Chapter 4 - Finding A Mortgage Lender

Before you can make an offer on a home, you should have either a pre-approval letter or be pre-qualified for a loan. Most real estate agents do not want to waste time with people who want to look at homes but are not qualified to purchase them. Although, with today’s market, they are a little less picky.

You should have an idea of what amount you can spend on a home and how much your monthly payments will be. You should talk to a few lenders to find out their loan packages.

If this is your first home, you have an option of getting a conventional loan or an FHA loan. If you served in the military, you can also get a VA loan. An FHA loan is backed up by the federal government and usually offers a lower interest rate than a conventional loan. A lot of sellers don’t like dealing with FHA loans because of the fact that they are backed up by the government and require inspections. They also require the seller to pay points and expenses that are normally assumed by the buyer. This is usually reversed outside of closing.

A VA loan operates pretty much the same way only is backed up by the Veteran’s Administration instead of the federal government. Again, a lot of seller’s don’t’ like dealing with these type of loans, although they do give the first time home buyer a break.

If you put less than 20 percent down on a home, chances are that you are going to have to pay PMI. This is premium mortgage insurance. PMI is not like home insurance or mortgage insurance for you - it s a policy that the lender is getting to insure them against loss if you default on your loan.

If you buy a home with a VA or FHA loan, you do not have to worry about PMI. This is because the federal government or Veteran’s Administration is prepared to back up the loan for the lender. This can save you a substantial amount of money each month on your mortgage.

If you get a loan for $120,000 and have PMI, chances are you will be paying $130 a month for this charge. This is not tax deductible and will just be incorporated into your loan. If you got the same deal with an FHA or VA loan, you would save $130 each month (a $120,000 loan on a home where you put 10 percent down).

You can only use an FHA loan once. You can use a VA loan three times. After that, you have to go for a conventional mortgage.

Because lenders are so eager to make loans with today’s market, make sure that you shop around for a good mortgage package. Be sure to ask what the bottom line monthly payment will be. The monthly payment quoted should include real estate taxes, homeowner’s insurance and PMI as well as the principal and interest of your mortgage.

You should try to get the lowest interest rate possible, but because the rates are so low at the moment, stay away from adjustable rates. Interest rates are the lowest they have been in 50 years. Lock in at a 30 year fixed rate if you are planning on staying in your home for at least 5 years. If you are planning on moving in 5 years or less, you may opt for an adjustable rate mortgage that will save you money.

You should not have to pay points in today’s market. Points are based upon the purchase price of your home. Lenders used to require one or two points that were paid to get a lower interest rate. Each point is one percent of the purchase price. This is cash that you have to pay up front for your home.

Points are paid one time only and are deductible on your income tax return. However, because of the current market, most lenders are not trying to get people to pay points.

After you have decided on a lender, you should get a pre-qualification letter or pre-approval letter. There is a difference between the two:

Pre-Qualified

This means that based on the information that you gave the lender, you are pre-qualified for a loan up to a certain amount. You can get this in writing or the lender can just tell your agent that you are pre-qualified up to a certain amount.

It doesn’t take long to get pre-qualified. Generally a lender can even do this over the phone. You are not at the point where you need to supply documentation. A credit check is usually run so that they know how you are rated.

Even if your credit is very poor or you have had a bankruptcy, you can still get a competitive rate in today’s market. You may have to go to a sub-standard mortgage company, but it can be done. And don’t worry about them “selling” your mortgage. Who cares? Your payments are the same in any case. Chances are, if you are looking on the secondary market, your loan will not be sold as quick as if it was on the primary market.

Pre-qualification is easy and takes only a little bit of time. This is a good way to get started in looking for a house in your price range.

Pre-Approval

This means that you are willing, able and ready to close on the house. You have provided the lender with all necessary documentation and have been approved by the underwriter for the loan. You need only to find a home and close. Closing can usually commence as soon as a week or so after pre-approval. In today’s market, it can even occur sooner.

A pre-approval letter is the best armor you can have when you begin looking for a house. This will give the seller an incentive to sell the property to you as you have already been approved for the loan and they need only get the appraisal and set the closing date. When looking for a new home, you are better off to have a pre-approval letter from the lender than a pre-qualification.

The pre-approval letter will have a stipulation. It will say how much you are approved to borrow and how much the home will have to appreciate at in value. It will be contingent on the home appraising out. This will be the only contingency to the letter. If the seller has priced his home competitively in the market, there should be no problem. If the seller has inflated his price, which would be really foolish to do in today’s market, there might be a problem.

There can also be a problem in an area where the house prices are rapidly declining in value. This usually occurs in a blighted area when residents are desperate to sell. Buying a home in a blighted area is not really a good idea, anyway, and we will talk more about that when we discuss “location.”

Before you go looking for a house, get a pre-approval letter or at least get pre-qualified. You will be in a better bargaining position if you have no contingencies on your real estate contract.