When a new homebuyer reaches the decision point on financing a property through a mortgage, the transaction starts to get real.

The homebuying process leading up to this point — run the numbers, set a budget, visit properties — has all been rather standard. But mortgage options and their impact in the long term are personal.

That’s why it’s important to know before you grow, advises the professionals at Penn Community Bank, Perkasie.

Choosing a Mortgage

Homebuyers have a variety of mortgage options, each with associated advantages and disadvantages. The more common types are fixed-rate, adjustable-rate, and bi-weekly.

• A fixed-rate mortgage, as its name implies, maintains a steady interest rate for its term. Should finances enable an early payoff, there are no prepayment penalties.

• Rates on an adjustable-rate mortgage — no surprise here — change periodically. The rate may float for an initial number of years and lock thereafter. Caps ensure that rises in interest rates don’t inhibit repayment.

• Bi-weekly mortgages replace the traditional monthly loan installments (12 per year) with remittances every two weeks. It therefore shaves one month per year off the term of the loan through prepayment, without penalty. Many first-time mortgagors find the convenience of this vehicle’s automatic payments to be a significant advantage.

A Financial “Audition”

A mortgage preapproval is something like a financial audition. It’s the prospective buyer’s chance to show he or she is fit for the “role” of homeowner by demonstrating that financial strength to sellers.

Its analysis reflects a deep dive into an intended purchaser’s financial background, assessing credit and income.

It differs in scope from a mortgage prequalification, which is a more cursory financial sketch. Many home mortgage transactions begin with filing prequalification documents. But a mortgage preapproval has more teeth to it. Its data are vetted to prove eligibility. Common verifications include a borrower’s credit reports, bank statements, W2s, court filings, and other official documents to gauge a hopeful purchaser’s finances.

At the conclusion of the analysis, successful applicants receive a preapproval letter, which is a documented signal of a customer’s creditworthiness.

The Application and Its Underwriting

Mortgage approval in hand, the potential homebuyer can then apply for a mortgage. The application need not be sent to the institution where the preapproval analysis was completed.

The data in the application mirror much of what was collected for the preapproval, augmented by additional details. This closer look is designed to increase the chances that the loan survives its final credit scrutiny: the underwriting process. Loan underwriters seek to vet real estate transactions to ensure the lender has a guaranteed payment alternative if something goes awry.

The underwriter examines the proposed transaction in detail (some may call it nitpicking, but others see it as lending-institution prudence). Foremost in the analysis are three Cs:

• Capacity: Does the borrower have enough income to meet this financial obligation over the term of the loan?
• Credit: Is there sufficient history to show that the borrower repays debt in a timely manner?
• Collateral: Has an appraisal valued the home properly?

Unfortunately, the underwriting process may become a back-and-forth process of requests for additional information. Eager borrowers can do little more than respond as quickly and completely as possible to maintain the purchasing process’ momentum.

The good news is that after all this analysis, the borrower is cleared to move onto that monumental day: closing.

More Information

For tips and insight on the first-time home-buying process, download Penn Community Bank’s free The Basics: Buying Your First Home eBook.