Loan Pre-Approval

The first step in purchasing a new home, townhome or condominium is loan pre-approval.  The process does more than tell you the maximum amount a lender will let you borrow.  It also helps you answer some questions you may not have even thought of:

  1. How long do you intend to be in the property? A good loan officer will want to know how long you intend to stay in the property.  If you know you will only be there 3 to 5 years, a fully amortized* fixed rate loan may not be your best solution.  However, if you plan to be in your new home ten years or more, a 30 year fixed rate loan may be the right loan for you.
  2. Do you want to use the loan to pay equity, or is an interest only loan your best option? Most people don't realize how little equity they build the first few years of a fully amortized home loan.  A fully amortized 30 year fixed rate loan of $1,500 may only pay $50 on the principal every month.  An interest only loan on the same balance may only have a $1,300 a month payment.  If you are only going to be in the home 3 to 5 years, why pay the extra interest?  Most interest only loans allow you to make principal payments.  If you need a short term loan and want to pay down the principal, you are actually better off with an interest only loan.
  3. Is your strategy to buy the most home you can afford, or are you determined to stay within your budget? Most home buyers suffer from sticker shock when they first find out what their house payment is.  The choice then becomes whether you want as much home as you can afford, or accept less home and stick to your budget.  You'll only know for certain where you stand after your loan officer runs the numbers.
  4. How much home can you afford? Are you a cash buyer with a multi-million dollar budget? Or will you need the assistance of a mortgage? If it's the latter, the loan pre-approval process can be full of surprises so stay ahead of the curve and be flexible when working your lender. 


*fully amortized means that the purchase price will be paid completely by making the agreed payment through the life of loan.  For example, if your payment on a 30 year fixed rate loan is $1,500 a month, after 360 payments you will own the home free and clear.