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Credit Inquiries: Why Lenders Care

FICO scores are calculated using an algorithm originally developed by The FICO Company. This algorithm considers five different characteristics of a credit file. Of course, payment history carries the most weight, contributing 35% to the total, three-digit score. The second most important relates to current account balances and credit limits. Scores need consumers to use credit before scores can be properly calculated so having a balance is important. 30% is attributed to this category and the ideal balance appears to be around one-third of credit lines. Keeping balances around this one-third target causes scores to improve.

How long someone has used credit is also a factor, making up 15% of the score and the final two of the five both contribute 10%. Types of credit used and credit inquiries. Types of credit boosts scores when consumers responsibly use different types of credit and credit inquiries logs in the number of times someone has requested credit. But about that 10% for a credit inquiry, if it makes up such a small part of the total score, why do lenders care about this category?

For one, requests for credit over the past year or so won’t hurt scores but making several requests for different credit accounts in a relatively short period of time can indicate the consumer is going through some sort of financial difficulty, perhaps being laid off or otherwise a loss of regular income. Such requests for credit can cause scores to drop, but still, it’s just 10% of the total score.

Each time a consumer makes a request for credit, that request is recorded in the credit file. Again, an occasional request is fine. What can cause a loan application to stop dead in its tracks is to see a recent credit inquiry on a credit report but no indication any account has been opened. It usually takes about 30 days. That can mean someone opened up a credit account or maybe bought a car and financed it but the amount borrowed and the terms haven’t yet made it to the credit bureaus. When a lender looks at a credit report with recent inquiries, there is no way the lender can properly determine a consumer’s new monthly payments. Someone with relatively high debt ratios could take out a new car loan which could push ratios so high they can no longer qualify.

When this happens, the lender will request the borrower to explain the inquiry and verify that no account was opened and if an account was opened, to send in documentation regarding the terms of the new account. That’s why loan officers tell you that once you apply for a mortgage, just sit tight with any other credit requests until and after your loan is ultimately funded and closed.

Position Realty
Office: 480-213-5251

Creative Ways To Save For A Down Payment

You’d love to buy a house, and if it weren’t for that pesky down payment, you’d be sitting pretty in a place of your own, right? You’re not alone. Not surprisingly, the “top challenge for would-be homebuyers is the down payment requirement,” said The Mortgage Reports. In a recent study, “Over half of potential buyers claimed saving a down payment was a bigger issue than credit scores, income needed or housing prices.”

There are some creative ways to get there.

Look for down payment assistance

Many homebuyers don’t realize that these programs even exist. “Down payment grants are designed to help eligible buyers bridge the gap between their savings and the required down payment for a mortgage,” said The Mortgage Reports. “This money doesn’t usually have to be repaid.”

Grants are available through the Department of Housing and Urban Development (HUD) and typically have eligibility requirements that are tied to income. In addition, “You must be a first-time buyer purchasing a primary residence,” they said. You can check for available grants here.

Save your pennies

Every little bit helps! Get used to paying for things with cash, which is another tip financial analysts recommend to keep track of spending. At the end of the day or week, put aside any change. You’ll be surprised how it can add up over a few months.

Shop for a better savings account

Some banks offer special rates or even kick in money if you open a new account and maintain a certain balance. If you already have a good head start on your down payment, this could be a great way to get a bump. Also pay attention to any fees you are currently paying at your bank just to have your savings and checking accounts. If you can’t negotiate to get them removed, it might make sense to open fee-free accounts elsewhere.

Among the best out there: “Discover Online Savings has no minimum deposit requirement and offers a competitive APY of 1.40%. In addition, there’s no monthly fee and no minimum balance requirement,” said NerdWallet in their review of the best savings accounts of 2018. “Discover is a decent choice for simple, stress-free savings.” Discover also offers bonuses that are tied to a $15,000 minimum deposit.

Do automatic transfers

Setting up an auto transfer from your checking to your savings on payday is a relatively painless way to pump up your down payment. You’ll want to keep track of what’s coming out, and when. This is no time to get hit with an overdraft fee.

Get a gift

For many types of loans, the down payment can come via a gift. Just make sure you know the rules so you don’t run into trouble. “Even though lenders do allow gift funds, they also require mortgage applicants to disclose the source of these funds,” said Cherry Creek Mortgage. “There are specific rules for using gift funds as a down payment. For starters, your lender will need information about the donor. Donor requirements vary by lender and mortgage program. Some programs only allow gifts from a blood relative, or in some cases, a godparent. Other programs, however, will also allow gifts from a charitable organization or a non-blood relative. Speak with your lender for information on acceptable donors.”

Save all raises and bonuses

If you get a raise or a bonus during your saving period, don’t celebrate by blowing it on a new living room set. Pretending it didn’t happen and socking the money away will pay off in the end. “For a set period of time, consider saving all extra income you receive from work,” said Quick and Dirty Tips. “For instance, if you get a 3% raise, increase your down payment savings percentage by at least that amount. Or if you get quarterly or annual bonuses, transfer the full amounts to savings.”

