3 Things to Know about FHA Loans
FHA loans are popular with mortgage borrowers because of lower down payment requirements and less stringent lending standards.
Simply stated, an FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Less-than-perfect credit is OK
Minimum credit scores for FHA loans depend on the type of loan the borrower needs. People with credit scores under 500 generally are ineligible for FHA loans. The FHA will make allowances under certain circumstances for applicants who have what it calls "nontraditional credit history or insufficient credit" if they meet requirements. Ask your FHA lender or an FHA loan specialist if you qualify.
Lender must be FHA-approved
Because the FHA is not a lender, but rather an insurer, borrowers need to get their loan through an FHA-approved lender (as opposed to directly from the FHA). Not all FHA-approved lenders offer the same interest rate and costs -- even on the same FHA loan.
Costs, services and underwriting standards will vary among lenders or mortgage brokers, so it's important for borrowers to shop around.
Closing costs may be covered
The FHA allows home sellers, builders and lenders to pay some of the borrower's closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an inducement for the borrower to buy a new home.
Borrowers can compare loan estimates from competing lenders to figure out which option makes the most sense.
Divorce? The 5 Worst Money Mistakes
Written by Guest blogger: Leslie Thompson
During a divorce, a spouse who hasn’t been involved in the family’s finances can often be at a disadvantage during settlement negotiations. That’s why it’s so important for both spouses in the process of dissolving their marriage to understand their post-divorce financial needs and their current financial situation.
The following five items are often overlooked as part of the settlement process, but they’re vital areas to address:
- Cash flow needs
Understanding your need for immediate cash flow is extremely important in determining which assets would be the most beneficial for you to receive in the divorce. If immediate cash flow is a concern, the most valuable assets for you are ones you could sell easily and quickly (so-called liquid accounts), such as stocks, bonds, mutual funds and possibly Roth retirement accounts.
If immediate cash flow is not an issue, a combination of assets with various degrees of liquidity (taxable and retirement plan accounts) will likely be more beneficial long-term.
- Joint liabilities
Just because you agree to split a liability does not mean that the lender will honor your property-settlement agreement. Mortgages will need to be refinanced (if possible), any outstanding tax liabilities on jointly-filed returns will need to be paid and jointly-held credit cards will need to be canceled.
It is important that all liabilities are settled before completing a divorce, either by paying them off or by transferring them to the spouse taking responsibility for the debt.
It is also a good idea to run a credit report to determine if there are any outstanding debts that need to be addressed before settlement.
By securing proof that all liabilities have been settled before the divorce finalization, you’ll avoid an unpleasant surprise when a creditor demands payment from you for a liability that you thought had been settled.
- Taxes on assets
It’s critical to review the tax impact of your investments when evaluating the division of your assets. While two assets or investment accounts may have equal dollar values, their economic value could be vastly different when taxes are factored in.
For example, Roth IRA and Roth 401(k) accounts are funded with after-tax dollars; their future growth and distributions are tax-free. On the other hand, traditional 401(k)s and deductible IRAs are funded with pretax dollars and when you withdraw money from them, taxes will be due on both the amount you contributed and the growth of the investments. As such, Roths have a higher economic value than non-Roth 401(k) or deductible IRAs because they won’t be reduced by future taxes.
If you are younger than 59 and a half, you will pay income tax on withdrawals from non-Roth retirement accounts and possibly a 10% tax penalty. But you can avoid the 10% penalty if the distribution occurs within 12 months following a divorce.
You’ll also want to think about any unrealized capital gains on your taxable investments, since taxes will be due someday. Keep in mind that the first $250,000 of gain from the sale of a principal residence is sheltered from tax.
- Past tax returns
It’s a good idea to review the past three to five years of the tax returns you filed as a married couple. Aside from showing you how much income you two had in a given year, you’ll see whether there are any assets on the settlement agreement or if there are what are known as “tax assets” that need to be considered in the negotiation — such as capital loss carry-forwards, charitable contribution carry-forwards or net-operating losses.
