How Your Mortgage Affects Your Credit and Vice Versa

 How Your Mortgage Affects Your Credit and Vice Versa

Obtaining a home loan can have a variety of consequences for your credit score, and yourcredit score can have a variety of consequences on your mortgage.

Here’s what you need to know about credit when shopping for a home.

The Effect of Mortgage Applications and Inquiries

When you apply for a loan or for a line of credit, your credit score usually takes a small hit. Luckily, you don’t have to be too worried about dinging your credit score when you go loan shopping.

Normally, multiple credit inquiries would indicate a problem with your credit or that you have a problem with debt. However, loans such as mortgage and auto loans have a grace period during which multiple inquiries are treated as a single inquiry, so you don’t have to worry about your credit taking a dive.

While your lender will probably pull your FICO score, which has a 30-day grace period, they may instead pull your VantageScore—which only has a 14-day grace period.

To be on the safe side, do all of your loan shopping within seven to ten days.

What Mortgage Lenders Look for in Credit Scores

Lenders are looking for good credit scores and the absence of bad credit marks, such as these:

§  Defaults in payment

§  Lawsuits

§  Liens

§  Bankruptcies

§  Repossession

§  Foreclosure

Payment history is the greatest factor in your FICO credit score, accounting for 35% of the score. The other FICO credit factors are amounts owed (30%), length of credit (15%), new credit (10%) and types of credit (10%).

Loan Balances and Debt-to-Income Ratios

The balance of your home loan influences your credit positively as the loan decreases. Your credit score gets better as the gap between your original loan and current balance diminishes.

Your debt-to-income ratio compares all your debts, loans and credit cards to your total income. A high debt-to-income ratio could result in the denial of a loan. A low debt-to-income ratio shows lenders you have a better ability to repay the loan and is preferred by lenders.

Some loans, like qualified mortgages, require the borrower to have less than a 43% debt-to-income ratio to be eligible as a borrower.

Managing Your Credit Score

Getting and maintaining a good credit score may not be easy, but there are steps you can take to keep a healthy score:

§  Offer a higher down payment so you are borrowing less money.

§  Do not apply for any new loans or lines of credit during the home-buying process.

§  Lower your debt-to-income ratio by paying off as much debt as possible before applying for more credit or a mortgage.

§  Make all payments on time.

Sometimes credit reports may misreport negative events—like late payments, lawsuits, liens, bankruptcies, repossessions and foreclosures—so monitor your credit report every few months. Dispute any claims that don’t look right.

By law, you are granted one free credit report from each of the three credit agencies (Equifax, TransUnion, Experian) every year. Go to annualcreditreport.com to get yours.

Updated from an earlier version by Frank Alan Herch.

3 Keys to Being an Attractive Mortgage Candidate

3 Keys to Being an Attractive Mortgage Candidate

When you’re searching for a home loan, you want to make yourself look as financially attractive as possible to a mortgage lender. Having a good credit history, a healthy down payment and job stability are three key ways to boost your buyer attractiveness.

If you need some help with one or all of these categories, don’t worry—with a little work, you can fix those first-time home buyer blemishes.

Mortgage Approval Key #1: Have a Stable Job

Evidence of a dependable income stream can help you get a better mortgage rate and make you look more attractive to lenders. Because people tend to change jobs and careers more frequently these days, banks understand a certain degree of turnover.

However, the longer you are with one company—or at least in the same career or field—the better it looks to a lender.

Stay in your present position for a while, at least until you have secured the loan. If you have changed jobs or fields within the past two years, be prepared to explain why to your lender.

Know your income-to-debt ratio and don’t try to buy a house outside your means.

Mortgage Approval Key #2: Manage Your Credit

Lenders are more likely to deal with people who have good credit. Many people have made mistakes when it comes to credit, but there are things you can do to clean up your score:

§  Get a copy of your credit report and make sure it is accurate. If you find things that are incorrect, request to have them changed or removed.