Shift some money toward repairing your credit

That might seem counterintuitive if you’re trying to get together as much cash as possible to buy your house, but it might just be that doing a little credit repair can improve your buying position, which could lower your interest rate and lower the amount of money required by the bank for your down payment. A conversation with your lender or broker and a detailed look at your credit history may yield some surprising suggestions.

Pare down

This is a great time to take a good look at your stuff and decide what’s going with you, and what’s not making the trip to your new place. “You likely have some used furniture you no longer use or old clothes that are no longer in style. Sell it to make a few more bucks to use for your down payment,” said Bankrate. “You can sell your items on sites like Craigslist, eBay, Facebook and Amazon to turn your trash into someone else’s treasure.”

Call your cable, Internet, and phone providers

There may be lost money floating around out there. Bundling your services with one provider can create dramatic savings. It might also be time to look at new providers – just make sure you won’t incur a penalty or cost when you move and have to have your services set up again.

Make your coffee – and your lunch – at home

“If there are two people buying one coffee each at $4 every day, or $8 total, that adds up to $240 per month! So by getting a good coffee maker and putting it in a TO GO cup, you can potentially save more than $2,880 over the course of a year,” said Blue Water Credit. “If you think coffee was expensive, add up all of those $12, $20, and $25 lunches at restaurants when you step out from work. Even if you only buy lunch three times a week, that could easily end up with $50 a week in savings per person, or about $400 a month, or $4,800 per year!”

How to Keep Your Mortgage Approval Approved

You know how tough it is to qualify for a mortgage.

Proof you’ve got a long-term job with ample income. A credit score to the moon. Your life’s savings as a down payment. More cash stashed away. A debt-to-income ratio to die for. For some, tax returns for the last two years.

You’ve been there, done that. For weeks now. Maybe a month or more.

You’ve fought the good fight, you’ve run the gauntlet of mortgage qualifications and you have your signature-tired hands on that coveted home loan approval.

Now, all you have to do is not blow it.

For goodness sake, don’t make any surprise financial moves that could cost you your home loan.

Your mortgage approval is primarily based on documenting your income and assets, your equity stake or down payment, your credit and the cash you’ll have left over after the deal is done.

Once you have a mortgage approval, if you change the profile of any one of those qualifiers, you could have to kiss your mortgage goodbye.

Lenders today don’t just check your qualifying information once or even twice. Three, four or more checks, of one document or another, aren’t out of the question in today’s tight lending market.

Avoid big purchases – If you buy a new car, change the lease, or acquire another large possession, it could show up on your credit report or bank statement.

The lender could think you’ve gone beyond the risk the lender is willing to accept on your mortgage – especially if you qualified by a hair.

If the new loan or purchase amount upsets the debt-to-income ratio the lender used to approve your home loan, your mortgage could go “poof.”

No new credit – Likewise, don’t open new credit cards, even for a zero interest rate. Those credit card offers will come streaming in after you close your mortgage. Just wait. The lender didn’t approve you based on the additional card or extra loan.

Pay your bills – Also, pay your bills on time, even if there’s a dispute. Stop paying a bill and the blotch on your credit report can block your mortgage.

Keep your job – Be kind to your boss and don’t get fired. Also, don’t go looking for new work right now, unless it’s a second job to make more money.

Certain job changes also can affect how the lender rates your creditworthiness.

That includes a job change between industries, a job change to start a new company and changing from a job with a salary to a job that pays by commission.

On the other hand, get a promotion and a raise and you should be fine.

Don’t cash out – Leave your stashes of cash alone. Don’t transfer large sums of money between bank accounts. Don’t make random, undocumented deposits to or withdrawals from your bank account.

Don’t be stupid – It should go without saying, but criminal activity, trying to buy a second home and trying to add a co-signer or name to the loan, after approval, could all also get your mortgage canned.

Remember, stuff happens. There are events beyond your control that could cost you your mortgage. A pink slip. A divorce. Hospitalization. The co-signer bails.

However, once your mortgage is approved, do keep tight reigns on what you can control.

Slaying That Credit Score – New Tips For A New Year

Getting ready to buy a house or just thinking about it? Where to buy, what to buy, and how you’ll afford it are probably top of mind. But if you’re not also concentrating on your credit score – and by concentrating on, we mean actively trying to raise your scores as much as possible – you’re not looking at the whole homebuying picture.

Not only does your credit score factor greatly into what you’ll pay for your house, it can keep you from being able to buy one, period. “Your credit history determines what loans you will qualify for and the interest rate you will pay,” said eloan. “A credit score provides an easy way for lenders to numerically judge your credit at a point in time. It gauges how likely you are to repay your loan in a timely manner. The better your history appears, the more attractive you become as a loan customer.”

