Wednesday, January 6, 2010

Why You Should Get Prequalified for a Loan

[This article first appeared in the Chattanooga Times Free Press]

Q: Is it normal for a Realtor to ask a buyer to get prequalified for a mortgage loan before showing you homes?

A: I believe that getting prequalified is the smartest thing for anyone thinking about buying a home for a couple of reasons. Although the thought of paying a mortgage is more enticing than paying rent, it’s important to understand all the costs involved in buying and owning a home as you determine whether you can afford to join the ranks of homeowners.

First, you must have a realistic idea of what you can afford before you start to search for a home. In other words, you will not be out looking at mansions if you can only afford a small condo. And it is not always a matter of what you can afford. It may be a matter of what you want to pay for your monthly mortgage payment. You may be qualified for $1,400 per month for a payment and you do not feel comfortable with a payment of more than $1,000.

Also, potential buyers should review different mortgage loan types and compare their required down payment amounts to the money you have available. Most mortgage loans today require some amount of a down payment. Popular FHA loans can be as little as 3.5 percent down and the down payment can be funded by gifts from family members or borrowed from a 410(k) account. FHA loans have purchase price limits and a buyer may need to explore other loan types due to price, property type or other factors. Other mortgage loans may require more money down than the 3.5 percent of an FHA loan. And there are some options for 100 percent financing including Veteran’s Administration and USDA Rural Development loans. Review different mortgage loan types and compare their required down payment amounts to the money you have available.

And there are closing costs associated with a mortgage loan. These costs will generally add up to between 2 and 6 percent of the property value. You’ll receive an estimate of these costs from your lender after you apply for a mortgage. Some loans allow the seller help pay some or all of your closing costs for the mortgage loan. You need to know the permitted amount of seller’s contribution before making an offer. Asking the seller to contribute to your loan closing costs can reduce the amount of money required to make a home purchase for a buyer significantly.

Consulting with a Realtor or mortgage lender for mortgage prequalification is the first step to beginning your home search.

Get answers to questions you might have about real estate from Randy Durham, who is a broker with Keller Williams Realty. He also serves as president of the Chattanooga Association of Realtors. His column appears weekly on Tuesdays. Send your questions to Business Editor John Vass Jr. at jvass@timesfreepress.com.