“Tax assets” provide the user a reduction in future taxes and should be considered an asset when splitting the marital estate. But left unresolved, they can cause confusion or errors when filing future tax returns.
- Division of retirement assets
Retirement assets typically represent a large portion of a couple’s net worth and there are special rules to allow for the transfer to be tax-free. You’ll want to make sure the intricacies of these transfers are handled with care.
The divorce decree should specify that any IRA is to be treated as a “transfer incident to divorce” to avoid having the transfer classified as a taxable distribution. Be sure to determine if any basis exists from after-tax contributions made to the IRA — an amount that will be tax-free when distributed. (Consult a tax adviser on this.)
Employer-sponsored retirement plans transfer through a qualified domestic relations order, which requires specific information and approval by the court and plan administrator to allow for a tax-free qualified transfer.
Leslie Thompson is Managing Principal of Spectrum Management Group in Indianapolis. With over 20 years of financial industry experience, she has holds the Chartered Financial Analyst, Certified Divorce Financial Analyst and Certified Public Accountant designations.
*This blog is for information purposes only. Derek Parent and NFM, Inc. accept no liability for its content. Please consult a tax adviser or legal counsel for more information.*
Trick Your Brain into Saving a Down Payment
Follow these 5 strategies to ensure you meet your long-term goals.
Why is it so difficult to stick with a long-term savings plan even when we truly consider our future goals to be just as important as — if not more than — our current desires? Chalk it up to our hardwiring: The rational side of the brain is often drowned out by the emotional side. Good news: It’s possible to outsmart those (very persuasive) instincts that encourage us to spend even when we know we should be saving.
Here’s how to save money for a down payment — or any other long-term savings goal — without letting those instincts get in the way.
Make it hard to spend
If your money is hard to get to, those impulse buys won’t be as easy to make. Put up some roadblocks by moving your savings from your checking account into a separate account that doesn’t have a debit card attached. Better yet, if you’ve got a separate emergency fund and you’re comfortable with not being able to access it immediately, move it into a money market account or other account with a higher interest rate and forget about it (unless you’re adding to the bottom line, of course).
Automate your savings
Take the task of saving out of your control and set up an automated account that diverts a certain amount of your income each month into a savings account. Because it removes the rationalization factor (“Should I save this month or skip it?”), it also removes the emotional act of negotiating with yourself.
Create specific goals and set reminders
Avoid settling for immediate gratification by forcing yourself to acknowledge your long-term goal regularly. Try posting a picture of your dream home in a highly visible area, pinning some money-saving quotes on your Pinterest board, or creating a clear savings timeline with specific number-based savings goals and saving it to your desktop to update with your daily progress.
Match impulse buys with an equal amount into your savings
Computers and smartphones make spending an ever-present option. Spending shouldn’t be forbidden. Instead, skew the act of spending to your favor. So you really want those new boots? Match that spending with an equal contribution to your down payment.
Sometimes the pain of doubling a cost is enough to deter a purchase. In the case you still choose to spend, the matched contribution ensures that at the very least you’re still taking measures to save.
Put away any unexpected savings
Can’t turn down a great sale? To piggyback a good habit onto any impulse purchase, take the sum that was discounted on your sale item and add it to your down payment savings account.
5 Financial Perks of Being a First Time Homebuyer
A number of tax benefits come with being a homeowner — but you’ve got some work to do if you want to take full advantage.
All of those forms you filled out to buy your house were just the beginning. First-time homeowners have years of mortgage and insurance paperwork to look forward to, and, of course, taxes.
To sort through that pile of paperwork and make sure you’re saving as much money as possible, here are six tax benefits for new homeowners.
1. You can deduct the interest you pay on your mortgage
The home mortgage interest deduction is probably the best-known tax benefit for homeowners. It lets you deduct all the interest you pay toward your home mortgage with a few exceptions, including these big ones:
Your mortgage can’t be more than $1 million.
Your mortgage must be secured by your home (unsecured loans don’t count).
Your mortgage must be on a qualified home, meaning your main or second home (vacation homes count too).
