Qualifying for a Mortgage
Lenders "pre-approve" you for a loan only after a thorough review of your credit history and income. If you are pre-approved, you will get a letter from the lender. Some sellers or real estate agents require a pre-approval letter. Pre-qualified is not the same as pre-approval. Pre-qualification is only a general estimate of the loan amount you might qualify for.
You can get a mortgage through a bank, credit union, finance or mortgage company or online lender. Contact a few lenders to compare rates, fees and points (an optional charge to get a lower rate). A point is 1% of the loan amount.
To prepare to meet with lenders or mortgage brokers:
- Copy your most recent tax returns, pay stubs, and bank account statements.
- Know your credit score—a number that measures the quality of your credit history. You can buy your score at Myfico, Experian, Equifax or Transunion.
- Don't apply for other loans (auto, credit card) near the time you apply for a mortgage as it will show on your credit report and perhaps lower your credit score.
- If rates are heading up, consider paying extra to lock-in (guarantee) your interest rate. If you apply with several different lenders, do it within 60 days to maintain a good credit score and improve your chances of getting a good loan. The better your credit, the lower the interest rate will be on your loan.
- Participation in first-time homebuyer programs can reduce your interest rate, limit fees or help with a downpayment. Check with a housing counselor, or with your city, county and state government to learn about these programs.
Private Mortgage Insurance (PMI)
If you put down less than 20%, lenders require you to pay PMI to protect them if you don't pay your mortgage. This is an added cost to you. Per $100,000, monthly PMI premiums range from $25 to $65. Many lenders will stop charging PMI when your home's value increases by at least 20%. To avoid PMI, you can take a second mortgage called a "piggyback" loan to use as a downpayment. PMI premiums and the interest on most piggyback loans are tax deductible.
Lenders hire appraisers to estimate the home's value. An appraiser assesses the condition of the house and compares it to similar homes in the area. You're entitled to a copy of the appraisal before closing.
Truth in Lending Statement
Within three days of submitting your application, the lender is required to give you this statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required. This document will also provide information about prepayment penalties (if any), whether the loan is assumable, the payment schedule of the loan, and any late payment charges.
Good Faith Estimate
Also within three days of submitting your application, the lender will also give you a "good faith estimate of settlement costs." Expect closing costs of 3%-6% of the mortgage. This document should include your total estimated monthly payment, including principal, interest, taxes, and insurance but may be several hundred dollars less that your final costs because all prorated charges may not be known so early in the process. Ask for an explanation of all fees.
Lenders require that you pay this charge to ensure that the property is free of forged titles, liens and errors. Consider buying additional owner's title coverage to protect you from title problems that were not found during the title search and to cover any legal fees needed to defend claims against your title. To compare title insurance costs in your state, check the American Land Title Association website.
Consumer Action's Housing Information Project created this brochure in partnership with Capital One Services, Inc. © 2007 Consumer Action. Rights Reserved.