Timing is everything. Those home buyers who are hoping to close in time for their children to start at their new schools should be actively looking at homes and searching for the best mortgage. If you haven’t started thinking about mortgages, here are a few important things to know:
Q: What’s the difference between pre-qualification and pre-approval?
A: Pre-qualification means the lender has taken your basic personal financial information (income, debts, assets, etc.) and run them through a formula. The result is the amount of money you’re qualified to borrow for a mortgage. Pre-approval takes the same process a step farther. You’ll actually apply for the loan and the lender will approve your application with certain caveats. The nice thing is that the lender commits to the loan and interest rate up front, so you know you have your financing in place before you shop for a home.
By the way, lenders will pre-qualify you for free. Some may charge you an application fee for pre-approval, but others will waive it.
Q: My broker tells me she can pre-qualify me. Is this the same thing?
A: Anyone can run your personal financial data through a formula and pronounced you “qualified” to buy a home. It doesn’t mean anything, however, unless it comes from a person who has the cash you’ll need to close on your purchase.
When real estate agents talk about pre-qualifying buyers, they simply want to find out if you have the financial worth to purchase a home in a general price range so they don’t waste their time and yours. Experts are divided as to whether you should share your financial information with real estate agents, especially if you’re working with a sub-agent of the seller and not a buyer’s broker. You could be giving too much information away to the wrong party.
Q: How do I find out what the current interest rate is? And how do I shop for a loan?
A: First, there is no single, national interest rate. Interest rates are a local commodity, set independently by each company for each type of mortgage product. Market competition affects the interest rate you pay, though the rate itself is usually based on a financial index, such as the rate of the 1-year Treasury bill. The best way to find out what the going interest rate is to call a few local lenders and ask. You can also check the ads in the real estate section of your local newspaper.
When you shop for a loan, have your real estate agent, friends and family members refer you to several different lenders. Call them and compare the rates they offer, the points they charge (a point is one percent of the loan amount) for specific loan types (such as the 30-year fixed-rate and 1-year ARM), and their fees with other lenders listed in the newspaper. Narrow your search down to two or three and then compare and contrast each loan product. If you have access to the Internet, you may want to do your shopping there. Just remember that anyone can put up a web site and proclaim himself or herself a mortgage lender. Stick with big names, and thoroughly check out the company before you send any money.
One of the biggest mistakes you can make is choosing a lender based on price alone. Service is equally important. If you don’t choose a reliable lender, you could wind up without funds on closing day.
Q: What kind of information will I have to give the lender?
A: The lender will want to see documents relating to your net worth, such as bank and checking account statements and stock fund statements; tax returns, your W2, check stubs, and year-to-date financial statements (for those home buyers who are self-employed); divorce decrees, court judgments and partnership agreements.
Keep a file of all these documents and make sure they’re up to date. When you’re ready to pay a visit to a lender, you’ll have them handy.
Q: How do I know when to lock in the interest rate on my loan?
A: Lenders give you the option of locking in a specific interest rate for a specific period of time (usually 45 to 60 days) or floating the interest rate. You’ll lock in if you believe interest rates are at their lowest point between the time you apply and your closing date. You should float your rate if you think they may go lower. If you want to lock in a rate for a longer period of time, say 90 days, your lender may start charging you additional points or fees to hold the rate.
If anyone really knew whether interest rates were headed up or down, they’d be the richest person on the planet. The truth is, you probably won’t get the highest rate and you won’t get the lowest rate. You’ll be somewhere in the middle. The good news is, if interest rates do drop, there are no-point, no-fee loans readily available for refinancing.
May 27, 1996.