“What happens when you go to a lender,” asked Deborah Johnson, vice president and relationship manager for J.P. Morgan Chase. I didn’t know the answer and from the silence in the room, I was in good company. But Johnson, who was this week’s presenter at the Bedford Central Development Corp. homebuyer seminar series, schooled us on the mortgage process.
First of all, what is a mortgage? A mortgage is a type of loan used to purchase property. The preapproval process will tell you the maximum loan amount you could qualify for. Please don’t mistake this with prequalification, which is an affordability estimate. The preapproval process is a much more accurate process which involves verifying gross monthly income, the balances and payments on current debts like credit cards, and how much cash is available for a down payment. Assets, such as IRAs, stocks, and bonds are also itemized.
“You want to do a preapproval closer to the day you’re going to buy,” explains Johnson. This is because most preapprovals have a 90 day life span. After that everything needs to be re-verified.
There a five types of mortgage payment options. Depending on your situation you may choose a fixed-rate mortgage, adjustable-rate mortgage (ARM), interest only mortgage, balloon mortgage, or a jumbo mortgage. The two most common types are traditional and ARM.
A Traditional Fixed-Rate Mortgage is attractive to many buyers because it provides stability despite netting a higher interest rate. You can count on your payments being the same amount every month for the life of the loan.
ARMs offer a lower initial interest rate for a certain period of time but the mortgage lender can raise the rates according to market indexes. Lower mortgage payments may sound more appealing, but there are some risks involved. This option is best for individuals who don’t plan to be in the home for more than five years.