Don’t assume that if you are married and file a joint tax return, you have to own your home together to claim the interest: For purposes of the deduction, the home can be owned by you, your spouse, or jointly. The deduction counts the same either way.
And don’t worry about keeping track of how much you’re paying in interest versus principal each month. At the end of the year, your lender should issue you a form 1098, which reports the amount of interest you’ve paid during the year.
Warning: Since, as a first-time homeowner, you pay more interest than principal in the first few years, that number can be fairly sobering.
2. You may be able to deduct points
Points are essentially prepaid interest that you offer upfront at closing to improve the rate on your mortgage. The more points you pay, the better deal you get.
You can deduct points in the year you pay them if you meet certain criteria. Included in the list (and it’s a long one): Points must be paid on a loan secured by your main home, and that loan must be to purchase or build your main home.
3. For 2015, you can deduct PMI
Private mortgage insurance, or PMI, protects the bank in the event you default. PMI may be required as a condition of a mortgage for first-time homebuyers, especially if they can’t afford a large down payment.
For most years, PMI is not generally deductible. However, for 2015, qualifying homeowners who itemize may claim a tax deduction for the cost of PMI for both their primary home and any vacation homes.
4. Real estate taxes are deductible
Real estate taxes are imposed by state or local governments on the value of your property. Most banks or other mortgage lenders will factor the cost of your real estate taxes into your mortgage and put those amounts into an escrow account.
You can’t deduct the amounts paid into the escrow, but you can deduct the amounts paid out of it to cover the taxes (you’ll see this amount on a form 1098 issued by your lender at the end of the year).
If you don’t escrow for real estate taxes, you’ll deduct what you pay out of pocket directly to the tax authority.
And don’t forget about those taxes you paid at settlement. If you reimburse the seller for taxes already paid for the year, you get to deduct those too.
5. You’ll get capital gains tax relief down the road
Resale value is something you considered when you chose your home. And different from other investments for which you’re taxed on the full value of any gain, you can exclude some of the gain attributable to your home when you sell.
Under current law, you can avoid paying tax on up to $250,000 of gain ($500,000 for married filing jointly) so long as you have owned and lived in the property for two of the last five years (those years of owning and inhabiting don’t have to be consecutive).
Gain over that amount is taxed at capital gains rates, which are generally more favorable than ordinary income tax rates.
Buying a Home When Your Partner Has Bad Credit
You pay all your bills on time and you work hard to earn more — so you can save more. Your credit score reflects your savvy money management skills, and you can proudly boast that you’re a member of the 730-and-up club.
Your partner? Not so much. Whether due to past actions or financial mistakes they’re currently working to correct, your love’s credit score is not something to write home about.
What’s a committed couple ready to settle down into a place of their own to do?
Before giving up on dreams of home ownership, take a look at the following options and determine what path makes the most sense for the two of you.
Ask why your partner’s credit score is low
Before trying to beg and plead with a lender to just give you the loan, ask why your partner’s credit score is less than stellar. If in the end you can chalk a bad credit score up to a mountain of consumer debt, you both might need to take a step back.
Buying a home isn’t a requirement — it’s an important decision, but it’s a big one — and trying to force the situation while one of you faces dire financial straits is a recipe for monetary disaster.
Step one: develop a debt repayment plan. Step two: look into home ownership later, when you each carry smaller liabilities.
If your partner has “bad” credit due to long-past transgressions, you each may benefit by taking action to improve their score before applying for a home loan. Start with these tips to boost a credit score (and score a better interest rate on that mortgage):
- Check credit reports, look for mistakes, and correct errors if necessary
- Make all future payments on time and in full
- Keep your credit utilization ratio low (which means don’t run up a balance of $499 on a card with a $500 credit limit, even if you pay off that balance in full every month!)
- Leave old accounts open, but don’t use them
Make the mortgage your own
Ready to buy a house now? It may make more sense to apply for a loan on your own instead of going in jointly with your partner.
