Called “B paper” in industry lingo, loans offered include 2/28 and 3/27 loans. The number before the slash refers to the number of years that the initial rate is fixed. After that, the rate changes on a predetermined schedule (usually every 6 months or 12 months) for the remainder of the life of the loan. The amount of the rate change (called an Adjustment) is determined by a mathematical formula based on the U.S. bond market (typically the yield on the 1 Year U.S. Treasury Bill). The 2/28 is usually the best place to start for two reasons, one of which impacts the other. These B paper loans usually have a two-year prepayment penalty, meaning you can’t refinance for two years.

Most A paper lenders want to see 24 months of on-time mortgage payments in order to approve a loan. So, if you get that 2/28 loan with a two-year prepayment penalty, you can put up with a higher interest rate, rebuild your credit, and refinance into a better loan at the end of two years.

B paper is just as competitive as A paper, if not more so. There are plenty of lenders out there, so although you won’t get the lowest possible rate, you also don’t have to pay an exorbitant amount in points on top of the higher rate. (One point is one percent of your loan amount.)

Remember that you’re not only getting a loan. You’re also rebuilding your credit. Think how good your credit report will look two years from now when you have 24 on-time payments behind you. Then you can apply for an A paper loan with confidence.

On Moving.com, you can compare up-to-date rates from over 1,400 lenders including B Paper lenders!

A: It’s never too early. In fact, contact should be made with a loan officer when discussion first turns to buying a home– certainly it should be before any properties are actually visited.

Q: Why make contact with a loan officer so soon?

A: Two very practical reasons– to become pre-qualified or pre-approved for a loan before house hunting. You will find many sellers or mortgage brokers need one or the other.

Q: What is the difference between the two?

A: Pre-qualification is simply based on a conversation between the lender and the borrower about income, employment, credit and savings. There is no validation, no underwriting of the data supplied– it’s a process than can be done over the phone in fifteen minutes. This gives the customer an idea of their loan worthiness and how much they might expect to qualify to borrow.

Pre-approval is based on actual submission of income, assets, credit and employment information. Assuming the information is accurate, the loan officer can give the borrower a written loan commitment, subject to a property appraisal. We strongly recommend first time buyers consider taking this step to make them more credible buyers in the marketplace. Pre-approval will give them leverage when competing for a property and tells the seller that the buyer can close the mortgage. I would encourage going through this process if the borrower intends to buy a home within six months, otherwise the information goes stale. Pre-approvals are generally good for ninety days.

Q: Is the relationship between borrower and lender one that extends beyond the initial meeting?

A: Most definitely. We encourage loan originators to stay in touch with pre-qualified buyers, keeping them updated on new products, trends and rates in the mortgage world. In fact, we have loan officers who work with people for a year or more before they finally find a home. It’s an ongoing relationship and a very intimate one in many ways because buying a home is a huge financial experience and can be very emotional.

Q: How does one find a loan officer?

A: I’d say the best way is word of mouth. It’s a lot like moving into a new town and you want to know the best place to get a haircut, or who is the best butcher or best lawyer. Ask people who have already bought a home because they’ll tell you the good, the bad and the ugly about their borrowing experience. If the buyer feels uncomfortable talking to people, check the yellow pages– just make sure to speak with two or three different loan officers– don’t jump on the first one. It might be a good idea to visit a big bank, a little bank and a mortgage broker. Whoever you choose, it’s important to work with someone who is honorable and [trustworthy].

Q: Okay, you’ve found a lender or broker you trust. What kind of mortgage advice questions should one ask?

A: Whatever’s on your mind. A good loan officer wants to encourage the homebuyer not to be intimidated. The borrower is in charge, not the lender. Don’t allow yourself to become uncomfortable, to feel pressured or pushed to accept a loan program you don’t want or a rate you consider too high. Again, take control. Take control of the process by becoming educated.

Q: And how does one become educated about the mortgage process?

A: I recommend a first time homebuyer education course. These courses are free, or very low cost, and are given through community development groups most everywhere in the nation. They usually last four or five evenings, maybe an hour each time– but for that amount of time the homebuyer will learn, not only about mortgages, but about the appraisal process, the closing process, managing credit, working with Realtors– a whole bunch of valuable information about probably the most important financial transaction any of us will ever go through. Every lending institution maintains data on these programs or you can check with state or local housing agencies.

Q: Many first time buyers are reluctant to go for a mortgage because of sub-standard credit, checkered employment history or because they lack a substantial down payment. What mortgage advice do you give to them?

A: I say there is a mortgage program for nearly everyone. One thing the first time homebuyer will find is flexibility. The perception that one needs a large down payment or must have angelic credit or needs to be in the same job for two straight years is part of an earlier mortgage era. The first time buyer can expect to see programs that offer low down payment options, programs that work around credit problems, blank credit or bankruptcies and others that deal with employment issues. There are even some no income, no asset programs but, in return for no verification, the borrower can expect rates that are generally much higher. You’ll also need a great credit history and a larger down payment for those types of programs. Bottom line is, don’t let a blemished credit history prevent a conversation with a loan officer.