Thankfully, your credit score is not static; it can (and does) change all the time, and there are all kinds of ways to improve it, some better than others. We’re running down the smartest options to boost your score in the new year.

Shoot for perfection

850 is the best score you can possibly get, and, while it may seem completely out of reach, there are people who actually crest that credit mountain and reach the top. “It’s the Holy Grail of all credit scores: 850. On the widely used FICO credit score scale, approximately one in every 200 people achieves perfection, at least as of a 2010 estimate by the Fair Isaac Corporation,” said The Motley Fool. Careful budgeting and detailed attention to every aspect of their financial picture are the umbrella tactics they use to get and maintain that score – and they’re ones you should be using, too.

Or, shoot for 750

If 850 is out of reach within a reasonable timeframe (reasonable being the maximum amount of time you want to wait before buying a home), try for 750. This is the magic number for many lenders and creditors. “It puts the ball completely in the corner of the consumer rather than the lender, said The Motley Fool. “You’ll often have lenders fighting for your business, and in nearly all instances, you’ll be offered the best interest rate by lenders, meaning you’ll have the lowest possible long-term mortgage and loan costs of any consumer.”

Talking to your lender about the items on your credit report that have the best chance of raising your score is key. You may think that paying off that old unpaid account from six years ago is an easy way to get a score bump, but is it about to fall off of your report on its own?

Set up automatic payments

According to CreditCards.com, a good 35 percent of your credit score is taken from your payment history. You may have missed payments in the past that you need to deal with now, but you certainly don’t want to make another mistake while you’re trying to get homebuyer-ready. Almost every creditor, from your utilities to your car payment to any outstanding student loans you may have, offers the option of automatic payments. This is the easiest way to ensure you never miss a payment because you got busy or spaced on the due date.

But, just remember to make sure there is enough cash in your account to cover the payments on the day the money will be coming out. If you have been busy moving funds into savings for your down payment, you’ll want to set a reminder to put money back into whatever account your auto payments are attached to.

Ask before you shut down credit cards

The amount of credit you have is a factor in qualifying – or not – for a mortgage. Too much debt is a bad thing. But, long-term credit use that has been managed properly can be helpful to your score. If your lender does recommend getting rid of some of your available credit, it likely won’t be older cards. “Length of credit history is considered when determining your score – so the longer you’ve had a credit card, the better,” said CNN Money.

Also beware that closing any card triggers a change in your “utilization,” and that might not be a positive. Be sure to consult with your lender first.

Watch your credit limits

Banks don’t look kindly on those who have used all of their available credit because it gives the appearance that you’re not living within your means. “The amount of available credit you use is the second most important factor in your score,” said NerdWallet. “Experts recommend you keep your balance on each card below 30% of your limit — if your limit is $5,000, your balance should be under $1,500.”

Of course, even lower is better. Get to 20% or even 10%, and you’ll be in great shape. But don’t go below that. While it may seem like a zero balance would indicate that you are financially savvy, banks like to see responsible credit management. That means using your cards and paying down the balance to a reasonable level every month.

Pay down your debt…but check with your lender first

If you’re trying to weigh the best tactics for improving your credit and you don’t have the funds to take care of every outstanding wrinkle on your credit report and pay down your existing debt at the same time, you definitely want to check with your lender before you make any move. Every dollar is important, and while NerdWallet notes that your credit score will “soar” as you “pay off your debt as aggressively as possible without acquiring more,” it could be that your lender has a strategy that places more importance on other credit issues in your report, or has structured your credit repair according to a different timeline.

This underscores the importance of working with a lender who is skilled and experienced in credit repair. Using the tools our lender gave us, we were able to improve our score by almost 100 points in four months, allowing us to qualify for the home we wanted and get a great interest rate.

Don’t be afraid to refinance

You may end up buying a home before you get your credit score exactly where you want it to be. If you’re in an appreciating market, which much of the country is, and your score continues to rise after you close escrow, you might be in a position to refinance sooner than you think. Especially if you buy your home with an FHA loan, their streamline refinance program can potentially lower your rate without an appraisal, a credit check, or job/income verification.

Position Realty
Office: 480-213-5251

Financial Don’ts When Getting Ready To Buy A Home

If you’re in the process of buying a home, you’ve probably already met with a lender who advised you on what to do and what not to do during the escrow process. But if you’re just getting ready to buy or plan on doing so in the near future, following a few financial tips can mean the difference between qualifying…and not, and also getting a decent rate. These are a few universal “don’ts” that will help you stay on track, even before you get a lender involved.

Don’t take out more credit

If you’re thinking you’re going to buy a house in a matter of a few months, forget that new laptop on the Best Buy card, forget that new car, and forget that Old Navy card. Sure, it’s only a $30 pair of pants. But, taking out more credit can harm your debt-to-income ratios, which can make you look like a credit risk. And that’s not worth it, no matter how cute the pants are.

