Pre-Qualified vs. Pre-Approved
Finding your new home can sometimes be a daunting task; however, with the
right preparation it can be an exciting adventure. The following explanation and
tips regarding the pre-approval process are offerred by Raoul Amescua, V.P. of
www.GoldMedalMortgage.com:
"We find many first-time borrowers confuse being
“pre-qualified”
with “pre-approved.” Pre-qualification is a casual process, where we can
tell how much you may borrow based on income, existing debt, and cash down
payment."
"A pre-qualification may be a form letter or personalized, but will
contain disclaimers to protect us in case you fail to qualify. Some real estate
agents feel that pre-qualification letters say little more than you have
contacted a mortgage company. Before a lender will make the loan, a formal loan
application will be required," continues Amescua.
"In contrast, pre-approval letters have far more validity and indicate
to the seller that you have passed the credit check and have preliminary loan
approval. To obtain pre-approval you formally apply for a loan and submit all
the relevant documentation to us. We will verify this information and credit is
checked, then we will arrange for a lender to agree in writing to make the loan
to you. The loan will be subject to a satisfactory property appraisal and title
search."
"A formal loan process is an eventuality, so we recommend obtaining a
loan pre-approval in advance. By doing this, you can avoid the disappointment of
making offers outside your price range, and get more cooperation from agents and
sellers,"
Mortgage Loan Types
There are many types of mortgage loans. The two
basic types of amortized loans are the fixed rate
mortgage (FRM) and adjustable rate mortgage (ARM).
In a FRM, the interest rate, and hence monthly
payment, remains fixed for the life (or term) of the
loan. In the US, the term is usually for 10, 15, 20,
or 30 years. In the UK the fixed term can be as
short as five years, after which the loan reverts to
a variable rate (which makes the loan an ARM).
In an ARM, the interest rate is fixed for a
period of time, after which it will periodically
(annually or monthly) adjust up or down to some
market index. Common indices in the US include the
Prime Rate, the LIBOR, and the Treasury Index
("T-Bill"). Other indexes like COFI, COSI,
and MTA, are also available but are less popular.
Adjustable rates transfer part of the interest
rate risk from the lender to the borrower, and thus
are widely used where unpredictable interest rates
make fixed rate loans difficult to obtain. Since the
risk is transferred, lenders will usually make the
initial interest rate of the ARM's note anywhere
from 0.5% to 2% lower than the average 30-year fixed
rate.
In most scenarios, the savings from an ARM
outweigh its risks, making them an attractive option
for people who are planning to keep a mortgage for
ten years or less.
A partial amortization or balloon loan is one
where the amount of monthly payments due are
calculated (amortized) over a certain term, but the
outstanding principal balance is due at some point
short of that term. A balloon loan can be either a
Fixed or Adjustable in terms of the Interest Rate.
Many Second Trust mortgages use this feature. The
most common way of describing a balloon loan uses
the terminology X due in Y, where X is the number of
years over which the loan is amortized, and Y is the
year in which the principal balance is due.
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