§  Try to pay down your current credit cards. It’s good to have a moderate balance to show activity, as the credit card companies will report this as positive activity to be used as a reference.

§  Try to lower your debt-to-income ratio by paying off other bills so you are as liquid as possible.

§  If you have bad credit, start by paying your bills on time until your score improves.

§  Don’t take on new debts—wait until after closing to buy that big TV or new car.

Mortgage Approval Key #3: Have a Down Payment

A down payment for a mortgage is a good chunk of change, but it’s a chunk that makes you a more appealing buyer. Ideally, you will want to save up for at least a 20% down payment. The more you can put down, the lower your monthly mortgage payment can get. Some buyers may want to purchase positive mortgage points to lower their interest rate.

While you can get a loan with less than 20% down, you will probably have to get private mortgage insurance. However, if you can get a Federal Housing Administration (FHA) loan, you won’t need nearly that much. These  government-backed mortgages have low down payments but are a little tricky to get. Still, you should see if you meet those requirements.

Speaking of finances, you want your home buying experience to be a pleasant one, so take the time to put your finances in order the right way and save yourself some stress. Once you have made yourself as attractive a candidate as possible, find the right mortgage, get pre-qualified and then start shopping.

Updated from an earlier version by Philip Commins.

Your Final Steps to Securing a Home Loan

Your Final Steps to Securing a Home Loan

Once you’ve made an offer for a home and the sellers have accepted it, you may feel you can relax and just get ready to pack up and move.

However, until you get to the settlement date and have the keys to your new home in hand, you will need to stay vigilant about finances and keep in close communication with your real estate agent, the title company and—most of all—your lender: your home loan may still need attention.

From Pre-approval to Final Approval of the Home Loan

When you consulted a lender and obtained a pre-approval letter for a home loan, you may have thought your loan application was complete—but now that you have a contract, the real application must be processed.

Hopefully, your lender already went through the step of obtaining documentation from you—of your income and assets, bank statements and W2s, and an authorization to request your federal income tax returns. If not, you will need to gather all your financial documentsnow and provide them as soon as possible to your lender.

Even if your pre-approval included full documentation, you’re likely to need to give a lender updated paperwork such as your latest pay stubs, particularly if your pre-approval was several months ago.

The second part of your loan application depends on an appraisal of the property you are buying. Every lender needs an appraisal to understand the underlying value of the property, which is collateral for your mortgage. It’s up to you to pay for the appraisal but the lender will choose the appraiser.

If the appraisal meets or exceeds the price you have offered for the home, that piece of your loan application is complete; but if the appraisal comes in too low, you will only be allowed to borrow up to the maximum of the appraised value—minus your down payment.

In other words, if the appraiser says the house you want to buy is worth $200,000 and you intend to make a down payment of 10%, the lender will only approve a maximum loan of $180,000. If you and the seller have agreed on a higher price for the home, such as $215,000, you will either need to renegotiate the offer or come up with the extra cash to make up the difference.

Follow Your Lender’s Lead

During the interim period between the signing of the contract and settlement date, you will have several responsibilities to make sure your mortgage is in place when you are ready to close.

§  Respond immediately to all lender requests: Lenders often need more information from you while your home loan is being processed. Even if it seems excessive, make sure you provide everything needed in a timely fashion.

§  Keep track of all deposits and withdrawals: If you have any unusual deposits other than your paycheck, you will need to provide a paper trail of where the money came from, so it’s best to avoid any major financial moves at this point. If you must move money around for your home purchase, keep excellent records and be ready to provide them to your lender.

§  Maintain your credit profile: Don’t apply for new credit, spend anything on your credit cards or close any credit accounts—because any one of these moves could hurt your credit score or change your debt-to-income ratio. Wait until after the closing to make any purchases for your new place.