Don’t pay off all your current credit cards

Your lender will tell you specifically what you should pay down and what you should leave alone, but banks tend to like responsible credit management. In some cases, that may mean carrying a small balance on one or more cards.

Don’t charge up all your cards to the limit

“Responsible credit management” does not mean running every available card up to the limit and/or only making minimum monthly payments. Banks will not look kindly on this when you go to get approved for a loan.

Be careful with old debts

You may think that in order to qualify for a mortgage or get the best possible rate you have to pull your credit and go back through every single entry to identify and take care of anything negative. You’re right about the first part. Pulling your credit so you know what you’re working with is critical, and financial experts recommend doing it annually, regardless of what you’re planning (or not planning) to buy. But be careful with old debts. It doesn’t hurt to ask a lender what should and should not be taken care of. But, in general, you’ll want to:

Pay in full instead of making settlement arrangements – It’s not uncommon for debt collection companies to send out settlement offers that allow you to settle debts for less than the total amount. While this can sound tempting, it likely won’t yield the results you’re looking for. Yes, it’ll stop the harassing phone calls and persistent letters. But if your goal is to get the debt to disappear from your credit report, you’ll be disappointed.

“When you settle your debt, the activity usually shows up on your credit report as ‘debt settled’ or ‘partial payment’ or ‘paid in settlement.’ You can talk to the settlement company about the specific language they use, but the bottom line is: this is a red flag on your report,” said clearpoint. “FICO doesn’t reveal how much your score will drop, exactly, and your report doesn’t indicate how much of the original debt was forgiven; it simply shows you settled. Either way, it still points to the fact that you may be a credit risk.”

Stick to newer debts – Older debts that are getting close to falling off your report should be the last thing you pay. “You also want to consider the statute of limitations on your debt,” they said. “Most past debts remain on your credit report for seven years, so if you’re close to the time frame when the debt falls off, settling it may not make much of a difference. There’s an ethical argument to be made here, but practically, you might just be settling a debt that was about to disappear anyway.”

Be careful with debt consolidation

If you have a lot of outstanding debt, are in over your head with credit cards and store cards, and can only manage the minimum monthly payment on all your existing loans, you’re likely going to have a hard time qualifying for a mortgage. You may be tempted to lump your debt together into one payment through a credit consolidation company, but beware the consequences. There may be startup fees, interest rates on the consolidation loan could skyrocket after an initial teaser rate expires, and, in some cases, an improvement in credit is years away.

Don’t get lax with your payments

Your lender will reinforce this, but it bears repeating that even after you’ve been prequalified, you need to keep your payments current on your car, your Visa, etc. Your lender will do a recheck before closing just to make sure nothing has changed in your credit report, and if you have new issues, it could impact your loan.

Don’t move money around

“We know a story of one homebuyer who almost lost his home because he had stated on his application that the down payment was coming from a mutual fund account. Then, two days before closing, he decided to sell a baseball card collection instead,” said HSH.com. “The loan had to be underwritten all over, his ownership of the collection, its value and its sale had to be verified, the closing was delayed and the fees increased.”

Don’t change jobs before you buy your home

This is a big no-no don’t if you’re in the process of buying a home or are about to. Among all the other financial information your lender will be collecting in consideration of your loan, they will also be asking about your employment history. You’re obviously less likely to be approved if you’re unemployed (unless you’re independently wealthy, and, in that case, Congratulations!). A recent job change may also be problematic if the bank is feeling jumpy about your job security.

Position Realty
Office: 480-213-5251

Three Percent Or 20 Percent – Which Is The Smarter Down Payment Strategy?

The minimum down payment on an FHA loan is 3.5 percent, which makes it a popular choice among those who don’t have the funds for a large down payment (and also those who don’t meet the higher credit score requirements for other types of loans). And that’s not even the lowest you can go. Loans like this one require only three percent down, and if you’re a veteran or are buying a home in a rural area, you may be able to buy a home for nothing down. But should you go that low just because you can, or are you better off making a larger down payment? We’re breaking it down.

The case for 20 percent

There are several advantages to putting down 20 percent when buying a home, like:

  • Since the bank will generally consider you a lower risk because you have “more skin in the game,” you may be able to get a lower interest rate than you would with other types of loans—as long as you have the credit score to support it.
  • You’ll have built-in equity as soon as you move in.
    You can avoid paying private mortgage insurance (PMI).
  • It’s that last part that drives a number of people to strive for that 20 percent down payment since PMI can add several hundred dollars to a new homeowner’s monthly payment, and it can be hard to get rid of it. “If you can put 20% down and avoid PMI, that is ideal, said certified financial planner Sophia Bera on Business Insider.

