Eeeek! Don't do these things when you're buying a home!

Your agent keeps telling you not to make big purchases during the home-buying process, but you just don’t understand why buying a new couch or opening a credit card to save 20% off your $50 purchase will be an issue.  Any purchase, however big or small, can change your credit score and mess up the deal before it’s even closed. Here are some thinkgs to keep in mind and avoid doing until you close on your new home - and avoid the "what were you thinking?" questions later.

1. Don’t quit your job

I know you’re excited about your new home, but this is NOT the time to start re-evaluating your entire life. A new home is enough excitement for one month. Save the job search for next month.  I once had a buyer who gave his 2 week notice 11 days before the scheduled closing.  "But I'll be making $80 more a week," he said, figuring that made his buying position stronger.  Think again!  That $80 a week was a costly mistake that ended up costing the buyer money to extend the closing date out several weeks and lock in his interest rate.  Luckily the buyer was working with a super lender who was able to make things happen for him.

2. Don’t make large purchases

It’s really tempting to splurge on big scale purchases like a new car, furniture or appliances to match your fancy new home. It is even more tempting when a store is offering you a $10,000 line of credit with no payments for one year, but just don’t do it. DO. NOT. DO.  IT!  At least not until the deal has closed and the keys are in your hands.  Sure, you can window shop, measure and plan where your new furniture will go, but don't buy it or even put a deposit on it until you have closed on your new home!
 
3. Don’t make large deposits or withdraws  
 
If you are going to accept a large amount of money or move a large amount of money from one place to another, make sure your lender knows. Most of these things can easily be explained and likely will fly under the radar so long as they are brought up before hand and not discovered by your lender later. Remember, until the deal is signed and everything is done, you are under a watchful microscope. Don’t do anything to mess it up. I had a lovely buyer couple a few years ago who received the proceeds of the week's collection plate at their church.  Well, that $1,117 deposit into their checking account raised a flag with the lender.  Can you imagine how difficult it was to source that income?  Each parishioner put in a different amount of cash, with parishioners putting in everything from $2 to $50?  The lender worked out a solution with the church, but not without a few headaches and sleepless nights!

4. Don’t open or close lines of credit
 
Opening up new credit cards or closing old ones just before signing on your new home can potentially affect your credit score, and not in a good way. That being said, as mentioned before, wait until your mortgage and title are secure before making any risky moves.  Is it worth putting your mortgage in jeopardy in order to save 20% off your purchase?  Please wait to make those purchases and DO NOT open a new credit line!  And don't close a line of credit unless your lender advises that you do so.

5. Don’t pay your bills late

This may seem obvious but it tends to slip some homebuyers' mind. Stay on top of all your payments and don’t let late fees creep up on you. Don’t ruin your credit score days before your loan goes through.  This is especially easy to do if your current mortgage or property tax payment is due shortly before the closing on your new home.

Just remember that once you submit your loan application your finances and job status will be under scrutiny.  Any change can affect the closing process and prevent you from moving into that beautiful new home. It’s always best to wait until the keys are in your hand before making any changes - even if you think they won't matter.  And as always, feel free to ask your agent and lender if you have any questions or concerns!

Thinking of Buying a Vacation Home?

Are you considering buying a vacation home?  Weighing the pros and cons? Wondering if it makes financial sense? There are several benefits you can reap besides just being at your favorite vacation spot in your own place.  Here are some of the bonuses you can realize from owning a second home:

Rental income

When you buy a home in a popular vacation destination, you may be able to rent it on a short-term basis to other vacationers. That rental income can help you cover the costs of your vacation home. Depending upon your situation, keep in mind that you may have to pay a rental or management company to coordinate renters or maintenance.  VRBO and Air BnB are a couple of websites that allow you to easily schedule rentals and collect payment.

Tax benefits 

You may be able to deduct the mortgage interest, property taxes and repairs you pay for your vacation home.  If you use it as a rental property you may be able to use your expenses to offset your rental income. Consult a tax adviser to see which tax rules and laws apply in your particular situation.  

