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LOAN APPLICATION AND PRE-APPROVAL

Although it seems natural to 1) go and see some homes, 2) decide what you like, 3) make an offer, then 4) talk to a lender, that order of events is not the way to success. **

Step 1 in real estate success in our area is to talk to an experienced lender or two and understand the lending process.  The lending process takes a little while to understand.

You can estimate your payments with a loan calculator, but you must know much more than an estimate of your payments when it comes to loans in order to get into a loan product that is right for you.

The average consumer hears a lot about interest rates, but doesn’t hear about all of the other factors that are involved with a loan. Loan variables can include, but are not limited to:

Length of the loan: Loan products vary from the most traditional 30-year fixed to 1-year fixed, then adjustable.  So to focus on the length of the loan, know that you can get a real property (real estate) loan for up to 40 years.

Amortization schedule: To amortize is to write off gradually and systematically a given amount of money within a specific number of time periods.¹  Do you want to pay interest only, then make a balloon payment in 10 years? Do you want a fully-amortized loan?  Do you want your loan amortized over 30 years or 15?  Depending on which amortization schedule you prefer, and which the bank is offering, your interest  rate can be affected by the choice.

Interest rate: The percentage of a sum of money charged for its use and like rent paid for use of the money. It is expressed as a percentage - usually annually, but can also be monthly or daily - of the sum borrowed.²  Do you have cash to pay up front (points) to buy down the rate of your loan? Or do you want to put as little down payment up front and spread it across the length of the loan?

Available loan products: Banks offer different loan products based on availability of liquid (money to lend).  They may have one loan product (i.e. an interest only loan) this week that may not be available the next week.

Income:  How long have you made the income you are making now?  How long have you had your job or a job in the related field?  These factors and more affect your qualification.

Credit score:  Each lender has different criteria for what credit score they require of you to qualify you for different loans.  Lenders will need to run a credit search on you to determine a credit score they can use.  A credit report is not transferrable in most cases.  (You cannot use the Bank of America credit report with your Wells Fargo lender.)  Click here for information on credit scores and improving credit scores.³

Reserves:  The amount of money that will be left in the bank after your purchase usable as monthly payments and other items including unforseen financial necessities.

Pre-payment penalties:  A prepayment penalty is the charge payable under the terms of a loan agreement to a lender by a borrower if the outstanding principal balance of the loan is paid off prior to its maturity.  Lenders can sometimes offer somewhat lower interest rates if a borrower agrees to a prepayment penalty.  Ask yourself these questions:  If you run into a windfall of money, would you like to pay your loan off earlier than planned?  If you need money and want to borrow against your home, will you be penalized for refinancing?

Family health situation:  You may want to invest a large percentage of your savings in your home.  However, you may need to assure yourself that in case of an emergency, you have money available to use.  Ask yourself, is there someone, including yourself, who has health issues that are worth considering when you decide how much down payment you have available for your loan?

How long you plan on living in the home:  The fixed time period of a loan is the time in which the loan will not change interest rate.  It is fixed, (non-moving).  In general, it costs a bit more to fix the loan for a longer period of time.  If you buy a residence then move in 3 to 5 years, perhaps a 10-year fixed loan will allow you a lower interest rate than a 30-year fixed loan.  (If you have the loan longer than the fixed rate time period, you run the risk of your interest rate increasing after that fixed time. Your payments will adjust upward as this happens, adding on the additional interest rate and adjusting it to the amount of the loan that is still owed.)

Will it be your primary residence?  Qualifying to purchase the home you live in has different criteria than qualifying for an investment home.  As well, different interest rates are available for loans which are for your primary residence, and loans which are for income property, or a vacation home. There is also a difference on whether the property you are purchasing is a townhome ownership or condo ownership and how many of the units in the complex are owned versus rented.

These are only some of the variables to consider when getting your loan.  So this is step one. If you wait until you are in contract on the home you love to decide to learn about loan options, you will limit yourself with what you can learn and what banks are offering during that short (typically 10 days or less) financing contingency time frame.

Take your time to learn about loans, choose a lender you like, then find your home.