Few people can buy a home for cash. According to the National Association of REALTORS®, nearly nine out of 10 buyers in finance their purchase, which means that virtually all buyers — especially first time buyers — required a loan.
The real issue with real estate financing is not getting a loan. Instead, the idea is to obtain the loan that's right for you with the lowest cost and best terms. REALTORS® routinely suggest that consumers start the mortgage process well before looking for a home. By meeting with lenders and looking at loan options, you will find which programs best meet your needs and how much you can afford.
REALTORS® also recommend preapprovals for another reason: Purchase forms often require buyers to apply for financing within a given time period, in many cases, seven to 30 days. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option.
What Is Preapproval?
"Preapproval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which demonstrates your borrowing power. You can visit as many lenders as you like and get several preapprovals, but keep in mind that each one carries with it a new credit check, which will lower your credit score.
Although not a final loan commitment, the preapproval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.
How Do You Get Preapproved?
Real estate financing is available from numerous sources. Based on his or her experience, your REALTOR® may suggest one or more lenders with a history of offering competitive programs and delivering promised rates and terms.
The loan officer will carefully review your financial situation, including your credit report and other information. The lender will then suggest programs which most closely meet your needs. For instance, a first-time buyer may qualify for state-backed mortgage programs with little money down and low interest rates, while a repeat purchaser with more equity might want to get a 15-year loan and the lower overall interest costs it represents.
Typically, first-time buyers opt for the traditional 30-year loan, with either a floating interest rate or a fixed rate of interest over the life of the loan.
Obtaining a Loan
To obtain a loan you must complete a written loan application and provide supporting documentation. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the prequalification procedure, the loan officer will describe the type of paperwork required.
Mortgage financing can be obtained from mortgage bankers, mortgage brokers, savings and loan associations, mutual savings banks, commercial banks, credit unions, and insurance companies. Also, ask your REALTOR® about any special programs or downpayment assistance that they may be aware of that you could possibly qualify for, such as if you are purchasing a home for the first time.
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Are you looking to buy or just curious? We've got you covered with an overview of the process. Contact a REALTOR® today for more details.
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