Prequalification or Pre-approval????? 

What does it mean?

Pre-qualification means that a lender or a real estate agent has asked you what your income and monthly debts are, then use that information to figure how much money a lender might be able to lend to you 

Pre-approval means that you have actually met with a lender and started the loan process.  Your credit, income and employment are verified and the lender approves your loan before you find a house to buy. 

Which is best? 

A Pre-approval is best.  After the Pre-approval is complete and you write an offer to purchase,  you are in a much stronger negotiating position because you only need to have an appraisal and title commitment to close the loan. 

The Fed and Long Term Interest Rates

The Fed has no direct control over long-term interest rates.  Mortgage rates are linked directly to Treasury bonds and mortgage-backed securities and their market performance on any given day.  These markets have been very volatile and most likely this will continue.  What this means to you is, that interest rates change daily, sometimes more than once.

Glossary 

Adjustable Rate Mortgage (ARM)–This loan is originated at an initial interest rate then fluctuates up or down during the remaining term of the loan based on a pre-selected index (usually U.S. Treasury securities).  These loans have annual and lifetime interest rate caps. 

Appraisal–An estimate of the value of your new home made by a licensed real estate appraiser. 

APR–Annual percentage rate-Factors in all of the fees and points that the lender charges to originate and close your loan.  This is a more accurate reflection of what your costs will be as amortized over the life of the loan.

Balloon Mortgage–A mortgage in which payments are structured in such a way as to require a large lump sum payment at the end of its payment schedule.

Closing Costs–The fees required to finalize the purchase of a home including the balance of the down payment, credit report, appraisal, tax service fee, title fees, homeowners insurance, taxes, interim interest, funding fee, document preparation fee, courier, flood certificate.  These costs will be paid at closing except for credit report and appraisal. 

Discount Points–Interest prepaid to lower the interest rate on the loan. 

Earnest Money–A payment made as evidence of a purchaser's good faith to complete the purchase of real estate.  This will be used as part of your down payment. 

Escrow Account–Each month you will include with your payment, 1/12 of the annual property taxes and homeowners insurance premium.  When these bills are due to be paid, the lender will pay them for you.

FHA–Federal Housing Administration–A federal agency that insures private banks, mortgage companies and savings and loans against loss on real estate loans under the FHA loan programs.

Fannie Mae–A nickname for the Federal National Mortgage Association which buys mortgages from institutions, such as banks, savings and loans and insurance companies in order to provide a degree of liquidity in the mortgage market by establishing a secondary market. 

First Mortgage–The senior mortgage attached to a property.  It is essentially the lien which has been recorded first against the property. 

Fixed Rate Mortgage–This is a fully amortized mortgage, which means that the borrower pays a constant amount of principal and interest each month.  The interest is paid first, then the balance is applied to reduce the principal of the loan.  At the end of the term, usually 15 or 30 years the loan is fully paid off.  The interest rate is fixed for the entire term of the loan. 

Freddie Mac–A nickname for the Federal Home Loan Mortgage Corporation, a federally sponsored agency which buys and sells government-backed and conventional mortgages.

Gift Letter–Lenders require that the borrower show proof of sufficient funds to cover the down payment.  If a close relative gives the borrower money to get their new home there must be documentation proving that this is a gift, not a loan.

Grace Period–Period of time between the mortgage payment due date and the date on which a late payment fee will be charged.  This varies from lender to lender.

Hazard Insurance–Also known as Homeowner's Insurance.  Protects homeowner against all unexpected perils such as fire, theft, personal liability, and wind.  

Loan Servicing–This is the company that collects your payments, answers your questions and pays your property taxes and homeowners insurance.  It may be the lender you have when your loan closes or it could be another company that they have sold the servicing rights to. 

Loan-to-Value–The ratio of the proposed financing to the property's appraised value. 

Origination Fee–A fee charged by a mortgage company for processing the paperwork on a loan.  This origination fee is above and beyond the "points" which may be charged. 

PITI–Principal, Interest, Taxes and Insurance 

PMI–Private Mortgage Insurance–Charged on any loan the has a loan-to-value higher than 80% 

Points–Service charge computed as a percentage of the loan amount.  This can also be called an origination fee.  One point equals 1% of the loan amount. 

Prepayment Penalty–A penalty which a lender may assess a party for paying off a loan before the due date. 

Rate Lock–The interest rate is locked and cannot fluctuate up or down. The borrowers are responsible for picking the time to lock the rate but it must be done 10 working days prior to closing.  If the borrowers have not locked the loan and the loan officer cannot reach them the loan will be locked at the current rate 10 days prior to close.  If, after the rate is locked, interest rates decrease, you will not be able to change to the lower rate. 

Second Mortgage–Junior mortgage which falls in title claim behind another mortgage.  Can be used for home improvements or to avoid PMI or jumbo interest rates. 

Title Insurance–Insurance protection sold to the purchaser of a property to cover any loss from undiscovered defects in the title.