Your credit score is the most important factor in determining if you qualify for a loan. It is also crucial in shaping the terms of your loan. A credit score is a three-digit number that a lender uses to decide how trustworthy you are when it comes to managing your finances and your ability to repay a loan. The higher your score, the less risk you are to the lender and the more optimal the terms of your loan will be. Credit reporting agencies use seven primary factors in calculating your score.
1. Your payment history is the most important because it reflects on-time payments, missed payments and those that were late.
2. The ratio of the amount of credit you are using against your available credit is factored in. Try to keep credit balances no more than 30% of the available credit.
3. Total debt will be part of the credit score calculation. Loans, collections, credit cards and other credit accounts are part of the equation.
4. The credit score will reflect what the mix of your credit accounts are. It looks at auto loans, mortgages, store credit and credit cards.
5. The age of your credit accounts are an element of your credit score. Older histories have less impact on your score than more recent credit histories. Lenders want to see established histories of on-time payments.
6. Inquiries into your credit by various entities are known as hard inquiries. Too many inquiries will lower your score.
7. Credit scores are impacted by debts that show up in public records. These include tax liens, civil judgments and bankruptcies. Paying off any of these liabilities will increase your credit score.
Call or email me and I will help you navigate what impacts your credit score so you can have the best loan options.
Saving for a down payment for a home doesn’t have to be a big challenge, nor does it have to have a big impact on your everyday budget. If you can build up a big enough savings account without having to drastically change your spending habits, then you can be motivated to do what you need to do to make homeownership a reality.
1. The easiest way to start your savings plan is to have a portion of your paycheck directly deposited into your savings account. If your employer will agree to make a split deposit on your behalf, this is the perfect way to not spend your entire income on everyday incidentals. If what goes into your savings is a reasonable amount, you likely won’t miss it, and you can still meet your essential monthly spending obligations.
2. Analyze where you spend small amounts of money on a daily basis. Money spent on coffee and snacks or drinks after work can add up to as much as $50 a day. Cut back on these nonessential items and direct those funds to your savings.
3. Small change adds up. Supplement your larger checking account transfers with periodic smaller amounts that don’t impact your budget.
4. Reduce your overhead by downgrading your living space and monthly rent. Live small, and you will find that the money saved can quickly increase your savings balance.
Call or email me today, and we can evaluate your financial situation and come up with a custom plan to help you save.
In these days of ever-watchful lenders, you, as a consumer, can put yourself in the best possible position to be approved for a mortgage by taking a few simple common-sense steps before you start your home search.
The first step is ensuring you are paying your bills on time. As simple as this sounds, lenders find it extremely important to know that you’re capable of paying on your current debt before they permit you to saddle yourself with even more debt–perhaps more than you can handle.
Second, if you aren’t doing so already, control the amount of your current debt, particularly revolving debt such as credit card balances. Pay special attention to the ratio of your balance to your limit and try to keep this below 30%.
For example, if you have a credit card with a $500 limit, try to keep the balance under $150. If the ratio goes too high, even on lower-limit cards, it looks to the credit bureaus as though you are about to reach the full limit of the card, which tends to drive down your credit score.
Having multiple cards that are at or close to their limits may start impacting the number of mortgage programs as well as the dollar amount you are able to qualify for.
It’s always a good idea to either pull your own credit, which you should be regularly doing anyway, or ask your mortgage professional to pull it.
If it turns out that there are unexpected items on your credit report that need to be addressed and/or removed, this action will give you the opportunity to take these steps before starting the approval process.
But don’t leave it too long; you can expect that any type of action to correct a credit report will take a minimum of 30 days to affect your report.
The answer to this question will be different for everyone. It will be based on your personal situation and financial goals. Once you define and prioritize your goals, you can develop the plan that works best for you.
If you come into some extra cash from an inheritance or a bonus from work, you may be narrowing the choices to spending it on paying off your mortgage or directing it to your child’s education. Investing in a 529 college savings plan allows you to contribute to the savings account and withdraw funds tax-free to pay for college tuition and other educational expenses.
