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Mortgage 101
Once a simple task that meant comparing the fixed interest rate mortgages of a dozen or so lenders, the mortgage search today is more like finding your way through a maze. There are dozens of loan types, hundreds of loan programs and thousands of mortgage brokers, bankers, lenders, finance companies, credit unions, and even stock brokerage firms originating loans.Because there is so much to learn, finding a mortgage that fits doesn't begin with an application, but education. If there's but one aspect of the home buying transaction you take the time to learn in detail, make it mortgages. Discover too late that you can't afford your mortgage, and you could not only lose your home, but also be unable to purchase another one for years.
Obtaining information is easy. Mortgage information sources are as numerous as mortgage types. Web sites, topical newspaper articles, mortgage books, consumer seminars and workshops can help. Professionals, including financial planners, real estate agents, mortgage brokers and lenders, can also assist you.
Examine your finances. First, compare fixed-rates with adjustable rates to determine which type best fits your current financial lifestyle, and to some extent, your future obligations 15 to 30 years down the road. Learn how much of a mortgage you can afford. Lenders are apt to qualify you for as much as they are willing to lend, which can be more than you can really afford. It's up to you to take stock of your income and expenses, both currently and projected, to determine what you can comfortably manage each month.
Along with your mortgage payment of interest and principle, remember to add related insurance costs, taxes, homeowner association dues and any other costs. Also, obtaining copies of your credit report in advance gives you time to challenge missing information, errors, or other discrepancies. If necessary, you can put a statement on your credit report to explain any blemishes you can't cure. Lenders will likely ask you to explain problem areas on your credit record anyway. Your attention will let the lender know you are conscientious about your finances.
Shopping for lenders and loans. When you are ready to shop for a loan you have two basic choices-direct lenders and mortgage brokers. Direct lenders have money to lend. They make the final decision on your application. Lenders have a limited number of in-house loans available. Brokers are intermediaries who, like you, have many lenders from which to choose. If you have special financing needs and can't find a loan to suit them, an experienced broker may be able to ferret out the financing you need. Mortgage brokers, however, are paid with a slice of the amount you borrow.
Along with shopping the source, you'll also need to shop loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal costs and host of others.
Your Application
Before you actually apply for a mortgage gather the documents necessary to prove claims you'll make on your application. Your application will contain information on the last two years history of employment, residences, bank accounts, investments, liabilities and others. So, be prepared to provide 2 years of income tax returns with W2 information, one full month of pay stubs, two months of current bank statements, 401K information, stocks/bonds, etc.
Get Pre-Approved
Finally, once the lender approves your loan, a pre-approval in writing is the amount the lender guarantees it will lend you, based on a thorough analysis of your application. Pre-approval not only gives you the security of shopping for a home you can afford, it tells the seller you are a serious buyer ready with solid financing.
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