Financial Steps To Take Before Buying A House

Once you feel ready to buy a house, the process usually happens fast. Whether it’s a buyers’ or a sellers’ market, you will quickly get excited about a house you see and want to jump on the chance to put an offer in. Before you begin this process, it’s vital to take a few financial steps so you’re prepared for what buying a house will look like. Not only will you feel more comfortable with the home-buying process once you have a grasp on your finances and learn about your options, this will allow you some time to save up more money or work on bettering your credit score. 

Have a grasp on your finances 

If you don’t already, start paying careful attention to all areas of your finances and be more proactive about your situation. Avoiding checking your account balance and only paying the minimum on credit cards isn’t being proactive enough when you’re preparing to buy a house. Start looking at your bank account more regularly; this will help you see just how many things you can cut costs on and how much money you can put in your savings instead of towards frivolous spending, after all, buying a house is a big financial investment.

This is also the time you want to check on the status of all of your loans, credit cards, and any other things you’re financing. At the least, make sure these accounts are in good standing, that you’ve been paying them on time for at least a year and none of your credit cards are over their limit. If possible, pay off any bills you can in total. This might not be possible for larger bills or if you’re aggressively trying to save for your future house, but if you have the extra cash this is a smart way to use it right now.

Paying off debts you have lowers your debt-to-income ratio, which is great when you’re looking to buy a house. Lenders look into your ratio to ensure that your income exceeds your current debt, this gives them a glance into your spending habits. If you have a lower debt-to-income ratio, you are less of a risk for the lender because you’re more likely to make your mortgage payment and less likely to default on the loan.

Finally, know your credit score! It’s a myth that checking your credit score can harm it, when you check your score on a website, this is considered a “soft inquiry” and does no harm to it! A “hard inquiry” is when someone like a mortgage lender checks your score, and this is when it can be affected. Therefore, you only want a lender to do this one time throughout your home-buying journey. It’s good to be informed on where you stand with all of your debts, so don’t be afraid to check that score. 

Research different loan options 

Before buying a home, you need to learn about different loan options to figure out which one is best for you. Luckily, there are many types out there to make it more accessible. Here’s a little information on different loan types so you can consider which one is best for your current financial situation:

  • Conventional loan – This loan is not backed by a government agency, like some others we will review shortly, it’s best to put at least 20% of the purchase price as a down payment so you don’t have to pay for mortgage insurance. Additionally, you usually need at least a credit score of 620. All in all, this loan is best for people who are in fantastic financial standing and who are less likely to default on the mortgage loan.
  • FHA loan – FHA loans have unique requirements because they are government-backed, this means that if you default on the loan, the lender is protected. Therefore, the financial requirements are a little looser. You can be approved for an FHA loan with only 3.5% down and a credit score of 580. This is a great option for people who haven’t been saving to buy a home or don’t have a great credit score right now.
  • USDA loan – This loan is also government-backed by the U.S. Department of Agriculture, which helps people buy homes in rural regions to encourage economic development in these areas. This will specifically help those that have average-to-low incomes for their area. If you feel like this describes you, then look into USDA loan qualifications.
  • VA loan – VA loans are another government-backed loan option but are for Veterans, Servicemembers, and their surviving spouses only. With this loan, there are competitive interest rates and no down payment or private mortgage insurance needed. If you’re a Veteran or another qualifying member, this is a great option for home buying!
  • First-time buying grants – Although this isn’t a loan and you will need one to buy, considering different grant options in your area is definitely worth it. Grants are gifts that don’t need to be repaid that can cover the cost of closing, the down payment, or even cover part of the total purchase price. You will likely have to do the heavy lifting on this because most mortgage lenders usually don’t offer the grants but it will be well worth it to try!

Shop around for lenders and rates 

To ensure you get the best interest rate on your loan, be sure to shop around for lenders. It might feel easy in this already long process to go to a friend that is a banker or go to the bank you already use. However, it’s financially smarter to shop around for quotes from different lenders to ensure you’re getting the best deal.

Interest rates can differ depending on the type of loan you decide on, based on what was discussed above you can decide which loan type is best for you. In general, people with more money down and a better credit score will benefit from a lower interest rate, because they are less risky to the lender. However, this is why it’s important to shop around for lenders because you may find an amazing one who’s willing to work with you.

