out to a lender for assistance.
Remember, there is no such thing as a "bad" question, especially when it comes to filling out a mortgage application. Lenders employ friendly, knowledgeable mortgage specialists who are happy to assist you in any way possible. Work with these mortgage specialists, and you can get the help you need to finalize your mortgage application.
3. Get Multiple Quotes
It may seem like a good idea to complete a single mortgage application to request home financing from a single lender. Yet doing so may be problematic, particularly for those who prioritize affordability.
Ultimately, meeting with multiple lenders and getting several mortgage quotes is ideal. If you shop around for a mortgage, you may be eligible for a low interest rate that helps you save money when you complete a home purchase.
Once you finish a mortgage application, it may be only a matter of time before you find out if you have received approval. Then, if you receive a "Yes" from a lender, you can accelerate the homebuying journey.
Of course, for those who plan to buy a home soon, it may be beneficial to employ a real estate agent. This housing market professional can put you in touch with the top lenders in your area, as well as help you complete a home search in no time at all.
A real estate agent typically learns about a homebuyer's goals and crafts a strategy to help this buyer accomplish his or her aspirations. Furthermore, a real estate agent provides recommendations and tips to help a homebuyer make informed decisions throughout the property buying journey. And if a homebuyer ever has concerns or questions, a real estate agent is available to respond to them.
Ready to complete a mortgage application? Use the aforementioned tips, and you can finalize a mortgage application, obtain home financing and make your homeownership dream come true.
A fixed-rate mortgage (FRM) offers one of many financing options for homebuyers. It enables homebuyers to lock in an interest rate on a home loan and pay a set amount each month for the life of a mortgage. As such, an FRM remains a popular option for homebuyers across the United States.
Ultimately, there are many benefits to choosing an FRM, including:
1. Easy Budgeting
With an FRM, your mortgage payments will always stay the same. Thus, after you get approved for an FRM, you can budget accordingly.
An FRM often serves as a great option for homeowners who struggle to maintain a budget. It ensures your mortgage payments will never rise or fall for the life of your loan, which may make it easier for you to map out a weekly, monthly or annual budget.
In addition, an FRM will stay intact regardless of market conditions. This means you won't have to worry about your mortgage costs rising even if interest rates increase nationally.
2. No Price Fluctuations
An FRM minimizes headaches for homebuyers, and for good reason. After you agree to FRM terms with your lender, you will know precisely what you'll be paying for your home.
Comparatively, an adjustable-rate mortgage (ARM) may be difficult for homebuyers to understand. This type of mortgage may fluctuate over time, which means the amount you pay in the first few years of your loan could escalate.
For example, a 5/1 ARM ensures that your interest rate will remain intact for the first five years of your loan. After the initial period, the interest rate may change annually. As a result, your monthly mortgage payments may fluctuate over the life of your loan.
3. Simple to Understand
Your lender will be able to outline the terms of an FRM with ease, as this type of mortgage ensures an interest rate is set in stone until your loan is paid in full. Plus, after you receive an FRM, you can focus on what's important – acquiring your dream home and enjoying this residence for years to come.
With an ARM, the interest rate for your loan may move up and down over the years. The factors that cause the interest rate to fluctuate are based on numerous market factors as well. Therefore, it can be tough to plan ahead for your monthly mortgage payments due to the fact that various factors may impact your loan's interest rate.
Determining whether an FRM is right for you can be challenging. Thankfully, banks and credit unions can define all of your home financing options and respond to any concerns and questions.
Furthermore, your real estate agent may be able to put you in touch with lenders in your area. This real estate professional also is happy to offer tips and recommendations to ensure you can get the financing you need to secure your dream house.
Examine all of your home financing options closely, and you should have no trouble obtaining a home loan that matches your budget.