The case for as little down as possible

The biggest roadblock to homeownership for many people is coming up with the down payment, so minimizing that expense sounds great, right? “The good news is a first-time buyer can purchase a home for a little as three percent down – and even no money down in some cases,” said U.S. News.

But is that a smart move?

“The less you put down, the higher the mortgage insurance is,” Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area, told them. “With five percent down, the mortgage insurance is quite high.”

Yep, there’s that pesky PMI again, which, for many first-time buyers, pushes their monthly payment to a level they’re not comfortable with. Another bummer about PMI: “If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment,” they said.

You may also have trouble qualifying for a loan even if you have a high enough credit score because you don’t have enough cash reserves; if you are using all your savings for the down payment and the lender questions where the funds for your closing costs, taxes and insurance, and any needed repairs are coming from, you could have a problem.

But, on the flip side, a smaller down payment will up your rate of return, said The Mortgage Reports. “Consider a home which appreciates at the national average of near five percent. Today, your home is worth $400,000. In a year, it’s worth $420,000.

Irrespective of your down payment, the home is worth twenty-thousand dollars more. That down payment affected your rate of return. With 20 percent down on the home – $80,000 – your rate of return is 25 percent. With three percent down on the home – $12,000 – your rate of return is 167 percent.”

Even when you add in the PMI and a higher interest rate, the equation comes out in favor of the lower down payment. “With three percent down, and making adjustments for rate and PMI, the rate of return on a low-down-payment loan is still 106 percent – much higher than if you made a large down payment. The less you put down, then, the larger your potential return on investment.”

The case for somewhere in between

Finding that balance between down payment and savings is a challenge for many homebuyers, and the sweet spot will be different for everyone depending on their unique circumstances and financial situation. Most financial experts will say that saving and scrounging to get together 20 percent at the risk of depleted savings and zero emergency funds is a shaky strategy, at best.

“If putting 20 percent down means that you use all of your savings, then don’t do it! I would much rather see people put five percent down, wipe out all their other debt with cash, and still have three months of emergency savings versus putting 20 percent down on a house,” said Bera.

Especially when you consider all the added costs you may be facing once you buy: “yard work, home repairs, renovation costs, property taxes, insurance, etc. It’s important to consider all of the costs and not just compare the monthly mortgage payment to your current rent amount,” she said.

Another thing to consider when evaluating how much you should put down is what would happen if you had an emergency. It’s easy to lose sight of real-life issues that can arise when you are so driven to buy a home and focused on saving the money to get there.

“A financial event can leave you wishing you had access to the money without selling,” said The Mortgage Reports. “Say you lose a job for three months. An extra $20,000 would be a nice safety cushion. And, if you lose your source of income, you can’t take home equity out via a cash-out refinance or home equity line of credit (HELOC). Lenders won’t approve a new loan to someone between jobs. In short, the more you need to get at the money, the less access you have to it.”

Position Realty
Office: 480-213-5251

7 Reasons To Stop Renting Today

Still renting? You must have a good reason. Although, we’re not really sure what it is. With rents continuing to rise across the country, interest rates staying around historic levels, and new loans lowering down payment requirements, it just makes sense to take the leap to homeownership. Maybe you’ve got terrible credit and don’t want to take the time to improve it (or don’t know about loans that accept lower scores)? Or, maybe you just like giving your money away. If you’re still not on board, these 7 reasons might change your mind.

Because owning a home is still less expensive than renting across the country

GOBankingRates’ annual survey of “the cost of renting versus owning a home in all 50 states and the District of Columbia” just came out, and, while they “found that the number of places where it’s more expensive to own than rent has increased,” the number went from 9 to 11. That means that, in 39 states, it still makes more financial sense to buy.

Rates are near historic lows

We’re spoiled. Seriously. Anyone who has been paying attention to the market over the last few years and has seen interest rates with a 3 or 4 before that decimal point may just think it’ll always be that way. But history has a way of repeating itself, and while we may not see rates in the teens again anytime soon, most industry experts have been predicting rates moving into the 5s sometime this year, with a pattern of rising rates beyond. Buying a home while money is cheap is a smart move.

“A difference of even 1 percent can have a major impact on your total payments over time,” said ZACKS. “For instance, a $200,000 mortgage for 30 years at an interest rate of 5 percent would require a monthly payment of $1,073.64. By comparison, the same mortgage at 4 percent interest would result in a payment of $954.83.” That might not seem like a big deal every month, but, consider the long-term potential: “Over 30 years, the total difference between the two would be $42,771.60.”

FHA loans and the like make it easier to qualify

Don’t have an 800 credit score? You don’t need to today. FHA requirements are lower than conventional loans, and you may already be where you need to be to qualify. “The average FICO score for buyers who finance FHA loans is 683, according to Ellie Mae. That’s considerably lower than the average score of 753 for conventional, non-FHA financing,” said Interest.com. “Most lenders have a…minimum of 600.”

