Nicholas Desantis' Blog
If you’re a first-time homebuyer, odds are you’ve thrown the words “prequalified” and “preapproved” interchangeably. However, when it comes to home loans, there are some very important differences between the two.
For buyers hoping to purchase a home with a few missteps and misunderstandings as possible, it’s vital to understand the procedures involved in acquiring financing for a home.
Today, we’ll break down these two real estate jargon terms so that you can go into the mortgage approval process armed with the knowledge to help you succeed in securing a home loan.
Let’s start with the easy part--mortgage prequalification. Getting prequalified helps borrowers find out what kind and what size mortgage they can likely secure financing for. It also helps lenders establish a relationship with potential customers, which is why you will often see so many ads for mortgage prequalification around the web.
Prequalification is a relatively simple process. You’ll be asked to provide an overview of your finances, which your lender will plug into a formula and then report back to you whether or not you’re likely to get approved based on your current circumstances.
The lender will ask you for general information about your income, assets, debt, and credit. You won’t need to provide exact documents for these things at this phase in the process, since you have not yet technically applied for a mortgage.
Prequalification exists to give you a broad picture of what you can expect. You can use this information to plan for the future, or you can seek out other lenders for a second opinion. But, before you start shopping for homes, you’ll want to make sure you’re preapproved, not prequalified.
After you’ve prequalified, you can start thinking about preapproval. If you’re serious about buying a home in the near future, getting preapproved will simplify your buying process. It will also make sellers more likely to take you seriously, since you already have your financing partially secured.
Mortgage preapproval requires you to provide the lender with income documentation. They will also perform a credit inquiry to receive your FICO score.
Mortgage applications and credit scores
Before we talk about the rest of the preapproval process, we need to address one common issue that buyers face when applying for a mortgage. There are two types of credit inquiries that lenders can perform to view your credit history--hard inquiries and soft inquiries.
A soft inquiry won’t affect your credit score. But a hard inquiry can lower your score by a few points for a period of 1 to 2 months. So, when getting preapproved, you should expect your credit score to drop temporarily.
Once you’re preapproved for a mortgage, you can safely begin looking at homes. If you decide to make an offer on a home and your offer is accepted, your preapproval will make it easier to move forward in closing on the home.
Once the lender checks off on the house you’re making an offer on, they will send you a loan commitment letter, enabling you to move forward with closing on the home.
Buying a home is one of the biggest financial milestones you’ll reach in your life. If you’re a first-time homebuyer, it can be scary to take the plunge and make a down payment on your first home.
Down payments are one element that makes up the factors which determine your monthly mortgage payments, and in turn, how much you’ll be paying toward your home in total. So, it’s important to understand just how much to save for a down payment.
In this article, we’ll talk about down payments, why they matter, and your options for saving up for a down payment.
Why down payments matter
A down payment is simply the amount of money a buyer pays at the time of closing on the house. Down payments help assure lenders that you will make your monthly mortgage payments because you have invested a substantial amount of money into the house and therefore risk losing your down payment if you fail to pay the mortgage and your house is foreclosed on.
If you’re eager to buy your first home, you may want to make the smallest down payment possible so you can move in sooner. However, a smaller down payment typically means a larger monthly mortgage payment. That’s because your mortgage payment depends on several factors.
When a lender determines how much they will lend you towards your home and how much your monthly mortgage payments will be, their formula takes into account your down payment, your credit score, and the value of the property. The higher your credit score and the higher your down payment is, the less your monthly payments will be.
Mortgage types and down payments
Many first time home buyers cannot afford large down payments on their first home (20% or more). As a result, there are loan types insured by the Federal Housing Administration that are offered for as low as 3.5% of the mortgage amount.
If you aren’t approved for an FHA loan but plan on making a down payment of less than 20%, you can still buy a home with private mortgage insurance (PMI). With PMI you pay a monthly premium for your insurance in addition to your monthly mortgage payments.
How long and how much to save
So, how much should you save? The short answer is as much as possible. However, if you need to move soon because of life circumstances, it isn’t always an option to hold off on moving for long periods of time.
If you’re currently renting each month at high prices, it might make more sense to put that money towards your first home, an asset which will likely increase in value, rather than spend it on rent which you get no return on.
One of the best ways to save for a down payment is to set up a new cash savings account that will automatically deposit a portion of your paycheck each week. Having an off-limits account is a great way to save without the temptation of spending it on luxuries if the money would normally be sitting in your checking account.
Another option is to start investing. If you’re in no rush to buy a home and have the financial resources, investing pays off much more than a savings account does when it comes to increasing assets.
Regardless of how you choose to save, the most important takeaway is that you take action now to start saving and you don’t deviate from your savings plan for any reason.
Perhaps one of the most challenging things about buying a home is saving for the downpayment. Collecting such a large sum of money can be difficult. The truth is that most buyers actually think that they need more than they actually do to buy a home. The downpayment doesn’t need to be a barrier to your path to homeownership. There are so many programs that offer low and even no down payment home loans. Read on to learn more about down payments and programs that can help you.
First, let’s look at what a down payment is and how it can help you. If you put 10% down on a $200,000 home that’s $20,000. The downpayment minus the purchase price of the home is $180,000, and that's how much your home loan will be. The more money you can put down on the house, the lower your home loan will be and the lower your monthly mortgage payments will be. A large down payment can indeed save you in the long term. If you’re looking to move into a home sooner rather than later, saving a considerable sum isn’t always possible.
Low Downpayment Mortgages
You need to decide what type of home loan you need by the amount of downpayment you’re willing and able to put down. Some benefits go along with making a down payment, but there are some negatives.
By making a substantial down payment you may despite your savings, leaving little money for emergencies. Your mortgage rate may not be affected by a large downpayment either. It can be hard to decide what type of loan to get and just how much you really can afford.
FHA loans are among the most popular type of home loans. The downpayment that’s required is just 3.5%. The requirements are simple, and you don’t have to be a first-time homebuyer to qualify.
The drawback to an FHA loan is that you cannot cancel the monthly mortgage insurance that comes along with it unless you refinance the home. Traditional mortgage insurance is canceled when you have built up 20% equity in the house, but this isn’t the case with FHA loans.
Another positive about FHA loans is that your credit score doesn’t have to be stellar in order for you to qualify. Some lenders approve FHA loans with credit scores as low as 580.
VA Home Loans
Buyers who have current or former military service status can qualify for this zero down mortgage. These loans are benefits to veterans and current members of the Armed Forces. While no downpayment is required, buyers may put down any amount they wish. The only requirements are that buyers be members of the military either currently serving for 90 days or two years of active duty service if not an active member.
The above options are great for those who can’t afford or don’t wish to put down large down payments but still hope to be homeowners.