Educating yourself to make the best decision possible is extremely important in this step of the home-buying journey. Be prepared by calculating what your interest rate could be before you even go to see a lender. The last thing you want is to be taken advantage of by a bank.

Regardless of if you’re a first-time homebuyer or seasoned in this area, there’s always room for improvement when it comes to your finances. Getting your financials in the best shape possible is vital before you can move forward in this journey, and you’re the only one that can do this. Next, begin to search for a realtor, lender, and lawyer that will help the rest of this process go as smoothly as possible!

What if I Have Little or No Credit History?

While credit is one important part of a total buyer profile when financing a home, there are ways, in addition to traditional credit, that you can prove to a lender that you have a positive payment history.

This is called alternative credit or nontraditional credit, and there a number of ways you can show payment history. One way you can do this (for example, if you rent) is to show cashed checks written on or before the day that the payment is due.

Other bills that you pay each month can be used in the same way. If you pay gas, electric, or monthly car insurance bills, you’ll also have a written record of your payment history. Cell phone bills work the same way.

If you are younger and just starting to build your credit history or don’t currently have any of the above items, you still have options.

There are several ways to actively build credit, especially if you are in a longer-term time frame to be purchasing a home.

One way is to start with a few smaller-type credit cards, such as from a gas station or a department store. What you can do is to use them regularly, even for small purchases, then pay them off each month.

In the eyes of the credit bureaus, the companies to whom the creditors report your payment history each month, you have consistent on-time payment history, and this is a good thing.

Another option is to look into what are called secured credit cards. This is where you give the credit card issuer the entire limit of the card when you sign up, say $500. You then basically borrow against yourself when you use the card. As you make payments, the card issuer reports your payment history to the bureaus as if it were an actual credit card.

If you have questions about any of this, please reach out. I would be happy to go over the options and help you determine what is right for you and your circumstances.

Factors that Make Up Your Credit Profile and Score

There are a number of factors that go into making up your credit score, which is a part of your overall credit profile. Lenders pull your credit scores from the three credit bureaus, Experian, Equifax, and TransUnion, which calculate your credit score by using a credit scoring model.

One significant part of your credit score is, of course, payment history. How well do you manage the debt that you have now? Are you making your payments on time? Do you have any collection accounts or judgments?

Another key part of your credit score is how much debt you are carrying and, specifically, how much of it you are carrying in relation to what you have available to you.

Do you have a maxed-out credit card? Do you have several of them? The ratio of balance to limit is a factor in your credit scores. A $200 balance on a card with a $1,000 limit looks much better than one with a $950 balance.

Too many installment accounts, such as car loans, or other types of fixed payment loans with high balances tend to drive down credit scores, as it gives the impression that you might be overextended.

The last factor that we’ll look into is the age of your debt. Maintaining a good payment history over a long period of time is a good thing.

The last thing you want is to apply for all kinds of credit cards just before you apply for a mortgage. This may make you look desperate in the eyes of the lenders.

Please let me know if I can answer any questions you have about how all of this works. I’m here to help, and I’m just a call or email away.

Having Property Ownership Rights without Being on the Loan

Yes, you can have ownership interests in a property without being on the loan. To fully understand ownership and payment responsibility, let’s first talk about some terminology.

The loan that you take out to purchase or refinance a home is referred to by lending institutions as a note. This is the document you sign at closing that says who is making the payments on a property. We haven’t yet said anything about ownership of that property. The note has nothing at all to do with ownership.

On the other hand, a mortgage, which is a different document than the note, says who owns the property but says nothing about who is paying for it.

The mortgage is held as collateral against the note. If you get far enough behind on the note, the lender can take possession of the mortgage, meaning that they then have ownership rights to your property.

There can and may be different people on the note and mortgage. You can agree to be on the loan, but you or your spouse may waive your ownership rights to the property. You may want this to be the case.

For example, if either you or your spouse were in some type of legal or financial trouble, such as if you were being sued, or if you were the owner of a business that is in distress and creditors were going after your personal assets, you may consider this option.

Your real estate attorney can take care of all of this for you with documentation you sign at closing.

On the flip side of this, you may want, for whatever reason, somebody who isn’t on the loan to have ownership interest in the property. This may be some type of close relative or a trusted associate.

If you have further questions about how all of this works, I’m here to help. I’m just a call or email away.

Will I Be Able to Get Cash Back at Closing or Not?