Home equity 

Just as with your primary residence, the value of your vacation home may increase over time, giving you equity in your vacation home. As you pay off any mortgage on the property, you’ll also build equity.  You can opt to cash out some of the equity to fund other investments, projects, college tuition or whatever you need or want to do with the money.

Family bonding

Having a "free" place to stay at the beach or the mountains can be a stress reliever, both in providing a vacation in a place you love, and in not having to worry about finding a rental for the dates you want and price you can justify.  A vacation home also makes for a comfortable, familiar place for family to come and hang out and make lifelong memories.  It can be a nice place to invite friends to come visit, too.

The answers to these five questions can help you figure out if vacation homeownership is for you:

1. Do you have a down payment? 

Vacation home lenders typically require a 20 percent to 30 percent down payment. Talk to a mortgage professional to see what options you have for financing.  Condos generally require a larger down payment than single family properties.  And closing costs are also generally higher, as you need to escrow extra funds for prepaid condo fees.

2. Can you afford the additional expenses of vacation homeownership?

A vacation home generates many of the same annual and monthly bills as your primary home. Can you afford community association dues, homeowners insurance, insurance for natural disasters like floods and hurricanes, utilities, telecommunications and property taxes for a vacation home?  If you plan to rent the property you will also need to be sure it is fully furnished and equipped.  With tenants coming and going, items are more likely to break or "disappear" so you'll need to factor in replacement and repair costs.  You'll also need to calculate how much you can rent the property for, and for how many weeks or months, to see if it can generate enough income to cover your costs - or at least cover a portion of your costs if you need help with the bills.

3. If you plan to rent, will you be bothered by other people using your home?

As outlined above, rental income can help pay for your vacation home, but renters will also spill things on your floors, steal small decorative items and increase the wear and tear on your property. If you can’t deal with minor damage and disappearing pots and pans, you won’t be a happy landlord.  When furnishing a rental property you need to remember that it is a business and not your residence, so look for sturdy furnishings, don't buy top (ie, expensive) quality items, and don't decorate with personal things like photos of your family and your favorite candy dish from Aunt Mary.  If you'll be bothered by others renting the property, you might want to consider buying a less expensive place so you won't need to rely on rental income to afford it.

4. Do you plan to vacation in this location for several years?

There’s no guarantee that home values will rise in the future.  If you decide to sell in just a few years, is the property in a market where you'll be able to recoup your closing costs and expenses? One of the major reasons for investing in a vacation property is the potential for making a profit when you sell. The longer you plan to stay, the better your chance of building home equity before you sell.  

5. Will You Use It?

To get the most possible enjoyment from a vacation home, you have to stay in it. And the shorter the drive, the more likely you are to use the home. Or if it's in a place you go to every year, such a Disney World or Lake Tahoe, you'll likely use it all the time even though you have to fly there.  But if you just think you're going to like a spot you might want to "practice" the commute before you commit to a purchase.  That condo in Myrtle Beach might seem like a sweet deal when you spend a week there playing golf, but does it make sense to buy?  How often will you make the 12 hour drive?  Can you get a direct flight? How expensive is it to rent a car if you fly there? The sweet deal may end up being a costly mistake.

With all that said, if you’re buying a vacation home solely as an investment, being close by may not be as important to you.  The more important factors may be the rental income and year over year return on investment.

Are you still leaning toward buying a vacation property? Then give me a call and we'll come up with a plan to make your investment goal a reality!

The Importance of Credit Scores When Applying for a Mortgage

Credit reports and credit scores are a fact of life. Lenders use your scores to decide whether you’ll likely be able and willing to pay back a mortgage, whether to give you a credit card and how much you’ll pay in interest for most forms of credit. Many credit card and car loan companies are now providing free monthly credit scores to borrowers.  These scores don't tell the whole credit story, but they can give you an idea of how strong your credit is before you apply for a mortgage.  To get a real look at your credit worthiness, a lender will obtain a credit report, which will go back many years, depending on your age and how long you've had any credit lines.  

