Q & A with Dottie Herman

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Q1 - What is the difference between a pre-approval, pre-qualification and final loan approval?

A - A pre-approval is a fully processed loan approval based on a proposed purchase scenario. For a Pre-approval the lender treats the loan like any Mortgage application for a purchase except there is no specific property associated with the application.  The lender will collect and review all income, asset, and credit information and make a credit decision resulting in a written Pre-approval document indicating the maximum purchase price and mortgage you can afford for a specific loan program and rate.  With a pre-approval you have completed 80% of the mortgage approval process and once you find a property can proceed quickly.  Negotiating a purchase with a pre-approval in hand can also be very powerful when negotiating the purchase.  On the other hand, a Pre-Qualification is when a mortgage lender reviews your information, usually in an interview, and based on the information provided renders an opinion of your qualification for a mortgage.  Bottom line is a Pre-approval is much more powerful and reliable when actively pursuing a home purchase.  While a pre-qualification is a great place to start in the home buyer process to learn what's required and how much you can afford.

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Q2 - My children want to buy their first house as an investment together. However, they do not have much money at all to put down. Are there any programs available for no money down?

A - The first question is: are they buying this house together to live in and as an investment or are they planning to buy and rent the house?  For homes used as investment properties the minimum down payment requirement is 25% so in this scenario smaller down payments are not an option. For a home they plan to live in, there are still no loans available with no money down but you can come very close using FHA with a 3.5% down payment.  One of the major criteria in loan guidelines is that the buyer has "skin in the game" so the more equity a buyer puts into the purchase the better in the eyes of a lender.  Pursue an FHA loan and also look into the availability of State sponsored mortgages that may allow for grants and other monies that can offset the expenses of a new mortgage as well.

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Q3 - Are there any advantages to a fixed rate mortgage over an ARM?  

A - For short term needs an ARM may be beneficial as the rates are normally lower for the initial period and there are some circumstances when an ARM makes sense.  However in today's very low rate environment there is no reason not to take a fixed rate loan if you are planning to be in the home for more than 3 years.  The fixed rate never changes so your payment will remain the same year after year.

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Q4 - I am a college graduate who has a number of student loans out. I currently have a stable job with a decent income and I would love to buy a condo. I am concerned that the loans will affect my credit score negatively. 

A - The amount of credit you have does influence your credit score but the student loans alone are not an issue if you are paying them on time. When it comes to credit scores here are a few key factors to remember.  The older more established accounts are very positive for your score.  Once you pass 50% of the available credit on an account it will begin to negatively impact your score.  Closing accounts, especially established ones will have a negative impact for a period of time. Keep these things in mind and do not build up any more debt that you need to and you should be ok!

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If you have a real estate question for Dottie, please send it to; Dottie@RealEstateChannel.com.

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