§  Communicate with everyone: Your real estate agent, your title company and your lender should be busy behind the scenes getting ready for settlement day, so you should stay in touch with them often to see if everything is on track—and if they need anything from you.

Following these simple steps makes it much more likely that your loan will be ready when you are ready to pick up your keys.

Basics of Home Repair Requests for Home Buyers

Basics of Home Repair Requests for Home Buyers

A home inspection report will highlight a list of home repair issues needing attention before you complete the purchase transaction.

Regardless of whether the house you want to buy is a new construction or decades old, you will always need to make a request for repairs.

Repairs can run the gamut from major plumbing or electrical issues to minor tile chips or floor scratches.

Keep in mind that it is unlikely that the sellers will repair the tens (or hundreds) of line items on your fix-it wish list.

Therefore, it is important for a buyer to have clear and reasonable expectations when making home repair requests.

Leverage Home Repair in Your Favor

Let them hear it from a pro: hire a professional, experienced home inspector to fully inspect the home you have your eye on.

Aside from determining whether the house is in good enough shape for you to invest your hard earned money in it, having an official inspection report will give you an edge at the negotiation table.

Telling the seller you want the porch repaired because it feels shaky will not hold weight unless a professional home inspector submits a report about the porch’s structural damage.

Each Home Repair is Not Equal to the Next

If the home repair is relatively minor in cost or a non-safety issue, it may not be worth making an issue over it. Valid buyer repair requests are generally significant issues uncovered by a thorough home inspection.

Any items obvious when you initially look at the house—like cracked sidewalks or peeling paint—should be stipulated in the purchase offer and not requested as a home repair later in the process.

Common Home Repair Requests

Here are some items commonly found on buyers’ home repair lists, although sellers may or may not be willing to fix them:

§  Upgrading ungrounded electrical wiring if the house was built before the 1960s

§  Replacing old-style galvanized water pipes or any leaking pipes

§  Making roof repairs

§  Changing disintegrating sewer pipes

§  Upgrading heating/cooling systems and water heaters

Required Home Repair Items

Items a seller must fix are these:

§  Any water penetration issues, such as a wet basement or moldy walls

§  Local code safety violations, such as missing handrails or an unstable deck

In addition, any repairs listed on the appraisal report must be fixed.

For example, if a structural problem was noted on the appraisal, a lender may not be willing to release funds to the buyer until that home repair is made.

In many cases, the seller may opt to offer you a cash credit for the cost of the repair, rather than taking the time to have it repaired themselves.

This is actually in the buyer’s favor, as the seller no longer has a vested interest in ensuring the job will be done right.

Updated from an earlier version by Aviva Friedlander.

Smart Financial Planning Must Come Before Homeownership

Whether you’ve got house envy about your best friend’s new place or just want to start building equity instead of renting, the first time you think about becoming a homeowner is the moment you should start financial planning.

While it may be tempting to begin looking at homes for sale, you need to be financially prepared so you don’t fall into the trap of identifying your perfect home—and then realizing you can’t afford to buy it. Casual visits to open houses or random Internet searches are fine to see what homes cost where you want to live, but you will need to start working on your finances, too.

The most important elements of the financial planning you need to put in place before buying a home are developing a budget and starting to save.

Financial Planning for Homeownership

When you are ready to consult a lender to find out if you can be approved for a loan, the lender will base a decision on your credit profile, income, assets, job history and debt-to-income ratio.

Your debt-to-income ratio for the lender’s purposes is based on the minimum monthly payment for all of your credit card debt, student loans, car loans and personal loans—compared to your gross monthly income. In many cases the amount a lender will say you can borrow is higher than you may feel comfortable borrowing. It’s crucial you decide what you think you can afford for your monthly payment and work with that number when you begin searching for a home.

Your comfort level should take into consideration other financial goals you have—saving for child-raising expenses, college tuition, retirement and even things like vacations, skiing or golf. Most of those expenses won’t be part of your lender’s calculation of what you can afford to spend on a housing payment.

