According to Bankrate, some new home buyers lose precious time by not bothering with a prequalified (or preapproval) loan application, overspending on their first home purchase, forgetting to check their credit scores and skipping the details on the mortgage they select.
As a Realtor in the Elgin Fox Valley area, I can tell you that few Realtors will take a buyer out to view homes unless they show them the money with a pre-qualification. Actually, in financial terms, a Pre-Approval is far better than a simple pre-qualification. A pre-qual is only a tentative “OK, they applied to our bank and we have a photo ID from them,” to get a checked out for a loan. A pre-approval is a banker backed approval of “these clients have our trust and will most likely get this loan done.”
Another great way to hate your home is to overbuy. When your monthly mortgage payment is an ugly reminder that you cannot afford much more than peanut butter and mac n cheese for dinner, you have overbought. It doesn’t happen as much as before, but just because a bank says you can qualify for $2800 a month payments doesn’t mean you should. You need to be able to eat as well as keep the lights in your new home.
Also, just like a car loan, a bank loan requires a credit check. The better your score, the better your terms. Paying 15% for a car loan is one thing, paying 15% on a home loan can be a deal breaker, so keep an eye on a low score now to bring it up for when you need it later. Remember, even shopping around for a loan can cause your score to wobble briefly.
Lastly, there are many mortgage products out there today. Fixed rate conventional loans are the most common, because you know every month exactly how much your payments will be. Adjustable rate mortgages can change interest rates every 1, 5, or more years, according to the terms of the agreement. It may start out low, then spike up to a very high payment amount that will not be affordable for many folks. Shorter term loans, such as a 10 year or 15 year mortgage, are great ideas if you’d like a higher payment to pay off your home faster. However, I suggest a fixed rate plan because your mortgage payment is your biggest expense in a household budget, and knowing this cost is fixed will be helpful in keeping your budget on track.