Which Should Come First, Loan Approval or Home Search?

Which Should Come First, Loan Approval or Home Search?

Residential News » Q & A with Dottie Herman | By Dottie Herman | January 30, 2015 7:58 AM ET

Q & A with Dottie Herman
Question: Can I apply for a loan before I find a home to purchase? Or should I wait to find a home I like and want to buy before I apply?

A: Yes, That's actually the correct way to start. Many lenders call this a pre-approval or pre-purchase commitment.  Make sure you chose a lender who is willing to fully vest your application, meaning not only looking over credit, but also looking closely at tax returns, pay stubs and assets.

By working with a lender first, this will give you three very important benefits;
1.)    You will know what you qualify for so you can be more comfortable on your decision.
2.)    Your Realtor can be confident that you're serious.
3.)    The seller will generally give you a priority position when considering your offer
Question: Is there any advantage to putting down a larger down payment than what is required?

A: The main advantages to putting down a larger down payment are twofold;

1.)    With a 20% down payment on a conventional loan you avoid PMI (Private mortgage
insurance); the PMI is based on a percentage of your loan amount which decreases with the decreasing percentage of loan to value.
2.)    With a larger down payment, and less risk to the lender, they can offer a savings through a lower interest rate.

Question: I have lived in my house for 20 years. We have a 30 year fixed loan. I need some cash for a project I am working on. Can I take it out of the equity I have in my home?

A: Yes,   a second mortgage or HELOC (home equity line of credit) would be the first option to look at for tapping into some of your available equity. These second mortgages are available as an adjustable or fixed rate and typically tied to the prime rate.
If you are 20 years into your 30 year loan- most of the interest on that loan has already been paid and now the majority of your payments are being applied towards principal, so a cash-out refinance of this first mortgage would have to be looked at with scrutiny to determine if it would make sense.
Question: I am looking to purchase a home and I am in the process of getting a mortgage. How do I know if it is better to lock in my rate or let it float? I am unsure how to make this decision

A: Locking in, or floating a rate, depends on the borrowers' tolerance for potential market fluctuations. It is better to lock at the current rate if a borrower is close to their maximum qualifying debt to income ratio, so as not to jeopardize their purchase should rates rise and they then no longer qualify. You may choose to float the rate, especially if your closing date is 60 or more days away. Check with your attorney to see what your contract allows for an outside closing date. This information will help you make a decision on floating. The longer the lock term the higher the interest rate will be, generally. If you decide to float, and rates increase, you can always buy the rate down with a discount point. 

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