Keep in mind that lenders look at your entire financial picture to determine whether you qualify. That means your own income, assets, and credit-worthiness need to meet the lender’s requirements without any help from other sources.
Before running down this road, ensure the monthly payments and other costs associated with home ownership are ones you can shoulder with your income alone.
While no one wants to think about worst-case scenarios, it’s your name on the dotted line — and you’re the one responsible for paying the mortgage if the two of you ever split up.
Plead your case
Although mortgage lenders may seem like faceless entities incapable of deviating from their set processes, there is room for you to explain your situation and provide all the facts.
If you can show your partner’s bad credit is due to factors that will not impact your reasonable ability to repay the home loan, the lender may approve a joint application despite a low score on one end.
Ask if you can write a letter of explanation for a low credit score. If the lender says it will consider your explanation, provide as much documentation to back up your reasons as possible. Consider including explanations and documents to show how, together, you and your love can reasonably make your monthly payments on your potential loan.
Consider a co-signer
If none of the above solutions works for your situation, you can consider asking someone to co-sign the home loan with you. Another person with a good credit score, sufficient income, and low debt-to-income ratio can help you qualify for the mortgage you want.
But you shouldn’t consider this option lightly. That other person will be financially responsible for the loan if you default.
To put it simply, co-signing can come with a lot of baggage. If co-signing makes sense for you, it’s an option — though you might want to think about other options first.
Love is blind, but mortgage lenders may not be so forgiving (or, well, blind to the realities of your financial situation). That doesn’t mean buying a home is out of the question, but do your research first.
If you can find a workable solution, take action and make your home-owning dreams a reality.
And if you both need to take some time to repair that bad credit score? Do that, and rest easier knowing your financial ducks will be in a row before you take on a mortgage.
4 Misconceptions about Real Estate & Capital Gains Tax
Walking away with a profit on your home sale is an exciting proposition. But there’s one thing that can suck the excitement right out of such a positive financial move:the threat of taxes on your investment gain — otherwise known as the dreaded capital gains tax.
Luckily, the Taxpayer Relief Act of 1997 helps many homeowners hold on to the gains earned on their home sale. Pre-1997, homeowners could only use a once-in-a-lifetime tax exemption of up to $125,000 on a home sale, or they would need to roll their earnings into the purchase of another home. Today the rules aren’t quite so stringent. As with all tax-related things, there are plenty of exceptions and loopholes to be aware of. So let’s break down a few misconceptions about capital gains and home sales.
Tax treatment: House flippers vs. homeowners
One common misconception when it comes to capital gains tax on real estate is that all home sales are treated equally. Unfortunately for house flippers, that’s simply not the case. To receive the best tax treatment on your gains, you must have used the home as your primary residence for two out of the five years preceding the sale. If the home was not used as a primary residence for the required time, profit on the sale is taxed as capital gains. However, for those who flip houses on an ongoing basis, homes are considered inventory instead of capital assets, and the profit earned is taxed as income. Long-term capital gains tax is 15% for most people, 20% for those in the top tax brackets. However, if the gains are taxed as income, rates could range from 10% to 39.6% depending on the rest of your income. In addition, house flippers aren’t allowed to simply avoid the tax by rolling profits over into their next home purchase.
Exemption limits: Filing married vs. single
While the Taxpayer Relief Act did away with the once-in-a-lifetime tax exemption of $125,000, exemption limits haven’t completely fallen by the wayside. Now you can pocket up to $500,000 of each home sale profit tax-free if you’re married, or up to $250,000 if you’re single. But for some newly married couples, claiming this exemption can be a little tricky. If one person owned the house for the past two years, but their partner wasn’t added to the title until, say, the last two months, that’s OK. However, both parties must have lived in the residence for two years prior to the sale — even if only one was on the title before they were married. In addition, if one person sold a previous home within the last two years and cashed in on an exemption, the couple will have to wait until they are both out of that two-year window before pocketing any gains from their shared home.