A little thing called equity

Rising rents may or may not equate to rising property values in your area, but either way, you’re not going see any financial benefit from it. When you own your home and your equity rises, that equity is yours. And so is the choice of what to do with it. Whether you decide to let it sit and continue to grow or tap your equity for home improvement projects, the money is yours to decide how to use.

The days of the 20 percent down payment are all but gone

Does 20 percent down make it more likely that you’ll qualify for a loan? Sure. Does that mean you have to come up with that huge chunk of money? No. Nor do you have to come up with 10 percent down, which, for some reason, the majority of new buyers seem to believe. “87% of first-time buyers think they need 10% or more down to buy a home,” said The Mortgage Reports.

The FHA loan is one of the most popular loans available to first-time buyers because, not only can you qualify with a fair credit score, but the down payment is as low as 3.5 percent, and, “100 percent of the down payment can be a financial gift from a relative or approved non-profit,” they said. But, it’s not the only option for a low down payment. Fannie Mae’s Conventional 97 Mortgage and HomeReady Mortgage require just 3 percent down. The Mortgage Reports also has information on closing cost help and down payment assistance programs.

Rents keep rising

Unless you’re in a rent-controlled apartment (and, bless you if you are since there are so few left), your rent is just going to keep going up every year. Apartment List’s monthly National Apartment List Rent Report shows that, “Our national rent index is continuing to climb, with month-over-month growth of 0.5 percent for June. Rents grew at a rate of 0.5 percent between May and June, which is generally in line with the monthly growth that we’ve seen over the course of this year thus far. Year-over-year growth at the national level currently stands at 2.9 percent, surpassing the 2.6 percent rate from this time last year. In addition to the growth on the national level, rents are now increasing in nearly all of the nation’s biggest markets.”

When you own your home, your payment is your payment is your payment. Unless you take out a home equity loan or refinance to take cash out, your payment’s not going to go up.

Tax breaks

Here’s another bit of fun for renters: nothing you pay comes back to you. I mean, except for that security deposit, but that all depends on what effect your dog and those few parties you threw had on the condition of the home. As a homeowner, you get to write off all kinds of stuff, which lowers your overall costs. “Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. And all that interest is deductible,” said Bankrate. “Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The other major deduction in connection with your home is property taxes.”

And think about it this way: Even if your house payment is going to be a little bit higher than what you’re currently paying in rent, it’s not an apples-to-apples comparison. How do those numbers look when you calculate the tax savings?

Position Realty
Office: 480-213-5251

3 Types Of Loans To Go For If You’re Credit Challenged

The latest numbers from mortgage analysts Ellie Mae show that the average FICO score of approved conventional mortgages is 732. If a borrower has low credit scores (650 and under), then that average FICO score could seem like a chasm between them and the home they want to buy. But just because the average credit scores for a conventional mortgage are above 732 doesn’t mean low-credit borrowers are shut out of homes.

There are a good amount of options, and the federal and state level for mortgages can help even low-credit borrowers get the home of their dreams. Here are three types of loans you may want to explore.

1. USDA Loans

USDA loans are a great option for borrowers with low credit scores, because the minimum score for approval is 640. Not only that, but you won’t have to make a down payment for this mortgage. It sounds like an incredible deal and, for the consumer with bad credit, it is a legitimate option.

However, borrowers need to know the very clear limits the USDA places on where homes can be bought. Because the program was initially started to provide economic stimulation in rural areas, only homes outside of urban areas are eligible for the USDA mortgage program.

As far as the hard numbers go, several sources indicate that the borrowers’ mortgage can’t be more than 29 percent of their income, and the overall DTI is 41 percent. Both home prices and borrower income are capped, and that cap depends on the area in which the borrower wants to buy.

To understand exactly where the urban limits are for the city in which you live, the USDA’s website has a straightforward mapping app that shows clear boundaries between urban and rural.

2. State Bond Programs

While the USDA program is available in all states, bond programs tend to be specific to certain states. For example, Florida’s first-time homebuyer bond program offers up to $15,000 toward down payment and closing costs. The product is treated as a second mortgage.

Like the USDA mortgage, the credit scores needed for this loan are pretty low: 660. Also, there are income limits and limits on the purchase price of the home. The down payment assistance is “free” – you don’t have to pay it back as long as the home is your primary residence for five years after closing.

The catch here is that the interest rates are higher because they’re set by the state. So, while the borrower is getting up-front free money, they end up paying for it on the back end over the life of the loan.

3. FHA Loans

Ellie Mae estimates that 689 was the average credit score for borrowers who were accepted for an FHA loan. These loans require a 3.5 percent down payment if the borrower’s credit is 580 or higher, Zillow says, while scores between 500 and 579 require a down payment of 10 percent. The standard for the total mortgage payment is 31 percent of income, and DTI needs to be less than 43 percent. Mortgage insurance applies to the life of the loan.