There are ways to improve your credit score, some easier than others.  Speak with a mortgage or credit specialist who can provide you with information on various ways to improve your credit, both in the long and the short term.  If you want to correct an error on your credit report, you can do that at no cost. You'll need to contact the credit bureau(s) directly and provide the information they request in order to fix the error.  There are three major credit bureaus, each of which may have a slightly different credit score, but in general, the scores should be within a few points of each other.  The credit bureaus are Experian, TransUnion and Equifax.

Here's a look at some myths and facts regarding your credit score.

Myth: If you experience credit problems, your credit score will not improve for seven years.
Fact: You can make a significant difference in your credit score by changing your ways and paying bills on time. That's because lenders place more significance on the most recent entries on your credit report rather than the old ones.

Myth: If you pay off your debts, the record of your bad debt will disappear.
Fact: Bad debts, charge-offs and late payments can remain on your credit report for up to seven years. That's why if there were extenuating circumstances to explain your trouble paying on time, you should send the credit bureaus a letter about your situation.

Myth: If you catch up on your late payments, they’ll be wiped off your credit report. 

Fact: Your credit report must reflect that you caught up, but it will also show that you were late.

Myth: If you have a high credit score, one late payment won't hurt.
Fact: Unfortunately, this is a case of one bad apple spoiling the whole bunch. The first time you are delinquent, you can lower your score by as much as 100 points. The later the payment, the more it will hurt your score.

Myth: If you check your credit report too many times, you'll be penalized.
Fact: People can check their credit report as many times as they want without hurting their credit rating. In fact, credit bureaus encourage you to keep a watchful eye on your credit report so you can spot any mistakes.

Myth: If you close as many credit cards as possible before applying for a loan, you stand a better chance of being accepted.
Fact: Having open credit cards doesn't hurt your credit score. If they are in good standing, they may even help your case. A credit card only hurts your chances when it's maxed out. Try to keep your use to no more than 25 percent to 30 percent of your total credit line.

Keep in mind that there are several companies that will periodically provide free or low cost credit reports.  With so much information available online, it is a good idea to keep a close eye on your credit report.  If you see anything that looks suspicious, contact the credit bureaus immediately to get to the root of the errors and have them corrected as soon as possible.

What the Heck is PMI?

What is PMI?   

PMI, or Private Mortgage Insurance, is required by private lenders as well as government backed loans, when borrowers put down less than 20% of the purchase price when buying a home. It basically protects the lender if a borrower stops making payments on the mortgage loan. 

How is PMI Calculated?

Good question.  PMI calculations can be very confusing! It is also important to know how much it will cost to add the PMI before you make an offer on a home.  The PMI can make the difference between being able to afford a home or not.  PMI is calculated per a table that assigns a PMI factor and depends on several factors, including:

  • Term of mortgage—The length of mortgage terms, which could be anywhere from 10 to 40 years
  • Financial status—Credit worthiness/Credit score
  • Down payment—The amount of money put down during the closing of a loan

For instance, for a $300,000 purchase with a 5% down payment (loan amount of $285,000) and assuming a 740 credit score for the purchase on a primary residence single family home, the PMI factor would be 0.62%.

Calculation: $285,000 x 0.62% = $1,767 annual cost / 12 = $147.25 monthly premium 

To see how rates are assigned, see the rate chart PMI Rate Chart bit.ly/2wBGF09

  1. monthly premium is the most common form of PMI payment offered by lenders. This option takes the PMI payment and adds it to a borrower’s monthly mortgage payment. Your mortgage payment amount is the same each month and includes the PMI as part of the payment.
  2. An upfront premium is a one-time premium paid at closing. This payment option is most common for conventional financing options (5% to 19% down payment).
  3. An upfront and monthly premium is a combination of both types of payment options. This type of payment option is typically required of borrowers using a government insured mortgage product, like the Federal Housing Administration (FHA) or United States Department of Agriculture (USDA). 

