Finding your new home can sometimes be a daunting task; however, with the right preparation it can be an exciting adventure. The following explanation and tips regarding the pre-approval process are offerred by Raoul Amescua, V.P. of www.GoldMedalMortgage.com:

"We find many first-time borrowers confuse being “pre-qualified” with “pre-approved.” Pre-qualification is a casual process, where we can tell how much you may borrow based on income, existing debt, and cash down payment."

"A pre-qualification may be a form letter or personalized, but will contain disclaimers to protect us in case you fail to qualify. Some real estate agents feel that pre-qualification letters say little more than you have contacted a mortgage company. Before a lender will make the loan, a formal loan application will be required," continues Amescua.

"In contrast, pre-approval letters have far more validity and indicate to the seller that you have passed the credit check and have preliminary loan approval. To obtain pre-approval you formally apply for a loan and submit all the relevant documentation to us. We will verify this information and credit is checked, then we will arrange for a lender to agree in writing to make the loan to you. The loan will be subject to a satisfactory property appraisal and title search."

"A formal loan process is an eventuality, so we recommend obtaining a loan pre-approval in advance. By doing this, you can avoid the disappointment of making offers outside your price range, and get more cooperation from agents and sellers,"

Mortgage Loan Types

There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).

In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the US, the term is usually for 10, 15, 20, or 30 years. In the UK the fixed term can be as short as five years, after which the loan reverts to a variable rate (which makes the loan an ARM).

In an ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the US include the Prime Rate, the LIBOR, and the Treasury Index ("T-Bill"). Other indexes like COFI, COSI, and MTA, are also available but are less popular.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.

In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due.