A cursory view of the numbers makes the FHA loan a good bet for borrowers with average to bad credit scores who have the ability to make a 3.5 percent down payment. However, there can be some problems.

The FHA has their own criteria for the condition of the home the borrower is buying—if certain things need to be fixed, those fixes have to happen before closing and paid for out-of-pocket by the seller. However, if the borrower can find a home in good condition with only minor repairs noted during inspection, closing should proceed with the normal aches and pains.

Some Final Thoughts About Mortgages for Bad Credit Scores

It’s important to remember that borrowers have bad credit scores for a variety of reasons. One of those reasons could be that the borrower has high utilization – their credit card balances are more than 60-70 percent of their credit limits.

While most of us see this as a credit score issue – high utilization leads to lower scores – the more important area of concern is debt-to-income ratio. Having multiple credit cards with high balances leads to high minimum payments, which can cut into a borrower’s DTI and push them past 45 percent.

While a high DTI isn’t a mortgage death sentence, it is, according to the Federal Reserve, the number one reason why borrowers are rejected for a mortgage.

Position Realty
Office: 480-213-5251

How to Get Denied for a Mortgage After Preapproval

You’ve done the work to clean up your credit score, scrape together a down payment and pry a preapproval letter from your mortgage lender. Cheers!

Getting preapproved is a smart move, especially in a seller’s market characterized by tight inventories and, in some regions, bidding wars. Having a lender’s letter in hand signals to sellers that you’re a legit buyer whose offer merits serious consideration.

Even so, a preapproval letter is just a conditional commitment. It can be withdrawn if your financial situation changes in a way that makes your lender nervous.

The best advice? “Maintain the status quo,” says Scott Schang, branch manager at BuyWise Mortgage in Anaheim, California.

There are a few surefire ways to get rejected after you’ve been preapproved. Among them:

Quitting your job

There’s nothing wrong with leaving a job to take a similar or better-paying position at another company, so long as you remain a full-time employee who gets a W-2 form at the end of the year.

“If you’re going from a W-2 job to a W-2 job, that’s fine,” Schang says. However, taking a significant pay cut will raise red flags. So will switching from a salaried job to a position where you’re compensated mostly on commission. And quitting your job to launch a new venture is a no-no, at least when it comes to keeping your mortgage approval.

Lending guidelines are much stricter for self-employed borrowers, and lenders typically want to see a two-year track record of self-employment income, says Mathew Carson, founder and broker at West County Mortgage in San Francisco.

The best play: Wait until after you’ve closed on your house and started paying your mortgage to quit your job and pursue your entrepreneurial dream.

Loading up on debt

This is an obvious bit of advice, but one well worth heeding. In the weeks or months after you get preapproved and before you close on your home, keep your spending impulses on lockdown. That means no new credit cards, no car loans and no big-ticket purchases of any kind. Ignoring this rule of thumb is likely to bring scrutiny from your lender.

Running up a balance on a new credit card will lead your lender to re-examine your debt-to-income ratios, Carson warns. If you were on the borderline before your shopping spree, the new bills could kill the deal.

Paying down old debt

Say you have a preapproval letter but realize you could get a better mortgage rate with a higher credit score. Don’t make the mistake of trying to be a hero — it’s likely to backfire, Carson and Schang say.

Paying off delinquent debt, settling up with creditors who have charged off an old debt, canceling credit cards — all might seem like responsible moves, but they’ll hurt your credit score.

“That’s one of the backwards things with the credit scoring system,” Schang says. “If you cancel a card, that will drop your credit score significantly for 60 to 90 days before it starts to creep up.”

It’s unclear exactly how much your score will fall if you cancel a card, but the hit could amount to as much as 40 points. Paying down an old balance presents a similar quandary. You think you’re cleaning up your finances but your lender just sees more available credit, Carson says, and you could be jeopardizing your credit score.

And when it comes to credit scores, not all debt is created equal. Before you close on a home — and ideally before you seek preapproval — you’ll need to pay off any liens, old tax bills or current debts in collection. However, if a debt has already been charged off — that is, the creditor isn’t expecting any more payments — paying it will vault your old debt to a “current” status and actually lower your credit score.

So the rule of thumb for retiring charged-off debt is the same as the guideline for taking on new debt: Wait until after you’ve closed on your home.

Moving large sums of money

Down payments are a challenge for first-time buyers, and many hit up relatives for help. However, receiving any sum that amounts to more than half your regular paycheck is likely to draw scrutiny from your lender, Carson says.

Banks want to make sure you aren’t laundering money. They also want to be certain any sudden windfalls are in fact gifts and not loans. “If money is moving around, that’s going to be a red flag for an underwriter, and they’re going to pull out the magnifying glass,” Schang says.

The good news is that receiving a gift doesn’t need to kill your preapproval. But your bank likely will require you to provide a paper trail that includes a letter stating the money is a gift and two months of bank statements from the gift giver. “It can be a little tedious,” Carson says.

