Why you need a loan preapproval

Get to know the different between a prequalification and a preapproval and what a lender needs from you.

 By Michele Lerner, realtor.com

Few experiences are more frustrating than falling in love with a home that's for sale and then discovering you can't afford to buy it.

The majority of first-time buyers need to finance their home purchase, and a consultation with a mortgage lender is a crucial step in the home buying process because you need to understand your purchasing power before you begin to look at homes.

Lenders offer borrowers a prequalification letter or a preapproval letter, but most real estate agents recommend that you get a preapproval before shopping for a home. A prequalification letter will state the amount a lender thinks you can borrow based on your income and your credit profile without any actual documentation. Mortgage-lending standards have tightened since the housing crisis, and all loans now require full documentation and verification of income and assets, so most sellers will only accept an offer from a buyer with a full preapproval letter that’s based on verified information.

Sellers aren't the only ones who benefit from you obtaining a loan preapproval, though. You're better off with a preapproval for two reasons:

1. You'll have gone through the credit check and paperwork requirements for a mortgage, so you’ll have clarity about your ability to finalize a home purchase. If the lender finds a problem with your credit or an error on your credit report, you’ll have time to fix it before making an offer.
2. Because your documentation will already be in place, a loan preapproval based on everything other than the actual value of the home you’ll purchase will speed up the process once you make an offer.

How to find a lender
Your real estate agent should be able to recommend a lender or two for you to interview, but you should also ask friends and colleagues for someone they trust. You can check for a loan officer's license and read reviews online to be sure you're working with someone reliable. As a first-time buyer, you should call a few lenders to find someone experienced with first-time buyer needs who can possibly help you identify special loan programs in your area that could help you get into a home.

• 9 must-dos after loan preapproval 

What to expect from your lender
The best lenders take a collaborative approach with borrowers and explain all your loan options. When your lender checks your credit report, you should get feedback about ways to improve your credit profile and recommendations for how to handle your money between the time you apply for a loan and settlement day. Your lender should provide advice about when to lock in your loan rate and discuss the pros and cons of various loan programs.

• What's the best interest rate you can get? 

What your lender expects from you
Your lender needs you to be honest about your finances and responsive to all requests for additional information, no matter how unimportant it may seem to you. The more cooperative you are with a lender, the easier the loan process will be. You should be prepared with tax returns, W-2s, bank statements, employer names and addresses and your current landlord's information.

Your lender will generate a loan approval based on your debt-to-income ratio and credit score, but you should also consider your budget and your own comfort level with a payment. There’s no need to borrow the maximum amount you qualify for, particularly if you know you plan to spend money on items that don’t show up on your credit report such as greens fees or ski trips. Your careful planning and preservation of your emergency fund are important for responsible, long-term home ownership.

HARP changes put refinancing in reach of more homeowners

(BPT) - When the federal Home Affordable Refinance Program (HARP) launched in 2009, millions took advantage, but many other homeowners found they couldn't qualify to refinance their underwater mortgages. Today, significant enhancements have made the program more accessible for homeowners and a great opportunity to lower payments or build equity faster.
If you owe as much or more on your home than its current value, you're considered "underwater" or "upside-down" on your mortgage. For some homeowners, the situation has led to foreclosure. Others, however, have stayed current on their mortgage payments, and those are the people HARP is intended to help.
You may be eligible for HARP if:
* You are current on your mortgage.
* Fannie Mae or Freddie Mac backs or owns your mortgage, and they acquired your mortgage on or before May 31, 2009. Use Fannie Mae's and Freddie Mac's online tools to find out.
* The mortgage is for your primary home, a single-family second home or a one- to four-unit investment property.
If you're underwater but still able to afford your current mortgage payment, you may wonder why you would want to refinance. Refinancing a higher interest rate mortgage is a great way to obtain a lower rate that saves you money over the life of the loan. Unfortunately, traditional refinances are not designed to help people whose current home debt exceeds their home's value. For underwater homeowners, qualifying for refinancing is virtually impossible without HARP.
When you refinance through HARP, you'll likely end up with a lower monthly payment, a shorter-loan term or you can even refinance an adjustable rate mortgage into a 30-year fixed rate mortgage. You can invest those savings in other areas, such as home improvements, retirement savings or college funds. Home improvements, in particular, can be a great investment because they can increase your home's value, even as you continue to pay down how much you owe on it.
With mortgage interest rates still historically low - but likely to rise - and the changes to HARP, it's a good time for underwater homeowners to consider applying for the refinancing program. More homeowners will qualify under the new provisions, and some who were previously declined for the program may now be able to qualify for it.
Key HARP changes include:
* No underwater limits - Borrowers will now be able to-refinance-regardless of how far their homes have fallen in value. Previous loan-to-value limits were set at 125 percent. For example, if your home value was $100,000, your mortgage couldn't exceed $125,000 in order for you to qualify for HARP. That limit has been lifted, so now you may qualify even if you owe much more than your home is worth.
* No appraisals or underwriting - Most homeowners will not have to get an appraisal or have their loan underwritten, making their refinance process smoother and faster.
* Modified fees - Certain risk-based fees have been reduced or eliminated altogether for borrowers who refinance into shorter-term loans.
* Less paperwork - Lenders have the option of qualifying a borrower by documenting that the borrower has at least 12 months of mortgage payments in reserve.
Perhaps most important, the deadline to apply for refinancing through HARP has been extended. Homeowners now have until Dec. 31, 2015 to apply, but take advantage of current low mortgage rates. To learn more about the new HARP and if you may be eligible to participate, visit www.harpprogram.org