If any step in buying a home is confusing, complex, or tedious,
it's figuring out how to get the right kind of financing.
However, since the Internet has made it relatively easy to
learn about, shop for, and secure great mortgages, the frustration
factor of getting financing has been mercifully reduced.
The first step is to learn how home financing works. In a
nutshell, the process involves the following steps:
- Checking your credit history
- Getting prequalified
- Shopping for loans
- Getting preapproved
Checking Your Credit History
If your credit report has mistakes or other blemishes, your
credit rating will suffer, and as a result, you will pay higher
interest rates and may even be unable to secure financing.
Get prequalified for free in less than 5 minutes at E-LOAN.
Before you apply for preapproval, you're well advised to
make sure your credit report (and therefore credit rating)
is as accurate and positive as possible. You want to check
your report because it's estimated that 20% of credit reports
have significant mistakes (the Consumer Union says that 48%
are inaccurate).
The first step is to get a copy of your credit report. There
are 3 major credit bureaus, but since they don't share information,
it pays to make sure that each report is error-free. Each
report will cost around $8, and a merged report from all 3
is around $30. You can get a merged 3-agency credit
report online from
ConsumerInfo.com or you can call the credit bureaus directly:
Equifax: 1.800.997.2493
Trans-Union: 1.800.888.4213
Experian: 1.888.397.3742
To fix errors on your credit report or if you would like
to improve any negative records, try the Consumer Credit Counseling site, which gives advice on how you can either
remedy errors or start to establish a better track record
with creditors.
When preparing to buy a home, you have to estimate how much
home you can afford. Similarly before you apply for financing,
you should allow a lender to size up how much mortgage you
can afford. Using financial information that you provide,
prequalification is a lender's analysis of your general position
as a borrower or, in other words, an estimate of what you
can afford.
Besides giving you an even better idea of what you can afford,
getting prequalified helps you make an informed application
for your mortgage preapproval and is evidence to realtors
that you will be able to get financing.
Shopping for Loans
The terms of your mortgage will probably be the biggest determinant
of the size of your monthly payment, so you'll want to shop
around. The main points to resolve are figuring out what kind
of loan you want, who you want to provide it, and for how
long you want it (most are either for 15 or 30 years).
Even if you don't feel comfortable taking out a loan online,
it still pays to shop for loans online in order to learn more
about the kinds of available loans, what rates are competitive,
and to calculate the financial consequences of each loan so
that you can more effectively negotiate mortgage terms with
a local lender.
When shopping for loans, remember that the interest rate
isn't the only cost involved with a loan. The size of the
down payment as well as "points" (or prepaid interest) and
other fees can significantly alter the cost, especially the
upfront cost.
There are two kinds of Web sites that help with online loan
hunting. First, there are the straight shopping sites that
let you enter your financial information and search for loans.
MsMoney.com recommends E-LOAN.
The second type of sites are loan referral sites that don't
offer loans but organize and streamline loan hunting by creating
loan marketplaces or presenting the lender options in your
area.
Getting preapproved is a firm commitment from a lender to
loan you up to a maximum amount without a specific property
being identified.
Preapproval is a useful step because you go through the financing
process before making an offer on a home, so the time required
for the process itself won't jeopardize your offer. And once
you are preapproved, closing the loan is quick, depending
only on a satisfactory appraisal and title report of the home.
To get preapproved, you apply for a loan program, submit
an application, and provide financial information. Getting
preapproved online via E-LOAN is free and quick.
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