Loans 101

The goal is to get the mortgage loan that is right for you, with the lowest cost and best terms for your situation.

It is best to begin the process before bidding on a home. Meeting with lenders face-to-face or online and looking at loan options, you can find the program that best meets your needs at a cost that you can afford.

Preapproval means your have met with a loan officer, your credit has been reviewed, and the lender believes that you can qualify for a given loan amount with one or more specific programs. The lender will provide a preapproval letter, which shows your borrowing power. You can get preapprovals from several lenders, but keep in mind that each one will do a new credit check, which will show up on future credit reports.

Although not a final loan commitment, the preapproval letter can be shown to listing agents and owners when making a purchase offer. It demonstrates your financial strength and that you have the ability to actually purchase the home.

The loan officer will suggest programs that meet your specific needs. For instance, a first-time buyer may qualify for a state-backed mortgage program with little money down and low interest rates. The buyer with a substantial down payment might want a 15-year loan with the lower overall interest costs. The first-time buyer would probably opt for the 30-year loan with either a fixed or floating interest rate over the life of the loan.

Your choice will be determined by a number of factors:

  • How much down? Loans with 3.5% down are now available.
  • If you put down less that 20%, most lenders require that the mortgage be guaranteed by an outside agency such as the Veterans Administration (VA), the Federal Housing Authority (FHA), or a private mortgage insurer (PMI). These are required to protect the lender from mortgage defaults.
  • How is your credit? The best rates and terms are only available to those with solid credit. Make a point of paying credit cards, installment payments, rent and mortgage payments and utility bills in full and on time.
  • Are you a first-time buyer? State-backed first-timer programs often feature small down payments and below-market interest rates.

To get a loan you must complete a loan application form and provide supporting documentation such as recent pay stubs, rental receipts and tax returns for the past two or three years.

Financing can be obtained from banks, savings and loans, mortgage brokers, credit unions and insurance companies.

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