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Chapter 5. Prequalifying for a Loan

┠What does it mean to prequalify for a loan?

┠Can a real estate agent prequalify me for a loan?

┠Can I prequalify myself for a loan using the Internet?

┠Can I prequalify for a loan through a lender?

┠What is the difference between being prequalified for a loan and being preapproved for a loan?

┠Once I am prequalified or preapproved for a loan, is my prequalification or preapproval amount the price of the property that I should really be shopping for?

What does it mean to prequalify for a loan?

Before you start looking at homes, you should know how much you can borrow. There are several ways to determine this amount. In order to prequalify for a mortgage, you need to gather some information — including your credit report, your income-to-debt ratios, and the amount of your down payment. You should also have some cash available for points and fees.

Can a real estate agent prequalify me for a loan?

A good real estate agent will ask you to fill out a simple form to determine your debt ratios and get your credit score (if you do not already have it). This is simply good business practice for real estate agents, since no agent wants to waste time showing you homes that you will not be able to afford to buy.

However, the agent will most likely show you the highest-priced homes for which you can qualify. This is also good business, since you are more likely to fall in love with a higher-priced home than a less expensive one. Once you fall in love, it is an easy sale. Remember, once you look at the most you can possibly afford, less expensive homes will be disappointing. Always try to look at the least expensive homes first and work your way up until you find one that satisfies both your needs and desires.

Can I prequalify myself for a loan using the Internet?

If you want to avoid seeing the most expensive homes first or you want to check out homes for sale by the owner with no agent, prequalify yourself for a mortgage. To do this, type "mortgage calculators" into any search engine. Look at several to get an idea of how they work. You want to find one that allows you to figure out how much you can borrow without someone calling to sell you a loan. If you are asked to give personal information, go to another website.

One website that has good information without requiring any identifying information from you is mortgage-calc.com . This site is also helpful in finding local rates. Click on your local area (state and city) and you will get a list of lenders and their current rates. When you find one you like, type in several interest rates to see the payment differences. Since you do not know yet exactly what your rate will be, this will help you come up with a range of affordable prices. Also, see if you can possibly afford a less than thirty-year loan.

This calculator even compares the costs of buying and renting. If you have never owned a home, this could be helpful. Many people simply compare the mortgage payment with their rent. There are many other expenses to home ownership, such as taxes, insurance, and maintenance.

Can I prequalify for a loan through a lender?

Yes. Go to a lender (a bank, for example) and ask to be prequalified. A prequalified acceptance by a lender is a good indicator, but not a guarantee, that you will be accepted for a certain loan amount. Always make your offer to purchase contingent upon getting your loan. If you do not, you become a cash buyer. There is a difference between prequalifying and being preapproved.

From the Expert

You can lose your deposit if you cannot complete the purchase and do not protect yourself with the contingency that you get your loan.

What is the difference between being prequalified for a loan and being preapproved for a loan?

When you prequalify, the lender simply takes your word for the information you supply. When you are preapproved, the lender has verified this information. Keep in mind, though, that even preapproval is not a guarantee of final loan acceptance, because interest rates may change. Higher interest rates mean higher payments, and that could mean you no longer qualify for the same loan amount. Only when the lender commits to an interest rate (locks in the rate) can you be sure that you qualify for the loan.

Once I am prequalified or preapproved for a loan, is my prequalification or preapproval amount the price of the property that I should really be shopping for?

Once you have determined how much you can most likely borrow, a good strategy is to cut that amount by 10%. If you calculate that you can qualify for a monthly payment of $1,000, use $900 as your goal. This will serve two purposes. First, it will give you a little cushion if interest rates turn out to be a little higher than you anticipated. Second, you will not stretch yourself so thin that even a small, unexpected expense will cause financial difficulty.

Tell your real estate agent that you do not want to pay more than $900 per month for a fixed rate, fully amortized loan. This will be the highest payment type of loan. If you like a home that you see for that payment, you are making a sensible purchase. If you absolutely hate the homes in that payment range, you can raise your sights a little. You may still keep the $900 a month payment (at least for a while) by getting an adjustable or hybrid loan. (These are discussed in Chapter 9 and Chapter 10.)

Once you know how much you can prequalify for, do not start shopping for a home before you understand some of the additional components common to the mortgages, the different types of loans available, and their variations. You can then calculate qualifying for the type of loan that is best for your situation.

 
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