Two often confused terms in the home buying process are a mortgage loan Pre-Qualification and a home loan Pre-Approval. Even some Loan Originators and Realtors will use the terms incorrectly, so here’s what you really need to know about each one.
A mortgage loan pre-qualification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you. The best time to get a pre-qualification is right at the beginning of your home buying process before you even start looking at houses. This involves either sitting down with one of our loan consultants or talking with one of them on the phone and providing information on your income, assets, debts and a potential down payment amount. The loan consultant would then provide you with a ballpark figure in writing of how much you could afford to pay for a monthly mortgage. There is no cost involved and there is no commitment on either side. This estimate simply helps you figure out if buying a home is a viable option, and if so, what your price range would probably be.
Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. In this case, you provide us with actual documentation of your income, assets, and debts. This process will require us to run a credit check and work to verify all your employment and financial information. Once you are approved, we will give you a Pre-Approval letter, stating how much money a lender will be willing to loan you for a home purchase. With a Pre-Approval in hand, you can start your shopping. Real estate agents and sellers will take you much more seriously when they see you have your mortgage funding in place. Some even require it to even begin showing you properties.
It is important to understand, however, that even a Pre-Approval is not a guarantee that you will be approved for a mortgage loan. The funding will only be given when the property appraisal, title search, and other verifications check out on the home you have chosen to buy. And, a Pre-Approval is not binding. You can still obtain a mortgage from a different lender. If you do stick with the same company that Pre-Approved you though, the application process will be much shorter once you find the right house.
There are many factors to weigh when considering renting vs. owning a home. Each choice provides great benefits, but deciding which is better requires borrowers to conduct research, examine their financial situation, review potential lifestyles changes (family additions, job changes, and so on) and long-term goals that could impact living arrangements.
Renters are only responsible for paying the monthly payment as stipulated by the lease or contract, paying for utilities (power, gas, and electricity) and for limited kinds of maintenance to the property. Renting a home allows the tenant flexibility to move or upgrade at almost any time, depending upon the lease. Renting can also allow a tenant to build up savings, as an investment into the property is minimal. These factors are a plus for tenants whose lifestyles do not allow them to purchase a home or whose incomes do not allow them to afford a mortgage loan.
Although renting requires less responsibility and provides flexibility, it has its disadvantages too. Renters do not earn equity in the home and are not able to reap the tax incentives or equity earned on the home. Also, annual rent increases can outpace the economy and or inflation which can make rental payments costly.
Homeownership provides several benefits, including a sense of stability and security. As a tax benefit, owners are able to write off mortgage interest, mortgage insurance, and taxes paid on the home on their income taxes. Owners earn equity in their home and can create retirement security.
As with renting, owning a home has certain downsides. Owning a home requires a significant investment, including securing the mortgage loan (with the down payment, home inspection, and any other associated fees), paying property taxes, maintaining the property and making home repairs. These costs add up and can be financially challenging for many owners. Another disadvantage is the lack of flexibility to move. If an owner wants to relocate, doing so will require that he/she sell the property. This can be quite a daunting task if the market is not favorable.
If choosing to purchase, the purchaser should review all costs associated with the initial investment and have savings or a savings plan in place to help cover unexpected costs. If choosing to rent, the renter should make monthly investments in a savings plan. Investing money for the future can make a transition from renter to homeowner smoother.
Being that we are a mortgage company one would imagine that there might be a bit of bias on our part. That couldn’t be further from the truth. We know home ownership is NOT for everyone. Our job (better yet, duty) is to do our best to lay out, in an easy to understand fashion, all of the pros and cons so that YOU the potential homeowner can make the best decision for yourself and your family. You will never feel as if we are “steering” you in any direction. Instead, we are here to inform, educate and in the end aid you in the event home ownership is the path you take.
The down payment is the part of the purchase price the buyer pays in cash and does not finance with a mortgage. Down payments are described as a percentage of the home’s selling price. For example, a 15% down payment on a $100,000 home is $15,000.
The type of mortgage determines the minimum down payment needed, usually ranging from 0% to 20%. The buyer will often have a wide range of options depending on how much he/she wants to invest in the purchase of the home.
Veterans Administration (VA) loans are government insured loans designed to help service people and veterans obtain financing at very reasonable rates and offer financing up to 100% of the home’s value.
USDA loans, similar to VA, are also government loans but instead are designed to help rural areas develop and the folks that chose to buy homes in them. These loans also offer to finance up to 100% of the home’s value.
The Federal Housing Administration (FHA Loans) was created to help middle to lower-income buyers secure home loans. The FHA doesn’t actually lend the money; instead, it only ensures the loan. The FHA requires down payments as low as 3.5%. There are guidelines and the buyer’s credit and income are important factors in meeting these requirements.
Conventional Loans (usually financed either through Fannie Mae or Freddie Mac) have the highest minimum down payment of any of the aforementioned options. These loans require a minimum of 5% or sometimes 10% (depending on credit and income requirements). Conventional loans are the hardest to qualify and if the down payment is less than 20% the borrower must also qualify for private mortgage insurance.
Although you may not have to put a full 20% down to buy a home, it can sometimes be wise to put down as much as possible (if the funds are available). A down payment demonstrates to a potential lender that you are serious about the purchase. It also creates equity, helps your credit score and often lowers your interest rate. As an added bonus, whatever you put down is money you won’t be paying interest on. If you feel your credit and or income may be deterrents for lenders, save as much as you can toward the down payment and be sure to pay off as much debt as possible to better your chance of approval.