Type of home: Primary residence vs. vacation home or rental property
If you aren’t flipping homes, but you do have a second home or a rental property you’d like to sell after living there for the required two years, it won’t be treated as a primary residence for tax purposes. Second homes and rental homes no longer receive the same tax shelter they did before a 2008 shift in the tax code — even if the home becomes your primary residence for a time. Instead, when tax time comes around, you will owe a prorated amount based on the number of years the property was rented out or used as a second home after 2008. If, for instance, you used your vacation home as your primary residence for five years starting in 2010, but you used it as a vacation home for 15 years before that, only 10% of the gains would be taxed: The two years post-2008 when it was used as a vacation home equals 10% of the total 20 years of homeownership. The rest of the profit wouldn’t be taxed as long as it fell within the exemption limits.
Profit: Large sale price vs. small sale price
Another common misconception is that the more a home sells for, the larger the tax bill will be. However, for tax purposes, what you owe doesn’t depend on the sale price — it’s based on how much profit you make from the sale. In fact, you could sell your home for $5 million and not owe a penny in taxes — as long as you didn’t make more than the allowed exemption amount on the sale.
Another important thing to note: Capital gains tax on real estate isn’t necessarily an all-or-nothing proposition. If you’re nearing the cap on exemptions, you could still qualify for a partial exemption — just be sure to consult a tax professional before you make any big moves.
The Truth About Bi-Weekly Mortgage Payment Plans
Traditionally, your mortgage payment is a monthly cost. You submit your payment once a month to the mortgage company, and your money is applied to principal, interest, and escrow. But many mortgage lenders also offer biweekly mortgage payment plans that allow you to pay in installments every two weeks instead of every month. Biweekly payment plans sound simple and straightforward: You pay biweekly instead of monthly and reduce the balance on your loan faster. In theory, by using one of these plans, you pay less interest over time, build equity faster, and get rid of your mortgage ahead of schedule.
But before you sign up for a biweekly mortgage payment plan, it’s important to understand the pitfalls — and consider whether putting this concept to work on your own makes more sense.
Should I sign up for a lender-sponsored biweekly mortgage payment plan?
Unfortunately, these mortgage payment plans don’t always work as well as they claim. What actually happens is that you send in your biweekly payment to the company servicing the loan, and then they hold your payment until the second one arrives. Only after the company has the full monthly payment amount do they apply the money to your mortgage — which means as far as the mortgage company is concerned, you’re still making one payment per month.
In effect, this saves you nothing in interest because your funds are still only being applied as if you were making monthly payments. Worse still, some biweekly mortgage payment plans can actually ending up costing you more money, because the companies that offer these plans often charge additional fees to handle and deliver the payments for you.
If they don’t help pay off a mortgage early, why do these payment plans exist?
Considering the potential costs for the borrower, it may seem silly for lenders to even offer this plan. What’s the point if using the payment plan is no different than if you paid on the regular monthly schedule? Consider this: Most lenders who originate loans don’t actually service those loans. A third party handles the payment and the processing. But that doesn’t mean you can’t make a plan to pay down your mortgage loan ahead of schedule. You just don’t need to set it up through a lender-originated plan.
How can I pay off my mortgage early on my own?
There’s nothing wrong with the idea of paying extra on your mortgage and accelerating the rate at which you pay off the loan. You can make extra payments at any time, and you can do so in a variety of ways. Consider adding a little more to each monthly payment you make to help pay off the mortgage early. If you know you have an extra $100 in your budget each month, tack that on to your payment. For example, on a $100,000 loan (assume a 30-year fixed mortgage and 4% interest), paying an extra $100 a month can cut approximately 8.5 years off the life of the loan — and save $22,463.76 in interest. That’s some serious cash.
Another option? Create your own biweekly payment plan. By skipping the third-party processing (and the fee they add on for doing so), you’ll end up making an extra payment each year that you wouldn’t make if you paid monthly. You can also continue to pay monthly but make one extra mortgage payment at some point during the year to get the same result. Anytime you have extra money on hand — from a tax return, bonus from work, or gift — you can apply these funds to your mortgage too.