Deciding on the college expenses choice will be dependent on your child’s age. Paying off your mortgage will be the better option if your child is elementary school-age or younger. You can still open a 529 savings plan and gradually grow it over the next several years until college age comes.
Evaluate your home’s equity. If you have less than 20% equity in your home, then paying down your mortgage is a good choice. Doing so will help you get closer to eliminating private mortgage insurance.
If your mortgage interest rate is higher than 3%, you should favor paying off your mortgage. Typically, 529 plans do not pay a very high interest rate, so paying off your home would be a wiser move.
The desired liquidity of your assets and tax benefits will also contribute to your decision-making. Call me, and I can help you decide which option best fits your personal financial situation.
The cost of having a mortgage is the interest you pay on the principal over the life of the loan. If you are current on your mortgage, restructuring your loan can potentially save you thousands of dollars in mortgage interest.
An easy way to reduce the interest you pay is to add a little extra to your monthly mortgage payment. On a $200,000 loan with a 6% interest rate over 30 years, you could pay as little as $100 more per month and save more than $49,000 in interest over the duration of the loan. You would also be able to pay off the mortgage five months sooner than the due date.
You can accomplish the same interest savings if you simply split your monthly mortgage payment in half and pay it every two weeks. Think of it as a biweekly payment plan.
Another way you can have your loan restructured to better fit your budget is to request that the lender recast your mortgage to gain a lower monthly payment.
If you apply a minimum lump-sum payment of $5,000 towards your principal, your lender can reamortize the loan with the new reduced loan amount. The interest rate remains the same, but you will have lower monthly payments. The bank fees to recast your mortgage are just a few hundred dollars.
Refinancing is used most often to restructure a loan to save interest. A mortgage refinance replaces your existing loan with one that has a lower interest rate.
Using the example of a $200,000 loan with a 6% interest rate, a refinance to a 5% rate will reduce the monthly payments by $125. You will have to qualify for the new loan and expect to pay 3% to 6% of the new loan amount in closing costs.
Email or call me, and we can look at what restructuring option works best for you.
Your home is likely the biggest asset you own. Having a financial plan to manage it is recommended. If you have a plan, you will be better positioned to pay and plan for home improvements. A financial strategy will budget for paying the mortgage, taxes, insurance, upgrades and routine repairs and maintenance. The benefit to you will be that you know how much you have to spend and what you need to put aside for maintenance and any desired improvements.
By analyzing your cash flow, you may find that you can pay a little extra on your mortgage every month, enabling you to pay down your loan faster. If you have a loan, you will need to have insurance. Be sure your insurance portfolio includes not only basic coverage but also liability coverage to protect from lawsuits. Make sure your insurance planning includes additional policies for natural disasters.
Property taxes will always be part of your financial plan, so keep track of how much they have crept up over past years and budget accordingly. Be aware that your tax obligation can possibly be reduced if recent sales show diminished value. Challenge your assessment.
Budget for maintenance and improvements. Your best ally will be the home inspection report you received when you bought your home. Be prepared to spend 1% to 3% of your home’s value every year on maintenance. A successful plan may yield extra funds for improvements.
Give me a call, and I will help you look at the total picture of the cost of home ownership to help create your financial plan.
If one of your goals for the new year is to buy a new home, then a vital part of that goal is to improve your credit score. Don’t let these credit score myths catch you off guard.
1. Credit cards should always have a modest balance. The truth is that credit scores are positively impacted by bills that are paid off and negatively impacted by credit lines that are constantly maxed out.
2. It’s not a big deal if you make a payment on a credit card a day or two late, as long as you pay it off in full. The reality is that your credit score benefits from timely payments of the balance due. Scores can drop as much as 100 points because of late payments.
3. To eliminate negative credit history, close out old credit cards. Since the credit history from a closed card follows you for seven years, take advantage of the fact that the longer you use a particular line of credit in a responsible manner, the more positive impact it will have on your credit score.
4. If you check your credit score too often, your score will go down. The truth is that when you do a check on your own, it will only be a “soft” hit, and your score won’t be impacted. It is important that you monitor your score periodically.