The wiser move, Schang says, is to have your benefactor wire the down payment gift directly into your escrow account.

The bottom line

Keep in mind credit scores are based on complex calculations, and every borrower’s situation is different. In general, though, your overall financial situation matters.

If you have a gold-plated credit score and enough income to comfortably afford your loan, a new store credit card probably won’t kill your deal. But if you have a borderline credit score and you’re stretching to qualify, even a small hiccup could hurt your chances.

Position Realty
Office: 480-213-5251

Want To Own Your Home Free And Clear? 7 Ways To Pay Off Your Mortgage Early

There was a time when taking out a mortgage on a house meant you actually planned to stay there long enough to pay it off and own it outright. In many cases, people bought homes, raised their families, retired, and then passed this valuable asset down to their kids. But, largely, this is not the case anymore. The most recent National Association of REALTORS® 2016 Profile of Homebuyers and Sellers shows that homeowners stay in their houses an average of 10 years – which seems like a lot when you consider how many people move up to a larger home as their family grows, move away for job transfers or other employment issues, or take the equity and run to something better after just a few years.

But that doesn’t mean it doesn’t make great sense to pay off your mortgage early, which can save you many thousands of dollars. “Topping the list for most folks in the ‘Pro’ category is peace of mind,” said The Balance. “Plain and simple, you don’t have to worry about a mortgage payment, and you know you’ll always have a roof over your head if, for example, you lose your job. For a lot of folks, knowing they’re not paying their hard earned money to the bank in the form of interest is also a plus. But freeing yourself from a big mortgage payment also gives you more financial flexibility to do other things.”

Here are seven ways to go about it.

1. Make an extra payment per year

Making 13 payments instead of 12 in a year can save you thousands and shorten your loan. “One way to pull off this tactic is to save 1/12 of a payment every month, and then make an extra payment after every 12 months,” said Bankrate. “Let’s say you do this starting the first month after getting a 30-year mortgage for $200,000 at 4.5 percent. That would save more than $27,000 interest, and you would pay off the mortgage four years and three months earlier.”

You can accomplish the same thing by changing when you pay your mortgage. Instead of making one mortgage payment per month, split it up into two. “A bi-weekly mortgage payment program is meant to short-circuit your loan’s amortization schedule,” said The Mortgage Reports. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year. With each ‘13th payment,’ your loan balance is reduced by the entire amount of the payment. You reach your loan’s payoff date sooner.”

2. Make an extra payment each quarter

Want to be a little more aggressive than that about getting your mortgage paid off early? “Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early,” said Dave Ramsey – an example that’s based on “the average $220,000, 30-year mortgage with a 4% interest rate.

3. Refinance

It may sound counterproductive to add to your mortgage balance while your goal is to lower it, but, depending on your existing interest rate and the new one you could get, it might be a great move, especially if your closing costs are low. Remember, though, that, while your monthly payments will drop and you will save money on all that interest you don’t have to pay, “It won’t accelerate your pay-off date,” said Forbes. “(In fact, it may extend that date even further out into the future.) Refinance into a 30-year mortgage with a lower rate, and then continue making the same monthly payment that you were previously making. This ‘extra’ money (the gap between your new, lower monthly payment and your original monthly payment) will get applied to the loan as an extra principal payment. And this will accelerate your payoff date.”

Or…

4. Refinance to a 15-year loan

As long as you’re refinancing with the goal of paying your mortgage off sooner, switch from a 30-year to a 15-year loan. By refinancing that same $200,000 loan at 4.5 percent into a 15-year loan at 4 percent, you can pay off the mortgage “10 years earlier and save more than $60,000,” said Bankrate.

5. Get rid of PMI

Refinancing is also a good idea if you’re looking to lower your payment – and apply the savings toward your mortgage balance – by removing your PMI. “If a home was purchased with less than a 20% down payment, the bank is probably charging PMI,” said Mortgage Calculator. “However, once the borrower owns 20% of the home, this charge could be eliminated.”

6. Apply any windfalls

Get a raise? A bonus? A surprise cash gift? Instead of taking that vacation or putting it into your savings, apply it to your mortgage balance. “A $10,000 lump sum payment on that 30-year, fixed-rate mortgage for $200,000 at 4.5 percent “pays off the mortgage two years and four months earlier, and saves more than $19,000 interest,” said Bankrate.

7. Save those pennies

They do add up, especially if by “pennies” you mean dollars. If you apply the same saving techniques toward paying off your mortgage as you did to get your down payment together, you should be able to carve away at the total owed. Even an extra

$100 a month toward your principal can save you more than $30,000 in interest over the life of your loan – or more, depending on your interest rate and mortgage total.

One of the easiest ways to chip away at your mortgage is to simply “round up your payments so you’re paying at least a few extra dollars a month,” said Dave Ramsey.

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