Just be sure that any extra payments you make are applied to the principal of your loan, not just the interest. This ensures you’ll actually receive the full financial benefit of paying extra toward your mortgage and be on track to pay off the loan early. You’ll also want to ensure that the terms of your mortgage will not leave you with a prepayment penalty should you pay extra or early.
10 Questions to Ask Your Mortgage Lender
One of THE MOST important stages in the home-buying process is finding a reputable lender or mortgage broker to handle your transaction. A good lender will respect that you work hard for your money — and you want to spend it wisely.
After running a credit check, your lender will present you with options for what you may qualify to borrow. The mortgage amount can be different depending on two things: the product and interest rate. Since the interest rate determines what you’ll owe every month on that balance, understanding how different mortgage products work is key. Here are 10 questions to ask to make sure you’re getting the best rate (and the best deal).
- What is the interest rate?
Your lender will offer you an interest rate based on the loan and your credit. The interest rate, along with the mortgage balance and loan term, will determine your real monthly payment. A loan with a lower balance or a lower interest rate will make for a smaller monthly payment. If you’re not satisfied with the interest rates offered, work to clean up your credit so you can qualify for a lower interest rate.
- What is the monthly mortgage payment?
As you develop a budget for your new home, make sure you can afford this monthly mortgage payment — and be sure to include insurance and taxes in your monthly payment calculations. And don’t forget about short-term financial goals — say, saving up for a vacation or buying a new computer — and long-term retirement goals to consider. Your monthly mortgage payment shouldn’t be so high that your money can’t work toward your other financial goals.
- Is the mortgage fixed rate or an ARM?
Fixed-rate loans keep the same rate for the life of the loan, which can range between 10 and 30 years. Adjustable-rate mortgages, or ARMs, have interest rates that change after an initial period at regular intervals. If you don’t plan to stay in your home long-term, a hybrid ARM with an initial fixed-rate period may be a better choice, since this type of loan tends to have lower interest rates than fixed-rate mortgages.
If you do consider an ARM, make sure you ask (and understand!) when the rate will change and by how much. Ask how often the rate will change after the initial interest rate change, the index that it’s tied to, and the loan’s margin. There are usually caps to how much the interest rate can increase during one period and over the life of the loan, so recalculate the monthly payment to make sure you can afford that higher rate.
- What fees do I have to pay?
One-time fees, typically called “points,” are due at closing. For every point you pay, your lender will decrease your interest rate by 1%. You can also inquire about whether you might have the option of paying zero closing fees in exchange for a higher interest rate.
- Does the loan have any prepayment penalties?
If you’re saving up to make some extra mortgage payments to pay off your mortgage principal early, you may have to pay a fee. Don’t forget to ask this important question.
- When can I lock in the interest rate and points, and how much does this cost?
Your lender may be able to lock in your interest rate for a time, and for a fee. If rates go up, you’ll still be able to benefit from a lower rate on your mortgage.
- What are the qualifying guidelines for this loan?
The underwriting guidelines are different for every loan, as are income and reserve requirements. Along with requiring you to have sufficient funds for the down payment and closing costs, most mortgages require proof of income and reserves of up to six months of mortgage payments.
- What is the minimum down payment required for this loan?
Different loan products have different down payment requirements. Most mortgages require a 20% down payment, but if you qualify for an FHA loan, for example, your down payment could be as low as 3.5%. In general, loans with lower down payments cost more.
- Do I have to pay for mortgage insurance, and how much will this cost?
Putting down less than 20% on your purchase requires paying mortgage insurance until your loan-to-value, or LTV, ratio falls below 80%. Mortgage insurance premiums can be expensive, sometimes costing up to $100 per month for every $100,000 borrowed.
- Do you have other mortgage products with lower rates that I qualify for?
The best way to comparison-shop is to start with your current lender. They probably offer more than one type of loan, and these may have terms better suited to your financial situation.
5 Ways to Use a Mortgage Calculator
Whether you’re hoping to buy or planning to sell, a mortgage calculator can give you some valuable insights. Here are five questions a monthly mortgage calculator can help answer to make you more savvy about home buying.
