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, and paying off 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'll 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.)
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 of 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. This also lets you see which types of properties fall within your price range.
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 and banks are 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 are 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 a limited choice of vendors as well as higher costs.
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 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.
The Bottom Line
When shopping for a mortgage, there are a variety of loans, vendors, and methods of shopping. The best way for each homebuyer to approach the process is largely a matter of personal preference. Some homebuyers are looking for the lowest-priced program, while others prefer the most convenient. Personal relationships and specific loan requirements also play a role. While there is no right or wrong method, a little-advanced planning, and careful shopping will be well worth the effort.