5. Credit scores are affected by your age, sex and other personal non-monetary issues. This is a myth because federal law prohibits discrimination based on issues like race, national origin or sex. What matters are concerns related to income and debt, expenses and what your credit history is.
The area of credit scores can be tricky to navigate. I invite you to call or email me for an appointment so we can set these myths aside and be able to maximize your credit score.
If you are buying a home, make sure you watch out for these mistakes.
1. Going house hunting before finding a mortgage. You will get a better loan if you have the opportunity to take time to shop for it rather than trying to make an acceptable offer on a home without your financing being in place. Your negotiating will be more successful if you can demonstrate that you are a qualified buyer.
2. Taking the first loan offering because it looks okay. Just because the interest rate is the lowest you have seen, that doesn’t mean it’s the best loan for you. You must make side-by-side comparisons of different loans. Compare interest rates, annual percentage rates (APRs) and loan fees on the “loan estimate” sheets of various loans.
3. Making your loan selection based on marketing promotions. Beware of advertising that says that the lender will be paying for some of your loan fees, such as mortgage insurance or all of your closing costs. You will actually be paying higher interest for the loan to offset what the lender is offering.
4. Not knowing how to read the loan documents. Loan documents have simplified since 2015, making it easier to compare loans. In layman’s terms, the loan estimate will break down the APR, the interest rate, payment, loan terms and cash needed at closing. Just prior to closing, you will receive a similar-looking document, but the line items will be actual amounts, not estimates.
Contact me for an appointment prior to house shopping so we can avoid these mistakes and get you the best loan for your money.
To “escrow” funds in real estate means to place funds in the hands of a third party by means of a legal agreement until certain conditions have been met. In real estate, escrow is used in two different ways.
In a home purchase, an escrow account is used to protect deposit monies until the fulfillment of the terms of a purchase contract. The earnest money deposit is held in an escrow account until closing, at which time it will be applied to the down payment for the buyer. If the sale were to fail because of buyer default, the down payment funds are likely going to be released from the escrow account to the seller as damages. Sometimes an escrow account will retain some funds after closing until certain conditions are met by buyer or seller.
In lending, escrow accounts are used to hold funds for payment of taxes and insurance by the borrower. Some low-down-payment loans require escrow accounts to ensure payment of these obligations, while some borrowers simply prefer to pay into these accounts on a monthly basis to insure timely payment when due. The lender will incorporate the projected taxes and insurance into your monthly payment and, when received, will set the required amounts aside in your escrow account. The taxes and insurance amounts will adjust when tax assessments and insurance rates change. Escrow accounts do not contain funds for HOA dues or supplemental taxes.
Escrow accounts can be managed by escrow companies, escrow agents or mortgage servicers. The disadvantages of escrow accounts will be higher monthly payments and occasional incorrect estimates of what needs to be held in escrow, resulting in fluctuating monthly mortgage payments.
Call or email me, and I will show you your loan options and determine if having taxes and insurance escrowed is right for you.
Preparing to buy a home begins the moment you make the decision to become a homeowner. It may take weeks, months or years to ready your financial status so that you can sign your first purchase offer. To help ensure your eventual success, here are five steps to follow.
Getting your credit in order should be the first thing you do. Pay off student loans and credit cards. Your credit score will go up, and lenders will look favorably at a lower debt-to-income ratio for qualifying. The better your credit score, the better the rate and terms of your loan.
Start saving as early as possible for a down payment. The higher the percentage of the purchase price that you can put down, the more favorable your loan terms will be. Once you pay off your debts, more money can be allocated towards your down payment.
Perform a personal expense audit so you can pinpoint where you can save. It will also help you budget for your housing expenses once you close. Your new-home budget should include maintenance costs and utilities in addition to the mortgage, taxes and insurance. Having reserves will make it easier to qualify for your loan.
Plan for closing costs when you start setting aside down payment funds. Expect your closing costs to be 3% to 5% of the loan amount.
Please contact me for a personal review of your financial status so I can help you prepare to buy a home. I am always here to help, and I am just a phone call or email away.