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Sorting Through the Mortgage Maze

If you have decided that it’s time for you to buy a house, there is one big hurdle you will need to overcome and that is getting a mortgage. While there is no shortage of mortgages, it may sure seem that way when potential lenders start to grill you.

The best time to apply for a mortgage is actually before you go house hunting. This will give you an idea of how much house you can afford in the eyes of the lender as well as a better idea of just what you can expect to pay monthly. However, before you call or visit a prospective lender prepare yourself and do your homework. Note: You will have additional hurdles if you have a low down payment, a low credit score, a high debt-to-income ratio, or a small cash cushion so check for these first.

Start by getting a copy of your credit report. Report any errors to the credit bureaus so they can be corrected before you go to a lender. Then create a budget to determine how much you can really afford to pay each month. You can use one of the calculators on sites like Bankrate.com to determine what this translates to in terms of a house price. Then stay in your safe zone. This is not the time to stretch your budget into a bigger house than you can afford. Next, check out prospective lenders. Rates are a good indicator but they are not the only indicator to look for in a prospective lender. Some other things to look for include:

  • The lender’s reputation in dealing with customers. Thanks to the internet you can find comments and other information before you call them.
  • Look on their website to see the types of mortgage options they have available. There are so many possibilities. Take some time to get familiar with some of the terms so that you can ask follow up questions and make informed decisions. Once you become familiar with the options make some initial decisions like whether you want a fixed mortgage or an adjustable one. There are pros and cons to each, make sure you know the difference before making a final decision.
  • How receptive they are to you and working with you. If they start out by pointing out all of your flaws in terms of credit or income then this might not be a good fit. Or this might not be a good time for you to get a mortgage. It is much tougher to get a mortgage today so be prepared to jump through some pretty tall hoops but rudeness and poor customer service don’t have to be a part of the process.

Finally, be aware that most lenders will want to run a credit check before you get too far in the process so do your homework to minimize the number inquiries and try to do them all within a 30 day period. Inquiries like these will lower your credit score and possibly cause you to pay a higher rate, however when you can keep them within a 30 day period they don’t take off as much. ps!

 

Is This the Right Time for YOU to Buy a House?

It’s a part of the American dream, rates are low, there are plenty of houses to choose from, and it’s a buyers market so is this the perfect time for YOU to buy a house? Well, it depends because rates and availability are not the only things to consider when buying a house. Here are four other factors to consider before taking the plunge:

  1. Do you know the ‘true’ cost of home ownership and how much house you can afford? In addition to your mortgage (principle and interest) you must also pay taxes and insurance. And depending on the area you choose to live in, these can add hundreds of dollars to your payment each month. Then there is maintenance. This is often not factored in but it is real. When you own a home something is always going to need ‘fixin’. And don’t forget to add in dollars for a new lawn mower or a lawn service, higher utility bills, more furniture, etc. In fact, some studies show that when you factor in all of the costs, in many cases even with the deductions you get for owning a home, it is still actually cheaper to rent and you don’t have all of the responsibilities that come with home ownership.
  2. Is your career stable and do you plan to stay in the area for at least five years? This economy has made a lot of things unpredictable, including jobs. If there is a good possibility that you could lose your job or that your hours could be cut, you may want to wait until things are more stable. Also, if you are still moving up in your career and there is a possibility that you will need to move away to move up, you might want to wait. As I mentioned earlier, this is a buyers market which means that it is often tough to sell a house quickly at a reasonable price and this could make it difficult to move on short notice especially if you have lived there less than five years. Unlike a lease that often has an out clause, mortgages don’t have those, so until you are able to sell your house, you could be stuck with payments in your old and new location.
  3. Do you have some money set aside for a down payment and a cash cushion? Gone are the days when you could get a 100% loan. You will now need to bring money to the table (at least 5% of the loan and 20% is even better because it means that you will not have to mortgage insurance on top of all of your other costs). And, in addition, lenders also want to see that you have a cash cushion or other investments that could tide you over if an emergency should occur.
  4. How is your credit score and your debt-to-income ratio? Like the amount of money you need to get a loan, the bar has also been raised when it comes to credit scores. Lenders are now demanding scores of 700+ and debt-to-income ratios of less than 40%. If you haven’t checked your credit reports lately, do so before applying for a loan so that you can see what your prospective lenders will see just in case there are errors that need to be corrected. Having a credit score below 700 could either translate into higher rates on your loan which could add thousands of dollars to your payments each year or even being turned down for a loan. Free credit reports are available at www.annualcreditreport.com. Note you have to pay to get your credit score. Your debt-to-income ratio indicates the percent of your income that goes toward paying all recurring debt payments, including housing, credit cards, car payments, student loans, child support, alimony, etc. In general, lenders typically look for a ratio of 36% or less. So calculate yours to see how close you are to the recommended percent. Like low credit scores, a high debt-to-income ratio could result in being turn down for a loan.

