Guide to Buying a Home
Pre Qualification vs. Pre Approval
Pre-Qualification is only a loan agent's opinion that you'll
be able to obtain financing. No verifications are made, so
formal approval is not issued.
Pre-Approval means your loan application has been taken through
a rigorous procedure. Pre-approval saves you the time of looking
at houses you can't afford.
Pre-approved buyers are ahead in the home buying game. If you
make an offer on a home and then apply for a loan instead of the
other way around, you are at the mercy of the lender who now
knows that you don't have time to shop around.
A pre-approval letter from a lender will also give you an
edge when multiple offers have been made on a house.
Pre-approved buyers generally close escrow more quickly, since
most of the paperwork has already been taken care of.
When considering your financing options, you'll want to
review many different things about the loans offered to you. In
this next section you'll find a basic overview of home loan
features and the things you should consider as you shop for a
lender or loan.
What kind of lender are you borrowing from?
Home loans are available to consumers from thrift
institutions - commercial banks, mortgage companies, credit
unions and mortgage brokers.
A Mortgage Broker is unlike other lenders in that the broker
does not lend money to you directly. A broker will help find you
a lender and secure the terms of your arrangement.
Mortgage Broker vs. Traditional Lender
A Broker may have access to several lenders and therefore can
offer you a wider selection of loan products and terms. He or
she can help you shop for the best deal based on your
circumstances. (A Broker is not obligated to find you the best
deal possible, so be sure to askquestions.)
For their work, brokers are paid a fee in addition to the
lender's origination fees. Brokers set their own compensation,
so you'll need to ask anyone you speak to how their fees are
What are the terms of the loan?
All the terms of a loan matter, not just the interest rate.
You'll want to get a complete picture and break down of what a
given offer means to you on a monthly basis as well as how much
money you'll be spending over the life of the loan.
At a minimum, you should request quotes with a few different
scenarios and compare the financial impact of each situation
before you determine your best course of action.
Loan Type/Rate Types
Fixed Rate (Traditional) Loan
These loans are usually structured with repayment terms of
15, 20 or 30 years. The lender will agree to charge a fixed
interest rate over the life of the loan. With this loan type,
your monthly mortgage payments will remain the same for the
length of the term.
Adjustable-Rate Loans (ARMs)
Also known as variable-rate loans, ARMs often offer a
teaser rate for the initial period of the loan. This
introductory interest rate is usually lower than rates offered
for fixed rate mortgages. The interest rate will fluctuate over
the life of the loan based on market conditions. Changes in rate
happen at certain time periods, and the lender can set both a
maximum and minimum on the rate of
Federal Housing Administration (FHA) Loans
Federal Housing Administration (FHA) insured loans are
made by private lending intuitions such as banks, savings &
loans, or mortgage companies to eligible borrowers for the
purchase of a home. To secure an FHA loan, a borrower must apply
and qualify with a certified FHA Lender. Additionally, eligible
borrowers must be able to pay a minimum of 3.5% of a home's
purchase price. If the loan is approved, FHA will insure a
portion of the loan's value to the lender.
Veterans Administration (VA) Guaranteed Loans
VA Home loans are available to qualified Veterans and
their spouses. Private lending institutions issue the loans
which are in turn guaranteed by the Veteran's Administration.
The VA does not require any down payment on VA Guaranteed loans
and allows the borrower to receive a competitive, fixed interest
The lender or broker can charge you points on your mortgage. One
point equals 1 percent of the loan amount. These are simply fees
paid to the lender or broker that are often linked to the
interest rate, and are usually paid in cash to the lender or
broker at closing. A lender may offer you a lower interest rate,
but charge more points, so it's important to compare offers.
What Additional Fees will be required in this Loan?
Most loans have additional fees. You can sometimes borrow the
money need to cover these fees, but that will obviously increase
the overall amount of debt you undertake. Some fees are paid up
front, and others are not due until closing.
Loan Origination Fees
The institution that actually loans you the money will generally
charge on origination fee for processing the loan. They are
often expressed as a percentage of the amount of the loan.
Certain lenders will charge a fee to investigate your
creditworthiness and determine if you are likely to repay your
Typically paid at closing, a mortgage broker may charge you a
fee in addition to the origination fee. If you are working with
a broker, be sure to check with them what their fee is.
Transaction / Settlement / Closing Costs
These fees lump together several charges for: application fees,
title examination, abstract of title, title insurance, property
survey fees, deed preparing fees, other mortgage fees and
settlement documents, attorney fees, recording fees, notary
fees, appraisal fees and credit report fees. The Real Estate
Settlement Procedures Act requires that a lending institution
provide a borrower with a good faith estimate of closing costs
at the time of application. This estimate must list each
expected cost as a range or as an exact amount where applicable.
The Down Payment / Private Mortgage Insurance
The largest upfront cost in purchasing a home is the down
payment. Most traditional lenders expect borrowers to put at
least 20% of a loans total amount down. Borrowers who are unable
to do so are required to purchase Private Mortgage Insurance
(PMI). This insurance protects the lender in case of
default by the borrower.
Interview Questions for your Lender
1. What kind of loans do you offer?
2. What kind of loan would you recommend for me? What are the
advantages and disadvantages of this loan structure?
3. What is the current mortgage interest rate? Is the rate
quoted the lowest for that day or week?
4. What is the Annual Percentage Rate (APR) of an offered loan?
5. Is the loan rate adjustable or fixed?
6. What are the Discount Points and Origination Fees?
7. What are all the Costs?
8. If the rate is adjustable, how will rate and loan payment
9. What are the Qualifying guidelines for this loan?
10. What is the lender's required down payment for this loan?
11. What documents will need to be provided?
12. What are the closing costs?
13. Will the Lender Guarantee the GFE?
14. Does the lender offer a loan rate lock? Is there a fee for
the rate lock?