Most lenders allow a maximum overall debt-to-income ratio of 43%, and some allow only a 41% ratio. The housing payment portion of your income should be a maximum of 31%, so if your annual income is $60,000 and your monthly gross income is $5,000, then your housing payment should be $1,550 or less.

Housing Payment

Homeowners have extra expenses renters don’t, such as property taxes and homeowners insurance. Your mortgage payment will include those costs as well as the principal and interest on your loan. You may also pay mortgage insurance if you make a down payment of less than 20%. If you live in a condo or a community with a homeowners association(HOA), you will pay condo or HOA fees separately.

You should also budget for maintenance and repairs on your home, at least 1% of the home value.

Before you become a homeowner, you should create a budget based on your current finances and consider how you can adjust that budget to accommodate extra savings to allow you to buy a home and to afford potentially higher housing payments.

Saving Strategies

There are countless resources for living frugally and finding ways to save on everyday expenses such as your cable bill and groceries, but in order to save for a home you will need discipline to set aside money for the future.

Here are some ways to do that:

§  Create a special savings account for your home purchase and have part of every paycheck automatically transferred to that account. Start with as little as $100 if you can afford it so you get used to living on less and then gradually increase the amount.

§  Consider saving the difference between your rent and anticipated housing payment. This increase your savings, and you’ll also show a lender an established savings pattern and the ability to afford the housing payment.

§  Work extra hours or take on a second job temporarily to increase your income. Even something simple like walking dogs each evening or babysitting can help your savings accumulate more quickly.

§  If you get a bonus, a tax refund or a cash gift, deposit it into your home-buying account.

The simple process of creating a financial plan should be the beginning of a long-term plan to buy a house—and to keep it.

When Do I Finally Get the Keys to My New House?

When Do I Finally Get the Keys to My New House?

It might be the most nerve-wracking, anticipatory, hard-to-find-the-patience question of home buying for first timers:

“When do I finally get the keys to my new house?”

Usually, a buyer takes possession of a new home after closing. But exactly how that is defined differs transaction to transaction.

In some states, this occurs when the local government has the new title on file, which could be a few days after you’ve signed all the papers. And other contingencies can be built into the negotiating process.

Get the Keys Before Closing

New buyers might want to move in before closing for a variety of reasons—because they sold their old place, because they want to get a jump on fixing up the new house, or because in a buyer’s market, they may ask themselves, “Why not?”

But moving in early presents a host of issues. First, there’s legal liability—what if the soon-to-be-owners do something to the house, or hurt themselves while in the new place? Who’s responsible for damage to property or person?

Then there’s the money angle—the old homeowners could ask for rent, since they still own the place, which the almost-owners might not be keen on paying.

And of course, there’s always the risk that for some reason the sale falls apart in the final hours, especially with all the various deals, parties and paperwork involved in home buying. And what if the new occupants refuse to move?

This type of possession can work, especially if the seller has already vacated the property. Just make sure to get any agreement in writing, in case anything sours.

Get the Keys At or After Closing

This is more typical. But exactly when closing occurs varies. It’s not always at the signing of the papers, no matter how exhaustive that process.

As mentioned above, you may have to wait until the county officially records the new title. Your REALTOR® should know local laws and be able to guide you through this process. This way, there’s a clear delineation between the previous owner and their responsibility and liability for the home, and the new owner’s.

The biggest surprise to many homeowners can be how long it takes the county to record the title. It could be a few days after signing—so while you just handed over large sums and signed hours worth of paperwork, the keys may not officially be yours for a few more days.

Again, talk to your REALTOR® about your local rules.

Renting Back

If you’re selling, organizing a move can be a challenge. Not only do you need to pack, butbooking movers during a busy summer season or around a holiday can prove tough.