There are only three ways to avoid PMI:

  • Make a down payment of 20% or more
  • Apply for a VA loan (if eligible). A VA loan however only avoids the monthly mortgage insurance payment. Unless the borrower is a disabled veteran, he still has to pay the upfront premium. But the burden of the monthly PMI premium is removed.
  • Lender paid PMI. The lender charges a higher interest rate, but pays the PMI upfront for the borrower.

How to Remove PMI

Getting rid of PMI is pretty simple, but you need to take care of it yourself and not rely on the lender to do it for you. You need to pay down the loan’s principal balance to 80% (or less) of the home’s original appraised value, or to 80% of the home’s current market value. All this means is that a borrower must show they have at least 20% equity in the property. Once you do this you need to contact your borrower and ask to have the PMI canceled.  You will need to provide documentation that the loan is paid up to date and ask for (and pay for) and updated appraisal.  Although lenders are genearally required to eliminate the PMI when your mortgage balance drops below 78% of the homes original appraised value, make sure you stay on top of the situation!  Using the example above, once you have paid your mortgage down to $240,000 you are eligible to have the PMI removed and save $147.25 per month!

If you have an FHA loan you may be required to refinance into a conventional loan in order to remove the PMI.  Always check with your lender to be sure you have the correct rates and information before making an offer on a property!

 

 

 

THINKING OF INVESTING IN A VACATION HOME?

Looking to buy a vacation home? There are many benefits of this type of investment.

 

 

Keep reading to find out how you can reap the rewards that come with a second home. 

Mortgage-Interest Tax Deduction

Whether you rent it out or not, you can deduct the mortgage interest as long as you use the home more than 14 days or more than 10 percent of the number of days the home is rented annually at a fair rental—whichever is longer.

Qualified second homes include houses, condominiums, cooperatives, mobile homes, house trailers, boats or similar properties that have sleeping, cooking and toilet facilities.

Here's an interesting twist on the mortgage interest deduction: if you take out a home equity loan on your first home and use the funds to acquire your second home, the interest on the home equity loan is also deductible. That's three mortgage interest deductions off your tax return!

(Consult IRS Publication 936 for a complete discussion of how mortgage interest for a second home is deductible.)

Purchase Your Future Retirement Home Now, at Today's Prices

Though your second home may be a vacation home now, if you buy right you can convert it into your principal residence later. This way you can lock in the price of the home you'll retire in at today's market prices. 

Vacation Homes Produce Their Own Income

Renting out a second home occasionally or often can help you pay for the property with OPM (other people's money). Check with your tax advisor about how much of the upkeep and management expenses are deductible against your income.  Although you may be able to generate rental income from your vacation home, it may not cover your ownership costs. 

Consider Different Styles of Properties in a Vacation Area

To minimize upkeep and have a more secure environment, a condo may be preferable to a single-family home. If you plan on converting it into a retirement home, consider what type of home you'll want as a full-time residence.

And When You're Reading to Start Searching, You Know Who to Call!

MORTGAGES: CONDITIONAL APPROVAL vs. PRE-QUALIFICATION vs. PRE-APPROVAL vs. APPROVAL

It can be confusing enough to buy a home and apply for a mortgage, but adding in terms like "pre-approval," "pre-qualification" and "conditional approval" may just put you over the edge!

Prior to beginning a home search, you should get in touch with at least one mortgage professional in order to truly determine how much house you can comfortably afford.  The lender will ask you some basic questions, such as information about your income, debts, savings, etc.  The lender will run a credit report and using that and the information you've provided, the lender will give you a general purchase price.  If yoyu're buying a condo, this number will fluctuate depending upon the monthly association fee and what's included - or not included - in it.  This was called a pre-approval until somewhat recently.  Now it is called a pre-qualification.  The pre-qualification will tell you how much you are eligible to borrow. Once you have this in hand, you can start house hunting in earnest. A pre-qualification is provided by a mortgage professional or broker (the person you contact to start the mortgage process) and is based on a review by the loan professional of the information you have provided about your financial situation.

