Mortgages
Mortgage rates are still very low!
What you need to know about pre-approvals?
Buying a home would be impossible in most cases without a mortgage loan. Mortgages allow homeowners to pay off the cost of a home over a long period of time, usually 30 years. For lenders, this is a way to make money by charging interest on the loan. Lenders may pre-approve a mortgage loan before the borrower actually buys a home, giving the buyer a firm price range and confidence to enter the housing market.
A mortgage pre-approval is not a guaranteed contract, so it represents no risk for the lender or the borrower. Instead, it serves as a preliminary step in actually agreeing on a mortgage loan. For borrowers, pre-approval is a way to begin the process early and get an idea of what sort of loan will be available once there's a home to buy with it. Lenders can get more business by offering pre-approvals for borrowers who are then likely to return to the lender for the actual mortgage, becoming interest payers for decades to come.
The biggest single requirement for mortgage pre-approval is a mortgage pre-approval application, which is similar to a standard mortgage application. This document asks the borrower to list personal information including financial information like account numbers and balances. The borrower must also state the desired amount of the mortgage, known as the target loan amount. Finally, pre-approval applicants must sign the application, indicating the truthful completion of the form, and submit it to the lender.
Without an adequate source of income, borrowers are very unlikely to get pre-approval for a mortgage. Lenders can't count on future prospects or expected income. Instead, they look at current income levels and work history. For example, an applicant with a spotty employment record may not qualify for a mortgage pre-approval regardless of a high current income level, since the lender recognizes this as an indication that the borrower is more likely to become unemployed in the future and therefore be unable to make monthly mortgage payments.
Borrowers need to have a good credit history in order to quality for mortgage pre-approval. Besides considering the information contained in the application, lenders run a credit check on the borrower. This will reveal any past financial problems including missed payments, accounts in default and personal bankruptcy. Lenders use the applicant's credit score, which is a three-digit number that indicates overall credit reliability, to determine whether to offer a mortgage and what interest rates to offer. Borrowers with a better credit score will typically qualify for lower interest rates since they represent less of a risk for the lender.
Prospective home buyers who want to be pre-approved for a mortgage also need patience. Typically a lender takes between seven and 14 days to verify income and run a credit check. Once the borrower is pre-approved, she can begin shopping for homes with prices that fall within the amount of the pre-approval offer. A pre-approval is subject to the borrower's continued good credit and usually remains valid for 60 or 90 days, after which the borrower must reapply in order to make sure the loan offer is still good.
The low down on mortgages
If you're ready to jump into the housing market, one of your first stops will be with a mortgage lender to get a sense of how much money you can borrow. Not all mortgages are identical, and not everybody can qualify for the same mortgage. There are some basic things you need to know when you go about getting a mortgage.
An array of mortgage options exist, but they boil down to two basic types: fixed rate and adjustable rate. A fixed-rate loan has an unchanging interest rate, and your monthly mortgage payment doesn't change. Right off the bat, you know how much your monthly payment will be for the length of the loan. With an adjustable-rate mortgage, or ARM, your interest rate goes up and down according to market conditions, and your monthly payment rises and falls with it. These loans also come with a low introductory rate, which resets to a market rate after a predetermined time, often one year. Don't choose an ARM unless you're confident you can handle higher payments down the road.
Lenders write most mortgages for 15 or 30 years. Fifteen-year loans have lower interest rates but higher monthly payments. If you sell the house before the end of your loan term--and most people do--you simply pay off the balance on the mortgage with the money you get from the sale. Some loans, particularly ARMs, charge a prepayment penalty. Make sure you know up front how long such a penalty, if there is one, will be in effect.
The maximum size of your mortgage--that is, how much house you can afford--is tied to your income. Lenders generally don't want to see a monthly house payment larger than about 28 percent of your pretax income, and total debt payments no greater than 36 percent. So if your household has a gross monthly income of $6,000, or $72,000 a year, before taxes, you can expect to be approved for a monthly payment of about $1,680. Assuming that your payment will include $300 a month for property taxes and homeowner's insurance premiums--commonly included in your house payment--that equals about a $230,000 mortgage at a fixed interest rate of 6 percent, or a $205,000 mortgage at 7 percent interest. Find an online mortgage calculator and try out some figures.
Mortgage lenders look at you in terms of your risk of defaulting--that is, the likelihood that you'll quit paying your mortgage. The lower your risk, the lower your interest rate. Lenders consider several factors in determining risk. One is your credit score. A high score--720 and above is a common benchmark--indicates the lowest risk, a "prime" borrower. A score below 620 is "subprime" territory; if you can even get a loan, it'll have a high interest rate. If you're in the middle, you may still be a good risk, but you'll probably pay a slightly higher rate. A second factor is your down payment. The more of your own money you put into a house, the less likely you are to walk away from it. Lenders like to see a down payment of 20 percent of the value. Put down less than that, and you may have to pay for "mortgage insurance."
If your lender has "pre-qualified" you for a mortgage, it means it has taken a quick look at your finances and deemed you a good risk. But it is not a guarantee that you will actually get a loan. "Pre-approval," on the other hand, means the lender has authorized you to borrow up to a certain amount. Pre-qualification can help you set your budget when you start looking for a house. Pre-approval lets you make an offer on a house with reasonable confidence that you'll have the money.
If you have an agent, you can ask them which lender they like to work with locally if you do not already have one. Or you can just do a Google search for lenders in Massachusetts.