And if you’re selling your current home and buying a new one in quick succession, you’ve got a lot to coordinate. Some buyers will agree to rent-back agreements, where they will rent the home back to the seller for a few days after closing. Divide the mortgage and costs by 30 (or 31), and that’s usually the amount you’ll pay per day to rent the home back.

Buyers don’t have to do this, of course, and they may have their own reasons for wanting to take the keys ASAP. They might have someone moving in to their old place. Maybe they are moving from out-of-town straight to the new house, so a rent-back means they’d have to find their own shelter for a few days.

Or maybe they just want to get a jump on painting and shampooing the carpet—their right as the owners. So while renting can be an option, it’s not always possible.

And the sellers can rent to the buyers as well. If the buyers want an early possession, a rental agreement is certainly in the rights of the soon-to-be-former homeowners, and often happens on similar terms as rental agreements after closing, at daily rates based on monthly mortgage costs.

Delays

Most loans close in a timely manner, but be prepared for closing delays.

First, there’s the radical delay—don’t expect your South Florida closing date to hold if, say, there’s a hurricane churning up the coast. That’s an unlikely scenario but not an unheard-of one.

More typically, the closing delay stems from more benign paperwork and human error. An active market when a high amount of home transfer activity translates into higher amounts of paperwork for banks and county deed recorders’ offices.

From the loan standpoint, delays occur when the bank requires some type of loan condition, such as additional credit references, additional paperwork to show income, or a higher escrow amount. A mortgage underwriter, upon reviewing the particulars of the closing, may want more information.

Some paperwork glitch might delay money transfers until late in the day, and then the funds won’t be available until the next morning, notes REALTOR® Jonathan Osman in hisCharlotte, NC, area blog.

His tips: Always schedule closings for mornings, never close on Fridays, and plan movers for the day after you plan to get the keys. That way you leave yourself some wiggle room.

For all, patience rules. Many veteran homebuyers have last-minute home buying paperwork frustrations to share. But ultimately, their trials ended with that most prized possession—getting the keys.

Updated from an earlier version by Philip Commins.

Top 5 Reasons to Buy a House Now

 Top 5 Reasons to Buy a House Now

Buying a house is a highly individual decision—and a local one—but current trends are creating a favorable situation for many would-be homeowners.

Interest rates are low, employment is rising, home prices—in most markets—are still well below their peaks, and rents are through the roof.

Every family and each individual have various factors affecting the ability and the decision to buy a home. If you live in a market where studio apartments are $2,400 per month—while nearby condos sell for $300,000—it might make sense to buy a house instead.

(Remember, a local REALTOR® always is your best resource in helping you assess market conditions.)

Five Compelling Reasons to Buy a House Now

1. Interest Rates Are Still Low

Mortgage interest rates are still low—for now.

A 30-year-fixed-rate loan now averages 4.16%, according to Freddie Mac, but many economists believe we will see 5% rates next year. As interest rates increase, so do your monthly payments.

A $300,000 house at 4.16% with 20% down would have a monthly payment of $1,168. With a 5% interest rate, that payment increases to $1,288.

2. There’s More Inventory

As more houses enter the for sale market, prices stabilize.

“Inventories are at their highest level in over a year, and price gains have slowed to much more welcoming levels,” said Lawrence Yun, chief economist at the National Association of REALTORS®.

The upside is consumers now have more choices, if they are looking at existing homes.

New homes are another story: Yun says new construction needs to double its current production to meet market demand.

3. Home Prices Are Going Up

Home prices are rising.

The median price of an existing home was $223,300 in June, or 4.3% higher than June 2013. That’s the 28th consecutive month of year-over-year price gains, and economists expect that trend to continue. However, we are still at least 20% off the peak prices of 2006.

“Attempting to buy a home when the market is at its lowest point—or to sell at the peak—is tricky,” said Jonathan Smoke, chief economist for realtor.com®.

He compares it to trying to time the stock market.

“You might get lucky one or two times, but overall, timing the market does not work,” Smoke added. “It all points to purchasing power, and that’s a reflection of price and interest rates, which will both be higher in the future.”