Once you have an accepted offer on a house you will need to provide additional, more detailed financial documents to your lender, along with information about the specific property you are purchasing.  Your lender will order a bank appraisal on the property and will send that and your financials to underwriting.  Mortgage underwriting is a process by which a lender determines if the risk of providing you with a loan falls within allowable parameters. An underwriter conducts a strict review of your documents to make sure your information matches what you originally provided to the loan professional.  As the underwriting process moves forward, there may be some additional conditions that need to be met before the loan is finalized. This will result in a "conditional approval."  The conditions that must be satisfied are listed, and are usually things like:                  

  • Final employment and income verification                                   
  • Most recent pay stub
  • Most recent bank statement
  • Proof of homeowner's insurance
  • Gift letter for any funds being given to you                                                  

This information is required before the loan is completely approved. A conditional approval comes from the mortgage company (not the person you applied through). If the conditions aren’t met, you might not be able to close on the loan.

Buyers with a conditional approval for a home loan are at risk for denial if they fail to meet any of the conditions laid out by the lender.

Here are a few reasons why you might be denied:

  • The underwriter is unable to verify the data you provided
  • The home you are trying to purchase has an unexpected lien.
  • You experienced a decrease in income.
  • You had negative entries on your credit report that weren't previously disclosed or discovered

Once all conditions are met, your loan will be approved and you will be able to close on your new home!

It can seem like an arduous process, but it is being done for your long term financial protection.  And you can take solace in the fact that everyone else who is buying a home is going through the same process!

 

Saving for a Home While Paying Off Student Debt

Due to the rising cost of a college tuition, more and more people are graduating with as much as 6 figures of student loan debt. Putting money toward debt first is a smart financial decision because every day the debt accumulates even more interest. These new graduates are putting off getting married, having children and even buying a home in order to pay down their student loans more quickly.

But it doesn't have to be this way. Many people successfully pay off their student loans while saving for a home. What are some of the ways that people have achieved these two financial goals simultaneously? 

1. Consider Your Debt-To-Income Ratio

This number is used by banks to determine whether or not you are a good candidate to take on even more debt. Typically, you are in good shape if your debt-to-income ratio is less than 40 percent. Calculate your debt-to-income ratio by adding up all of your monthly payments (auto loan, student loans, rent) and divide that number by your total monthly income. If your debt-to-income ratio is very high, you will definitely need to consider paying down your debt before you apply for a mortgage.

2. Make a Realistic Plan with a Reasonable Timeline

Saving up a down payment for a home is not an easy task, and splitting your money between student loans and home savings can make it an even morere daunting process. Try to decide how much money you can realistically dedicate to savings and debt repayment. Also, look at homes prices in an area where you might want to purchase a home. This will help to give you an idea of how much money you will need to save for your down payment.

3. Come Up with a Graduated Savings Plan

The next step is to come up with a monthly savings plan to achieve your goals. Consider using a graduated savings plan where you start out dedicating more money to your student loans than your home savings fund. As your loan balances start to shrink, you can slowly move towards saving more money for your home and putting less money towards your student loans. Early on, you might want to put 90 percent of your discretionary income toward student loans and 10 percent toward your future down payment. By the 3rd year, you might shift to a 50/50 split. By year 5, you might be close to paying off your debt and achieving your goal of buying a home. 

Once you have saved enough for a down payment and finished paying off your student loans, you will be well on your way to homeownership.  

4. Speak with a Mortgage Lender and Find a Great Realtor

You will need to speak with a mortgage lender to get a pre-approval for a loan and to be sure you understand all the costs associated with purchasing a home.  Without a current pre-approval you won't be able to make an offer on a home when you find one you like.  Your Realtor can help you find a lender and will explain the buying process in your area, discuss market conditions, and guide you through the transaction so you can buy a place of your own!