The benefit of debt

I wanted to share a recent article by  Michelle Singletary.  Ms. Singletary offers some wonderful advice to future home buyers and I’d like to provide the lender’s perspective.  In this post, I’ll address the first reader’s question, in which Ms. Singletary advises a potential homebuyer with $12,000 in savings and $11,000 in debt from a consolidation loan to pay $5,000 toward the loan and accelerate remaining payments. 

As a lender, I would recommend leaving the $12,000 in savings.  I agree that there should be 3-month’s worth of reserves removed from the $12,000, so if it helps you to physically put this in a different savings account I would recommend doing so.  Paying down unsecured debt is a great goal, for the most important reason is that this kind of debt generally carries a higher interest rate then a loan with collateral.  Adding extra on the payment when able is a good habit with any kind of monthly obligation as this will allow you to pay the debt off sooner.  The potential home buyer in this example makes it sound as though this consolidation loan is their only debt.  If this loan was heavily paid down with the author’s suggestion, and then rapidly paid off, there would be no more monthly obligation.  This is great, however, credit scores are calculated on several factors, and the factor that carries the most weight in the calculation is Payment History.  If your payment history is no longer being reported because your debt is paid off, then there is no ability to calculate a credit score.  A lender needs a credit score and history, to weigh the risk of what type of borrower you are as of the day the credit report is pulled. 

What I read from the potential home buyer’s question is that they want to buy a home.  I would need to find out more information on how much they are paying to rent the current condo.  Their rent could be more then the cost of having a home of their own.  With the current real estate market, there is no better time than the present to find out how your current rental situation compares to owning a home.  Rates are low, and there are a lot of homes for sale right now.  I have programs available that are geared towards first-time home buyers, or current home owners looking to upgrade.  There is no cost to find out whether home ownership is right for you and no better time to do so.  

Why is becoming pre-approved for a mortgage so important?

In today’s market, with so many loan programs being offered and the increased amount of homes for sale, you will find being preapproved for your mortgage will save both you and your real estate agent a tremendous amount of time. 

A “preapproval” is a commitment from a lender for financing to a specific loan amount that was concluded from a review of your credit and income verification.

Becoming preapproved will allow your real estate agent to find homes that fit into your price range, based on the amount for which you have been preapproved to obtain financing.  By doing this, you can eliminate homes from the large available inventory that would simply waste your time.

Keep in mind that a preapproval doesn’t always mean that a home that matches your price range is a guarantee once you have negotiated and signed a Purchase & Sale Agreement.  The preapproval is a process to examine just the borrower(s) and although you may qualify to afford the home, the home itself also has to qualify to allow for financing.  The home is qualified by having a Satisfactory Title Search done as well as a Satisfactory Appraisal.  If the Title Attorney’s exam of previous deed changes and survey changes are acceptable, and a Licensed Appraiser can find value in comparable homes to support the purchase price, you are doing great. 

One final item to remember is that a preapproval is generally only good for 120 days.  After that time, a new credit report will be required along with updated income verification to allow for the continuance of the preapproval decision.  If your original loan application changes in any way, such as, loss of income, or assets, the original preapproval will be voided, and a new decision will be delivered based upon the current information.

The preapproval process is relatively simple, and can usually be completed within 24 hours.  Feel free to contact me with any questions about the preapproval process.