Financing A New Home Mortgage:
What You Need To Know

When Is A Good Time To Buy A Home?

To many people get caught up in the real estate values, home financing price cycles, number of homes listed, buying in the winter instead or the summer, and so on.

Some home shoppers even go as far as to start shopping for specific products such as fixed rate mortgages or interest only loans.

While these are all useful considerations, they can perplex you so much that you fall into analysis by paralysis.

Don't get caught up in all of that. It's like all of the home owners who when attempting to refinance focus so much on the interest rate that they get taken advantage of on all the other fees and options. Asking for the best home mortgage loan rate is not the key to getting it.

The way to avoid all that is to have a plan when financing your new homes mortgage.

Don't get bewildered by the small details, just make the simple choice and buy when it works for you. Put your time into the plan I'll be talking about here - which will suit your needs much better than fretting over the small stuff.

Buying a new home is kind of like the analogy of the fish looking at the five fingers dangling in the water. From the fish's perspective, there are five separate things in the water above him (i.e. fingers) however if he were to rise above the water and see that the fingers are attached to the hand, attached to the person - the perspective changes.

Let's forget about what the real estate loan market is doing, and what time of year it is and first focus on the fundamentals.

It's not about what type of mortgage you want or even about the mortgage loan rate. It's about what you qualify for and how much you planned to begin with. At the pre approval process, your focus is not on the rate quote but rather on finding the hurdles you may have to overcome.

I'll go as far as to say, it doesn't even matter how much you have to put down simply because that's more of a question again of what you qualify for.

Buy a home not for an investment but buy a home because you want to. Begin understanding what sort of financial tool a mortgage really is and not because some real estate guru told you to.

Now, on to the fundamentals.

What's The Difference Between Being Pre Qualified And Pre Approved?

Before you start any of this home mortgage process you'll be asked if you've been pre qualified or pre approved.

Those terms may sound similar, but it's critical you know the difference and how each one is determined. We'll also cover the value of each and find out what you really want as opposed to what the mortgage broker/lender might guide you to do.

Remember; predatory lending usually begins with the borrower "allowing" such practices simply because they know nothing about the lending process (we'll be covering the entire process here at HowDoMortgagesWork.com)

A pre qualification is typically no more than a conversation with a mortgage broker who after asking a few basic questions (such as details about your income and assets) issues you a form letter saying you're pre qualified.

The value of a pre qualification is...well, valueless really.

If you know you're "mortgage" credit score (which is different from your consumer credit score, usually lower) and you know what your debt to income (DTI) ratio is then you can pre qualify yourself.

In all basic senses if your credit score is 680+ and your DTI is below 45% (monthly debt payments divided by monthly income = DTI percentage) you are in the right place. Of course there are other factors but if your credit score is 520 and your DTI is 68% you've got your work cut out for you and you'll be paying a lot more to get financed in the bad credit home mortgage market.

If you need help with your credit score, here's a great credit repair resource.

Those home mortgage shoppers who are more serious about buying a home should be seeking a pre approval.

During the pre approval process all of your personal information such as income and assets will be verified and your mortgage credit score determined. At this point it is not about what your home mortgage interest rate will be but rather will you fit the lending guidelines.

You are NOT committing to any lender or loan financing by obtaining a pre approval. << Read that again.

What you ARE trying to determine is if there are any obstacles you'll need to overcome before proceeding further and not necessarily what the lowest home mortgage rate you can get is (the market will fluctuate while you shop around for a new home). Obstacles being negative items on your credit report that need attention or a reduction of debt so you can meet the debt to income ratio limits for any given lenders home mortgage loans.

Here's a list of the items you'll want to have ready BEFORE you approach a mortgage broker/lender for pre approval.

- Copy of most recent 30 days of pays stubs
- Copy of last two years income tax returns (main filing page)
- Copy of divorce decree showing child support or lack of
- Copy of any asset accounts showing cash reserves (401K, Savings, etc.)
- If putting money down, proof of deposit for the previous 6 month
- Social security number - so your mortgage credit score can be verified

Do NOT be afraid to share this information. Without it, your mortgage broker has to guess and that's exactly what you DON'T want. Having your mortgage credit score pulled is not a bad thing and does not ruin your credit or kill your credit score. Not knowing what you qualify for will cause more troubles than your credit score moving 5 points up or down ever will when shopping for home mortgages.

Also, when you are attempting to get pre approved do not fill out an online form for new home mortgage financing that goes to 15 different mortgage brokers around the country. You don't need that type of competition for your pre approval. You are not choosing your lender or broker at this time - you are only getting pre approved so rise up out of the fish tank and see the big picture before initiating the mortgage loan online shopping process.

Your pre approval is not the end, it's the beginning and although doesn't carry much weight in terms of loan approval, you're real estate agent will want you to have it.

By verifying the income, verifying the available assets to close on a house, and reviewing the credit report, the two initial hurdles of ability and willingness to pay are overcome.

It's not big deal, but documenting your pre approval is your very first step to understanding mortgages. NOT the typical mentality of beginning to shop for a mortgage before you even get pre approved.

In the next article we'll talk about what to do once you've found a home and are ready to begin the home mortgage loan process. I'll show you an excellent home mortgage loan plan that you can use to gain control of the entire process and we'll also cover second mortgages. This is where the good faith estimate comes into play and knowing your stuff here puts you in control.

Note: the new "reverse mortgage" cannot be used to purchase a home, it's only meant for current home owners age 62 and older as a form of refinance.

How Do Mortgages Work?