Selecting The Right Mortgage
Selecting the right mortgage is central to the homebuying process–that's why it's so important to understand your options. You'll need to consider two things at the outset: which loan type best meets your homebuying needs, and which loan term offers the ideal repayment schedule.
Loan types
Most home loans fall into one of two general categories: fixed-rate mortgages and adjustable-rate mortgages (ARMs).
Loan terms
The "term" of a loan is the period of time you will spend repaying it. The most common loan term is 30 years, but other options are also available. A 40-year term is available for buyers who want lower monthly payments than those available from a 30-year term. There are also 20-, 15- and 10-year mortgages for those who want to repay their loans faster.
Whether you'd be better off with a longer loan term or a shorter one depends on a number of factors, most notably your monthly income and long-term financial goals.
Getting Preapproved
A preapproval is your lender's written commitment to finance your home purchase up to a specific amount. Getting preapproved is a smart move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction.
Preapproval vs. prequalification
A preapproval indicates that a lender has taken a detailed look into your financial background and has committed to lend you a certain amount of money, pending specific property details. Because preapproval includes a credit check, it's more powerful than a prequalification letter, which generally only estimates what you can afford based on information you've provided.
What are the advantages of being preapproved?
Preapproval offers a number of advantages over waiting to apply for a mortgage until after you've found a home. It lets you:
- Shop for a home with the confidence of knowing exactly how much you can afford.
- Take advantage of the preference many home sellers have for preapproved buyers.
- Find out about possible qualification problems early in the homebuying process.
- Avoid the hectic rush to find the right mortgage loan at the same time that you’ve found a house.
Who can benefit the most from preapproval?
Preapproval is a great advantage for anyone buying a home, but it can be especially useful for buyers looking for their first home and those who are self-employed or work on commission.
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First-time homebuyers. Without a record of previous mortgage payments, sellers may see first-time homebuyers as less likely to obtain financing than a similar buyer who's already demonstrated the ability to meet a monthly mortgage payment. A preapproval helps even the field by showing the seller that a lender has already run the numbers and is willing to proceed with the transaction.
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Self-employed buyers or commissioned employees. Because their incomes may fluctuate more dramatically, self-employed and commissioned buyers often lack the financial documentation of salaried employees, which can send up a red flag to some sellers. Showing that a lender has already considered these factors will help mitigate this risk.
How does the process work?
Before you begin shopping for a home, submit your financial information to a mortgage lender for review. Your application will be considered, if you qualify, you will be provided a written preapproval for a certain mortgage amount, down payment, and interest rate, subject to the terms of the commitment letter. The loan commitment letter can be finalized after information about the property, including an appraisal, is submitted.