This will depend on what type of loan you are taking and from whom you are taking it. If you are taking out a purchase loan, then you wouldn’t likely be able to take any cash out of the transaction.

There are, however, three types of refinance transactions that you could take cash from. One is a no cash-out refinance, also called a rate and term refinance. Another is a limited cash-out refinance. The last one is just called a traditional cash-out refinance transaction. A rate and term refinance is just as it sounds. You do it because you want to replace your existing mortgage with another because the terms are better.

You do it because you are getting a better interest rate, getting a lower payment, or possibly both. If you are able to pay your closing costs out of pocket, you can even keep your same loan amount. You can also choose to roll associated costs into the new mortgage, but then your loan amount would increase. A limited cash-out refinance allows you to get a limited amount of cash back. For FHA, the amount is $500, and for conventional loans, it’s up to $2,000.

How much money as a percentage of your home value you can take will vary by program. According to a 2019 HousingWire.com article, FHA, for the first time in a decade, has lowered the total amount you can borrow against your home, including cash you take. It is now 80% of the home’s value.

Conventional loans will go higher, depending on your credit scores. Please call me with your questions regarding purchase and cash-out loans, and I’d be happy to answer them.

How to Get Yourself into a Buy-Ready Position

The two words that best describe how to prepare yourself for home ownership from a financial perspective are these: plan ahead.

Before anything else, the first thing you need to do is figure out, regardless of what prices are doing in your chosen area, what you can realistically afford for housing, month after month and beyond. You and only you will be making the mortgage payment, and you need to enter into a purchase that truly works for you.

Once you are at that point, you then reach out to a mortgage professional, we here can help, to see how much house you can afford with your realistic housing budget.

In addition to the monthly payment that you’ll be taking on, there are other considerations, such as the amount of money you’ll need to close the transaction. Beyond your down payment, there are other expenses, such as closing costs, lender fees, interest expenses, and asset reserves.

Saving money for a home purchase can take time, and in keeping with our plan-ahead theme, having at least some idea of how much you’ll need for it sooner rather than later is a good thing.

There are other considerations that will factor into the transaction and determine what interest rate you’ll pay. One of these is what your credit report looks like.

If you are carrying too much debt or the debt you have (such as credit cards) is maxed out, your lender may ask you to either pay some of it down or pay it off completely.

Are there items on your credit report that are incorrect or shouldn’t be there at all? Just as with paying off debt, this can be managed but may take time to complete.

Give us a call so we can help you get in the best buy-ready position you can be in when you start looking at homes.

What Assets Can I Show on My Mortgage Application?

What lenders mean by assets are funds that you are able to put into your home purchase transaction. These are funds to be used for the down payment, closing costs, asset reserves, and so forth.

What lenders like more than anything are what are called “liquid assets.” “Liquid” means cash or a cash equivalent, such as money sitting in a bank account. This also includes available money from a retirement account that could be transferred into a bank account.

People often ask whether cars, motorcycles, jewelry, and other items they own could be considered assets.

The short answer is no. One challenge here is that in those forms, they aren’t considered liquid. Another is that the lender would have no way to determine their true value without having them appraised, and this would make financing your home much more complex.

If you have items you plan on selling to put money into the transaction, that’s fine. What needs to happen, though, is the source of those funds and where the proceeds went need to be fully documented.

An example of this would be your selling a car on March 14 for $3,500 cash and putting the money into your bank account a day later. A lender may ask for a copy of the bill of sale and bank statements showing the deposit.

If you have questions about how assets work in the mortgage process, please give us a call, and we would be happy to answer them.

How to Reduce Risk for Your Business

Every business venture has one thing in common: risk. Markets can change, trends can move in different directions, and technological innovation can force your business model to go from solid to so-so. When all is said and done, business owners and leadership must be prepared for risks in a variety of sectors. Comprehensive insurance coverage is a major risk reducer, but here are other ways you can reduce your risk so that insurance claims don’t happen in the first place.

Employee Safety Training

One significant cause of accidents is inadequate employee adherence to rules, regulations, and standard business and safety practices. Employee training can serve to ensure that beverages are handled carefully, spills are cleaned up quickly, and complaints or issues are promptly addressed so any potential issue does not become a true liability.

