Pre-Qualifying and Choosing a Mortgage

Before you apply for the mortgage, before you even start looking at houses, you are going to want to pre-qualify. There is no point putting the cart before the horse and all that sort of folksy sounding advice. Pre-qualifying is a process where a lender examines the buyer’s credit profile (you’ll want a good one), and debt to income ratio (you’ll want a good one of those, too). This allows the lender to make an estimate on how much money they are willing to loan the buyer.

Doing this before hand helps the shopper determine how much they can afford to spend. A price range is a good thing. There is no point in bidding on or really even looking at a home that is 5 times out of your range. Sure it’s fun to pretend you could afford a Malibu beach house, but the bank won’t accept pretend money in payment for your loan. The pre-qualification protects the buyer from bidding on a house without having a lender letter stating that they are having the credit and potential to buy the house. People selling their homes want buyers who are serious about buying them. Being pre-qualified allows the buyer to know who is serious, and who is wasting their time and maybe costing them a buyer.

To pre-qualify the lender will need a list of your assets, liabilities, all sources of income, monthly payments and permission to run a credit report. An entire loan application shouldn’t necessary at that time. The lender will do whatever magic they do and based on the afore mentioned debt to income ratio and their own guidelines give you an estimate on what they are likely be inclined to loan you.

Remember this isn’t the actual loan. It’s just you asking “If I were to ask for a loan, what would you say?” which is much less scary.

Shopping around for the right mortgage product is essential when deciding to go ahead and buy a home. There is a lot to lose if you chose the wrong mortgage and get something you didn’t plan on. There are tons of mortgage products out there so you really want to look around carefully before deciding on one. Remember, you’re going to have this mortgage for quite a few years. A mortgage stays at home longer than your kids.

The first thing you want to ask yourself is: “How much can I afford to make in monthly payments?” NOT: “How much will the bank give me?” That’s the kind of question that has caused half of the problems the home buying market has these days. You need to remember that buying the house is more than just buying the house; it’s also keeping the house up and running. Be honest with yourself. Don’t promise yourself you’ll drop the cable TV if you know you really won’t. Don’t think that you can make it work by not going out to dinner save on special occasions. Clipping coupons may save money but it will not save your home if you get yourself in over your head. Buy a house you can afford, not one that will impress your friends. Your self honesty will save you A LOT of headaches later, just ask half of Hollywood. Heck, ask a good portion of the country in general.

Now that you’ve worked out how much you can afford to pay, it’s time to find a mortgage that will work with your budget that has the lowest interest rate. Interest rates change often so before choosing a bank or whatever lending institute you opt for you’ll want to ask them about their current mortgage rates. While most banks are going to have similar rates, there are some that are lower than others. You’ll want to go with the lowest, but as I said earlier, they do fluctuate. It would be a good idea to investigate the economic conditions that that influence them, things like bonds, general treasury notes and the state of the economy in general. Consulting a crystal ball might not hurt either. You’ll want to be applying for a mortgage when rates are going down, NOT going up. Up is bad.

The last question to ponder: How long do you plan on staying in the home? Is this a short term thing? Do you plan on an increase in income in the future allowing you to upgrade? Do you plan on moving in 5 years when you get a better job so the spouse will stop nagging you? If so, you might want a mortgage that charges less up front, then when it’s time for larger payments you sell. Obviously no one knows what the future will bring aside from Nostradamus, but if you’re planning a move down the road, why not. The money saved can be used for the next house or the cable TV.