Dealing With the College Cash Crunch

As the economy struggles to recover, more families are now faced with some critical decisions when it comes to paying for college. Despite the economy, college costs are still on the rise with some elite private schools maxing out at as much as $50,000 per year. Market volatility and along with rising college costs has left many who were once on track with projected shortfalls.

So what can you do if you are the parent of student who is getting close to college age if you haven’t saved enough for college? Here are four strategies to consider:

  1. Consider a lower cost college. I know this is in the ‘duh’ category but you would be surprised at how many people get hung up on one specific college and never look beyond it. To achieve the desired outcome, research colleges to see if there is a public university or a private one that can provide the same training in your students’ area of interest at a lower cost.
  2. Apply for scholarships and grants. There are still a lot of scholarship opportunities out there. There are specific sites like FastWeb.com that can help but there are also companies, organizations, and foundations that sponsor scholarships. So do your homework before you give up on this option. Start early (some you can apply for as early as elementary school). And you can often increase your chances by applying to off-the-beaten-path schools instead of the brand names that everyone chooses. One of my friends sent both of her kids to college on scholarships alone – and they graduated debt free from really good schools and had multiple job offers.
  3. Consider going to a 2-year college. Many students are opting for this and then transferring afterwards to complete their four-year degree. This can dramatically cut your costs.
  4. Know your loans. Start by visiting FAFSA (www.fafsa.ed.gov) to learn about student aid and apply early. Many students and parents are utilizing Stafford loans and Federal Plus loans, and some parents are even using home equity loans (which I don’t recommend) to fund college. Another resource is FinAid.org. However, before signing on the dotted line for any loan be sure you have read and understand all of the fine print and be on the lookout for scams — if it sounds too good to be true, it probably is. If you feel you need more help in this area, check with a financial planner. Look for planners who specialize in this area because there are lots of options and things to consider. ps!

Credit Utilization Ratio

Credit Utilization Ratios (CUR) – We used this term in an earlier article about credit scores and how they are calculated. The three major credit bureaus all factor in the amount of credit you have available and how much of that available credit you are utilizing or using. In most cases, this makes up about 30% of your total credit score so it is an important thing to keep up with.

To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. For example, if you have a total credit limit of $10,000 on all of your cards and your total balances on the cards are $1,000, you have a low CUR of 10%. This will increase your credit score and lenders will love you. If on the other hand, you have total balances of $8,000, you have a high CUR of 80%. This could not only hurt your credit score but lenders will be very leery of extending additional credit to you. In fact, having a CUR of greater than 30% can start to negatively affect your credit.

Also, be aware that car loans or a mortgages are calculated based your original loan. For example, if your original car loan was for $20,000 and your current balance is $10,000 then your CUR will be 50%, whereas if you owe $18,000 it will be 90%.

The credit bureaus tend to look at your CUR in two parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits. So before applying for more credit, get your balances as low as possible and allow yourself enough time for changes to be reflected in your credit score. Remember, creditors may not report changes immediately. ps!

Minding Your Money: 5 Easy Ways to Lower Your Credit Score

Sometimes you start out to do the right thing – save some money or simplify your life – but many of the options you choose can also result in lowering your credit score. And this may mean paying a higher interest rate or getting less favorable terms if you want to make a big purchase such as a home or a car in the near future. So be on the lookout and be aware that the following behaviors could have negative consequences:

  1.  Applying for more credit. While it may sound frugal to open a department store credit card and receive an instant discount on your purchase, it often does not help you in the long run because the savings may not be worth the ding to your credit score. Any new credit applications are a hard inquiry on your credit report, which can lower your score. And the same is true for gas cards, new auto insurance, and cell phone plans where they check your credit. All of these could result in savings but they could also ding your credit score so weigh the pros and cons.
  2. Keeping a zero balance. Because we are at the mercy of the credit bureaus, many of the rules they have to build and maintain a high credit score are really counterintuitive to staying totally debt free and this is one of those instances. When a small amount is owed, the remaining credit on your card is factored into your credit utilization ratios (how much of your available credit you are using) while cards with no balance don’t count. So you can actually boost your score by having a small amount of debt while having none may lower it.
  3. Closing a credit card account. Everyone is trying to get out of debt these days so once you get there give yourself a big pat on the back but resist the urge to cut up your card and close your account, especially if is one of your oldest cards. One of the factors that the credit bureaus look at to determine your credit score is the length of your credit history and closing an older account could result in another ding to your credit score
  4. Keeping a high balance. While tough economic times may result in higher credit usage be aware that the amount you owe on your accounts makes up about 30% of your credit score. When you use only a small amount of the total credit you have available, such as 10% – 30%, lenders consider you to be a low credit risk and are more willing to lend to you and give you more favorable terms so always keep your totals as low as possible, but not zero (see #2 above).
  5. Negotiating a lower APR. Who wouldn’t like to lower their rate, however this sometimes results in the credit card company also lowering your credit limit. While on the surface this may not seem like a bad thing, what this does is it reduces the total amount of credit you have available and if you are using more than 30% of your available credit this could ding your credit score (see #4 above).
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