Q: The thirty year fixed rate mortgage seems to be the traditional route for most first time home buyers. Are there other options available?

A: The array of mortgage products is mind-boggling. As I’ve said before, there is virtually a mortgage for everyone. Take a look at all of your options and don’t make a rush decision. It’s true that most people immediately think of the thirty year fixed but the fact is very few home owners keep the same mortgage for that length of time– a lot of people are simply overbuying.

Q: By overbuying you mean?

A: The average mortgage length is about seven and a half years. Many couples moving into a starter home will have children in the next three to five years and will look to move up to a larger home. Rather than overbuying with a thirty year mortgage, there’s always the option of applying for an adjustable loan that stays fixed the first three, five or seven years. These loans generally offer a lower interest rate and, for those who can’t sleep at night worrying that the rate will eventually go up, the loan can always be refinanced.

Obtaining information is easy. Mortgage information sources are as numerous as mortgage types. Web sites, topical newspaper articles, mortgage books, consumer seminars and workshops can help. Professionals, including financial planners, real estate agents, mortgage brokers and lenders, can also assist you.

Examine your finances

First, compare fixed-rate mortgages with adjustable rate mortgages to determine which type best fits your current financial lifestyle and, to some extent, your future obligations 15 to 30 years down the road. Learn how much of a mortgage you can afford. Lenders are apt to qualify you for as much as they are willing to lend, which can be more than you can really afford. It’s up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month.

Along with your mortgage payment of interest and principle, remember to add related insurance costs, taxes, homeowner association dues and any other costs. Also, obtain copies of your credit reports from all credit reporting agencies. Obtaining your credit report in advance gives you time to challenge missing information, errors, or other discrepancies. If necessary, you can put a statement on your credit report to explain any blemishes you can’t cure. Lenders likely will ask you to explain problem areas on your credit record anyway. Your attention will let the lender know you are conscientious about your finances.

Shopping for lenders and loans

When you are ready to shop for a loan you have two basic choices — direct lenders and mortgage brokers. Direct lenders have money to lend. They make the final decision on your application. Lenders have a limited number of in-house loans available. Brokers are intermediaries who, like you, have many lenders from which to choose. If you have special financing needs and can’t find a loan to suit them, an experienced broker may be able to ferret out the financing you need. Mortgage brokers, however, are paid with a slice of the amount you borrow, some more than others.

Along with shopping the source, you’ll also have to shop loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal costs and a host of others.

Your application

Before you actually apply for a mortgage on or off line, gather documents necessary to prove claims you’ll make on the application. The application will ask for information about your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses and others).

The lender will run a credit check on you, but you’ll have to supply supplemental documentation including paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation. If the lender deems you creditworthy, it will likely hire a professional appraiser to make sure the value of the home you are about to buy is commensurate with your loan amount.

Lock it down

During your loan application, get a rate lock – an essential document in a rising mortgage rate market. On or offline, a rate lock — in writing – guarantees you a certain interest rate and terms for a given period.

Lock in all the costs you can, the interest rate, and points.

Set the lock ”on application” rather than ”on approval.” On approval means you won’t have a stab at rates until the loan application is approved. In a rising market, a lock on approval would cost you more in higher interest rate.

Along with shopping around for the best mortgage, shop around for both the terms of the lock contract and its cost. Both can vary.

Your lock-in period should be long enough to allow for settlement, contingencies imposed by the lender or the purchase contract and other factors that could delay the process. Consider all factors that could delay your settlement, including the time it will take you to provide requested materials about your financial condition, unanticipated construction delays on a new house and the like.

Most lock periods range from 15 to 60 days. Anything longer could be cost prohibitive. Ask your lender to estimate (in writing, if possible) the average time for processing loans. Once you lock-in a rate, you must make sure that your loan is approved and closed before the commitment expires. Follow up on your loan application to make sure you don’t delay sending additional documents the lender requires.

Get preapproved

Finally, once the lender approves your loan, you’ve been prequalified for a certain amount, but that doesn’t guarantee you the loan. Prequalification indicates you are creditworthy enough to obtain a loan and it lets you know how much the lender is willing to lend you based on your income and debts. Often, the lender has yet to pull your credit report. It’s wise to take the next step and get preapproved for a specific amount the lender will actually lend you.

A preapproval – in writing – is the amount the lender guarantees it will lend you, based on a thorough analysis of your application. The preapproval not only gives you the security of shopping for a home you can afford; it tells the seller you are a serious buyer ready with solid financing. That’s a negotiating edge you want in any market.