Robust Data Protection Assets

From online transactions to data-driven payment platforms, there is very little done without the use of customer data. Data is the lifeblood of every modern business. Hacking and data breaches have plagued even the largest corporations with information technology departments dedicated to this issue full-time. Ensuring your business has the most up-to-date hardware and software will help stop potential data breaches.

Cybersecurity Training

Even the best hardware and software cannot prevent cybercrimes from impacting a business if an employee makes a crucial mistake. Consistent and up-to-date cybersecurity training will help head off any attempts cybercriminals make to infiltrate your network. Teaching employees which emails are legitimate, how to avoid scam websites, and not to respond to unsolicited phone calls claiming to be from “customer support” will help mitigate the risk of falling victim to cybercrime.

Improve Security and Emergency Response Plans and Equipment

No business wants to suffer theft or accident, but there is a marked difference in results when businesses prepare before these events occur. Preventing theft or a worse crime begins by ensuring you have proper safeguards on doors and windows in addition to a monitoring alarm system. Becoming a business member of a Crime Watch or chipping in with others close by to have private security patrol the surrounding area may help reduce the risk of crime. In the case of emergencies, such as fire, proper sprinkler installation in addition to employee training can help reduce the damage incurred by your business, both to property and humans.

Review Your Coverage and Covered Employees

Sometimes accidents are inevitable, but one of the most costly mistakes an employer can make is not realizing a particular employee or category of employees is outside of their insurance coverage.

Business owners should regularly review their insurance policies to ensure that all relevant staff are covered, especially in high-turnover industries, so if an employee must take an action such as throwing out bad stock or breaking glass to provide ventilation in an emergency, it is not fatal to the business.

We can provide additional input and help you choose the right policies to keep your company properly protected.

How to Estimate the Value of Your Possessions

In each of our homes lies a treasure trove of possessions. Some are utilitarian with high monetary value, such as a refrigerator, but have little emotional pull. On the other hand, there may be items handed down from past generations that would likely stir great emotions but have low market value to others. Many would value their possessions based on their attachment to them, but is that how it works when you’re shopping for homeowners insurance or renters insurance? Below are a few ways to estimate the value of your possessions before negotiating your insurance policy.

Calculating the value of your possessions

It’s not easy to calculate the value of your possessions, but using a few easy strategies, you can be well on your way to determining the amount of insurance coverage that is right for you.

1. Walk around your home or apartment and take photos or video of everything you’d like to insure.

2. Make a list of everything you have photo or video proof of, and begin to estimate each item’s worth:

For items with receipts, take photos of the receipts and any warranties.

For expensive possessions like furniture or electronics, getting the model name or number and date of purchase is crucial.

3. For clothes, shoes, nonelectronic household items, and any other household possessions, calculate the value you estimate these all to be worth.

4. Add each group together, and that is the estimated value of your possessions.

How much insurance do you need?

One handy tip is to estimate the amount of money you can afford to pay out of pocket to replace your possessions and subtract it from the total value of your possessions. Arriving at that number will ensure a lower monthly payment but guarantee the peace of mind that comes from comprehensive insurance coverage.

Don’t hesitate to reach out so you’ve got as much information as you need to make a decision that’s best for you.

When Can I Deduct Car Insurance from My Taxes?

Taxes weigh on everyone’s minds, and many are looking for deductions relevant to their circumstances in order to reduce or eliminate an onerous tax bill. Oftentimes, we are familiar with deductions related to our homes or businesses but are less certain about one daily part of our lives: our cars.

Do you use your car for business-related purposes?

While pure personal use of your vehicle is not tax-deductible, there are certain situations where you may be able to deduct car insurance premiums from your taxes. A word of caution: commuting to and from work in a personal vehicle does not qualify for a tax deduction.

The two most common ways to deduct car insurance premiums are:

1. If you are self-employed and the vehicle is used to further your business (such as a house painter using his truck to complete jobs)

2. If you are an employee but your employer does not reimburse you for business-related expenses related to your case (such as a personal assistant getting an employer’s dry cleaning or driving an employer around town)

Are there any other deductions when it comes to my vehicle?

Yes, you may also be able to deduct other costs such as fuel, parking fees, car repairs, and even depreciation if your costs are more than 2% of your adjusted gross income (AGI). Every penny counts, so don’t miss out on auto expense deductions that could benefit you this tax season.

Contact our office today with any of your insurance coverage questions or concerns. We’re here for you.