4. Rents Are Sky-High

If you live in a big city, then you know rent is astronomical. In San Francisco, many people are spending 42% of their monthly income to pay the rent. Nationwide, rents are rising at a 4% annual clip.

It’s not unusual to see adults rooming together in expensive cities like New York, San Francisco and Chicago, but everyone needs his or her own space at some point.

Buying a home would lock in your monthly payment and stabilize your finances with a fixed-rate mortgage. This is, of course, assuming you don’t live the San Francisco area, where the average price of a home is $1 million.

(If you’re renting and never thought you could afford to buy a house, try our Rent vs. Buy calculator to see what’s possible.)

5. Employment on the Rise

Perhaps nothing is as important to the financial stability you need to buy a home as steady employment. The U.S. economy is finally adding jobs—about 200,000 new jobs per month.

The next generation of home buyers—the Millennials—has been particularly affected by the nation’s job slump. Saddled with student loans and tight lending restrictions, many in this generation have been living with their parents to save money until the economy picks up.

If your employment prospects look good these days and the other four factors check out, then it may indeed be the right time for you to buy a home of your own.

Putting the Wow Back in Your Hardwood Floors

Putting the ‘Wow!’ Back in Your Hardwood Floors

Hardwood floors bring warmth and charm to almost any home. They can work with almost any decor, and buyers almost always prefer hardwood floors to carpet.

But while hardwood floors are long-lasting, they don’t last forever. How do you know when to refinish, repair or overhaul?

Entire libraries have been written on the subject, but here’s a very basic primer.

Refinish or Replace Hardwood Floors

Most hardwood floors can last for decades with regular upkeep.

If the issues appear mostly cosmetic, there’s no need to ditch a whole floor’s worth of wood. A lot can be done to rehab a floor’s look: filling in holes, sanding down cracks and repainting or refinishing to hide stains.

If you suspect any problems below the surface—if you’re coping with squeaking floors, for example—the problem might extend beyond the floorboards to the subfloor. Fixing that is more than just a quick refinish.

Of course, if you moved into a new place and don’t like the look of the old floors, that’s a different story as not all wood flooring is the same.

Types of Hardwood Floors

The National Wood Flooring Association (NWFA) breaks the types of floors down nicely for homeowners.

Unfinished wood flooring: As natural as it comes, a contractor can fit and add finishing to your home.

Factory-finished flooring: Just like it sounds, the factory applies the finishes before the wood leaves the warehouse, removing some of the steps that would otherwise occur in your home.

Engineered wood: There’s solid wood traditional flooring, and then there’s wood flooring with different veneers. While this type of flooring can be sanded and finished, it cannot be done as many times as solid wood flooring, according to the NWFA.

Floating engineered wood floors: Okay, so this isn’t entirely a separate floor type defined by the NWFA, but it is a way to think about wood floors beyond just nailing down boards.

Floating floors offer a wood option for those who don’t want to invest the time and price of sourcing solid wood flooring. These boards sit above your current floor and fit together like puzzle pieces, with minimal shaping (except for along the edges).

Such flooring can lie over concrete, ceramic tile, and other surfaces that may otherwise rule out traditional wood floors—or necessitate costly removal to make wood possible.

Installing New Hardwood Floors

Cost, noise and time can play as much of a part in this decision as the environment or looks. Sure, you could refinish the floor, but do you have the time to do so?

Renting tools so you can DIY the new floor could bring the project cost close to that of a good contractor, not to mention the time involved for someone who doesn’t do this for a living.

If you’re fairly handy and the floors appear in good shape, buffering, stain and some finish—one weekend, or even one day, of elbow grease depending on the room size—could handle the issue. A local, well-stocked hardware store could help you here.

But if you aren’t sure how to install hardwood floors or how to refinish wood floors yourself, your living room boards may thank you for hiring an expert.