Prequalifications

Now that you have an idea of what kind of loan you want and you have a house in mind, it is a good time to think about prequalifying for your mortgage loan.

Prequalifying lets you know how much you can afford so you can set your price range while looking at houses. Then, when you find a possible home, it proves to a seller that you are serious about purchasing a home and makes the final mortgage process go faster and more smoothly.

Information needed to prequalify

It is a good idea to collect as much of the following information as possible, but not all of it is necessary:

• Type of house
• Price of the house
• Type of mortgage you prefer
• The amount of your down payment
• Employment history
• Financial information (monthly income, current debts, assets, etc.)
• Co-applicant information

Deciding on an interest rate

The main cost of borrowing money is interest. Interest is a fee you pay the lender to use their money. The interest rate determines the amount of your monthly mortgage payments.

Fixed rate mortgages always have higher initial interest rates than adjustable rate mortgages, but this does not mean that an adjustable rate mortgage will always have a lower monthly payment. This also does not mean that the lower rate will stay low. Once it adjusts to the market rate, it may end up higher than the fixed rate mortgage.

If you have found your dream house and you are getting close to the end of the process, you may want to lock in a rate. Locking in your rate means you secure the interest rate you have decided you want, to safeguard yourself in case the rates increase. You can lock in a rate after you have prequalified for your loan. Be careful to ask about any fees that may be associated with locking in a rate.

Another way to ensure a lower rate is to buy down the interest rate. You pay a percentage of the loan amount, also known as points, to get a lower interest rate on your loan

Compare rates

A helpful tool in comparing lenders is the Annual Percentage Rate (APR).

The APR shows the total annual cost of a mortgage (closing costs and interest) over its full term, shown as a percentage of the amount borrowed. APR is a good way to compare mortgage products. Lenders are required by law to provide you with an APR when quoting the rate of a loan, so you can compare total costs between loan products

Although APR is the best way to compare mortgages, different fees may be used in the calculations by different lenders, and the cost is calculated over the whole term when you may not plan to stay in the house that long. You will want to keep this in mind as you compare lenders.

Compare fees

You will also need to research and compare what fees will be involved in buying a home.

The fees you pay are commonly known as closing costs and they can amount to quite a sum. They include fees that your lender charges, including points, and various third party fees.

Different lenders may charge different types of fees, at different amounts, which makes it advantageous to compare fees included in the closing costs. Lenders generally charge fees for appraisals, credit reports, inspections, processing, underwriting, and administration. Third party fees typically include escrow, document preparation, and title insurance.

Now that you have prequalified, you can start to seriously look for the home you want. Once you have found your house, you will begin the buying process.

Read about Buying Your House