If
you're serious about buying a home, cleaning up your credit should be the first
item on your agenda. After going through your credit report,
identifying, paying off and closing most of your credit cards, your next step
is to shop for a mortgage. In this article, we'll go over the
preliminary steps of getting pre-qualified and/or pre-approved for a mortgage,
and then we examine the different types of lenders. (To learn more about the
home costs, see Mortgages: How Much Can You Afford?, Home-Equity Loans: The Costs and The Home-Equity Loan: What It Is And How It Works.)
Pre-Qualification
To
pre-qualify for a mortgage, you meet with a lender and provide information
about your assets, income and liabilities. Based
on that information, the lender will roughly estimate how much money you can
borrow. The entire process is informal. The lender does not verify the
information provided, nor charge you a fee, and he does not formally agree to
approve a mortgage for the amount you are pre-qualified to borrow.
While
the pre-qualification process does not guarantee loan approval, it does give a
general idea about how much money lenders are willing to provide you. This
gives you a number to work with, helping you decide whether you are willing and
ready to borrow that much money, and to see which types of properties fall
within your price range.
Pre-Approval
The
pre-approval process is more formal than the pre-qualification process. With
pre-approval, the lender checks your credit, verifies your financial and
employment information and confirms your ability to qualify for a mortgage.
Pre-approval strengthens your position to make an offer when you find a
property that you like - sellers are generally more willing to accept offers
from pre-approved buyers, who have already shown that they can actually afford
to purchase the house.
Choosing a Lender
Mortgage brokers,
banks and real-estate agents are all popular sources for
mortgages. While no single source offers the perfect solution for every
shopper, knowing the pros and cons of each type of lender will help you choose
the one that's right for you.
Mortgage
brokers are responsible for helping more borrowers obtain loans than any other
source. They have access to a large number of mortgage providers and shop the
marketplace on behalf of their clients. Mortgage brokers can be particularly
valuable if you have damaged credit or are in the market for an unusual type of
loan. Of course, mortgage brokers don't work for free, and their fees can
sometimes be excessive. Be sure to look before you leap. The time you spend
comparison shopping could save you hundreds of dollars in commissions and
document-processing fees.
Banks
are a traditional source of mortgage funding. If your local bank offers a good
interest rate and attractive terms, there's no reason not to take the loan. If
they don't, there are plenty of other banks in town. The primary drawbacks to
working with banks is that each bank generally offers only a limited number of
mortgage programs, and banks are not usually flexible when it comes to
negotiating fees.
Real-estate
agents often play a major role in introducing their clients to lenders. Since
real-estate agents make their living selling houses, they naturally have good
contacts in the mortgage industry, serving as a major convenience for their
clients. Instead of spending time shopping for loans, many homebuyers are
pleased to work with a lender their real-estate agent recommends. Like working
with a bank, working with a lender recommended by a real-estate agent may offer
limited choice of vendors as well as higher costs. (For a one-stop shop on
subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.)
Online
Loans
Shopping
online has become an increasingly popular method of gathering information and
obtaining loans. It's quick, convenient and enables you to contact multiple
vendors simultaneously. You don't have to leave home, and you can shop anytime,
day or night. Even if you ultimately get your mortgage from a bricks-and-mortar establishment,
the data gathered from online vendors will provide a wealth of information for
comparing loans and negotiating terms.
On
the downside, online shopping is a rather impersonal experience and it renders
greater potential for you to inadvertently hurt your credit rating. Anytime you
provide your social security number, an online lender may run a credit check.
Too many credit checks over an extended period of time can have a negative
impact on your credit rating. To eliminate this potential pitfall, do all of
your shopping at one time. Take a week or a weekend, log on and get the
shopping done. Learn what your credit rating means in The Importance of
Your Credit Rating, and find out how to check your
credit rating here: Consumer Credit Report: What's on It.