Should you rent or buy?
There’s more to being a homeowner than just swapping a rent payment for a mortgage payment. You’ll have to consider additional costs like property taxes, and depending on your loan, you also may have to factor in fees like private mortgage insurance (PMI) — all of which can be estimated by a mortgage calculator. It’s a good way to compare the total cost of renting with the realistic costs of buying.
Is an adjustable-rate mortgage (ARM) right for you?
One way to keep a mortgage payment down and still get the house with all the bells and whistles is to choose an adjustable-rate mortgage with an interest rate lower than a fixed-rate loan’s. There are some risks involved, however: With an ARM, your payment could spike if the interest rate adjusts. With a mortgage calculator, you can see how interest rate assumptions can impact your monthly payment, and the total interest paid over the life of a loan with an ARM versus choosing a fixed-rate loan.
Can you cancel your PMI payments?
Private mortgage insurance is an additional cost for most buyers who don’t put down at least a 20% down payment. To stop paying this fee every month, you must owe less than 80% of the value of your home. You could qualify by either paying down your loan or seeing enough appreciation in your home to meet the threshold. A monthly mortgage calculator can help compare your home value with the loan amount and determine when you meet the requirements to request cancellation of your PMI payments.
Can you afford to pay off your mortgage early?
To find out, use a loan calculator to play around with the numbers. Plug in your original loan amount, interest rate, and date the loan was issued. Then include the amount you think you can add to your current monthly payment to determine how quickly you might be able to own your home outright.
Should you refinance?
A lower interest rate is usually a good thing, but depending on the amount you owe and the time remaining in the life of the loan, refinancing may end up costing you more than staying the course.
If you would like answers to these questions and more without using a mortgage calculator, contact my office at 702.331.8185.
Will a New Bill in Congress Help You Qualify for a Mortgage?
A new bill in Congress could significantly impact your ability to secure a mortgage by changing the way lenders look at credit scores.
Known as the Credit Score Competition Act, the bill is in its first stage of the legislative process. Although it’s a long way from becoming a law, future homebuyers have good reason to keep an eye on this bill. The bill would push for a new credit-scoring system, one that could potentially allow more buyers to secure funding. This is a big deal for those who have a low FICO credit score but are otherwise good home-loan candidates.
People with credit scores that do not meet FICO’s standards of “good” or “excellent” could be evaluated under different credit-score systems and therefore have their credit rated differently. In theory, this could help those buyers receive approval for a mortgage they might otherwise have missed out on. Because Fannie Mae and Freddie Mac own about 90% of the secondary mortgage market, and they’re allowed to consider only FICO scores, there’s no room for competition in the credit-scoring industry.
With such low competition, there’s no reason for companies to innovate.
This matters because not everyone has access to traditional forms of credit that beef up your FICO credit score (think steady income, bank accounts, assets, and months of credit-building history). Proponents who argue Fannie Mae and Freddie Mac should be allowed to look at new credit-scoring systems say FICO’s way of formulating credit scores is unfair to a number of groups, including first-time homebuyers, lower-income families, and minorities. The model currently used to score borrowers is based on data from nearly 20 years ago and excludes millions of people that companies like Experian say are creditworthy but whose scores don’t reflect that under the system in place today.
Credit-scoring models currently used in the residential mortgage process judge someone’s creditworthiness on a strict set of criteria but leave out factors that may indicate financial responsibility. For example, right now, FICO generally doesn’t take into account factors such as whether you pay your rent on time. Sometimes, that’s the only way first-time homebuyers can demonstrate they’re capable of handling a monthly mortgage payment. The current credit-scoring model also effectively punishes borrowers who don’t have much of a credit history; a short or nonexistent credit history can drag down overall scores. With this system, if you’re financially responsible, a diligent saver, and debt-free, you could still miss out on a mortgage because you don’t utilize credit in your day-to-day life.
Stay tuned to Credit Score Competition Act's journey through the legislative process!