Recently I wrote an article titled, “Buying A Home? Down Payment Tips You MUST Know!” That article covered the basics of what to do and what not to do when it comes to documenting a home buyer’s assets.

Last month I processed two files for which proper documentation of assets were extremely burdensome and time consuming. to properly document assets. Mind you, the difficulty was not only for me, the processor, but for the home purchasers as well. A lot of the hassle could have been easily avoided had the home buyers worked with the loan originator to ensure funds were being managed properly.

Here I’ll lay out what occurred with the first of these two files, what resulted from those actions, and what could have been done to avoid the issues.

Names have been altered for privacy concerns.

Case #1 - Mr. & Mrs. White: Income or Gift?

The asset documentation on this file became a nightmare for these folks. While their loan DID close and they are now happy homeowners, a tremendous amount of stress and worry could have been avoided. Here’s a summary of what occurred:

• The Whites are self-employed, running an S Corporation
• Their business is focused on consulting and management
• The husband manages restaurants, and ththe restaurant owner pays the S Corporation, and the S Corporation pays Mr. White
• Prior to getting under contract to buy a home, the Whites established how much money they needed for their down payment and closing costs
• At that time, they did not have enough money to purchase a home
• In order to assist Mr. White, a restaurant owner agreed to pay him bonuses early
• However, instead of paying the owner paying tthe business (S Corporation), directly as per normal protocol, the restaurant owner paid Mr. White directly out of her personal bank account
• Mr. White deposited the bonus checks into his personal account (the same account from which the earnest money deposit came), which triggered the requirement to review the personal bank accounts in detail
• The “large deposits”, which were three deposits totaling $25,000, were discovered
• Instead of being able to consider the deposits income, as they should have been, they now needed to be considered gifts, because the monies were paid directly to Mr. White rather than to the business
• FHA allows gifts from employers and/or a person who has close personal ties to the home buyer, but proper documentation must be provided
• FHA requires that the person providing the gift(s) must provide proof that THEY have the ability to provide the monies to the home buyer (FHA’s reasoning is to ensure no one is borrowing monies in order to meet down payment requirements)

So what additional documentation requirements resulted from the restaurant owner paying Mr. White directly versus paying the business?

1. FHA required the lender to prove there is a relationship between Mr. White and the restaurant owner, which was accomplished via providing previous payroll journals and other miscellaneous business documentation to show they had an ongoing relationship
2. FHA requires the completion of a gift letter to document that there is no expectation of Mr. White having to pay the restaurant owner back
3. FHA requires that the person providing the gift has to prove that they have the capacity to give the gift, so the restaurant owner had to provide their personal bank statements to prove they had the funds available to give to Mr. White (can you imagine asking your boss for his or her personal bank statements?)

Obtaining all this documentation slowed the entire process down. However, more importantly, Mr. White was put in the very awkward situation of having to request all this documentation from the person for whom he works, who was simply trying to help out.

Had the restaurant owner's business paid Mr. White’s company, none of the above requirements would have been triggered. The restaurant owner in her attempt to help out Mr. White, fell subject to the old adage, “No good deed goes unpunished.”

Be sure to check the blog again soon, as Case #2 will be added.

If you're considering purchasing a home soon, it is critical to understand the documentation requirements to which lenders are subjected in today’s lending environment. Hopefully, this information will save you a lot time and grief as it pertains to the documentation of your down payment monies (referred to as "assets" by your lender).

As a Senior Loan Processor, documenting assets often times is my biggest challenge in getting a loan fully approved.

Let’s discuss the rules first. As Fannie Mae is the largest backer of conventional financing, we’ll reference their underwriting guidelines. They state:

Fannie Mae Asset Guidelines

When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan. Requirements for evaluating large deposits vary based on the transaction type…

The full guidelines are available here.

Why do Fannie Mae, FHA, VA, etc. even care about large deposits? The answer is simple. These institutions need to be absolutely certain that borrowers did not take out a loan to come up with their down payment monies. New loans can take months to show up on a credit report. Loans from friends, employers, etc. may never show up. New loans impact a borrower’s debt ratio, which is a critical piece of the loan qualification process.

To make more sense of this, let’s take a look at an example to see how this works.

Scenario A

Assume Mr. & Mrs. Smith are both employees earning W2 wages and have a combined $6,000 a month in income.

Monthly Deposits

None of the payroll checks above need documentation. However the $3,500 is more than 50% of the Smith’s monthly income (58.33%) and therefore needs to be documented.

If the personal check came from a family member, the terms for providing the monies to the Smiths will have to be documented. Is the $3,500 a loan or a gift? If it is a loan, what are the terms and how does this impact the Smith's debt ratio? If it is a gift, further documentation will be needed, such as the completion of a gift letter (a form letter lenders use).

If the $3,500 is not from a family member, then who provided the money, and why? Did an asset get sold? If so, documentation proving that would need to be provided.

What happens if it is a gift from a non-family member? Most often those monies cannot be considered, and the lender will reduce the assets of the Smiths by $3,500. This may put their loan approval in jeopardy.

As you can see, this process can get ugly fast. It is critical to note the lender will require two months of bank statements (all pages, even blank pages) and will review each and every deposit in those two months.

Here are some of my tips to prevent getting into documentation difficulty.

1. If you need to use some cash on hand for your down payment, put it in the bank at least 60 days prior to starting the loan application process.

2. Do NOT deposit cash or personal checks without speaking to your loan officer or loan processor first.

3. If you’re self-employed, do NOT transfer monies between your business and personal accounts. Why? You will trigger the requirement to show two months of business statements. Large deposits in those accounts will likely need to be documented as well.

4. Using gift funds from family members as a down payment? Be prepared that they will have to fill out paperwork and in some cases prove they had the money to provide you the gift as well (yuck!).

So the easiest way to avoid documentation work is to have your monies in the bank two months or more prior to beginning the home purchase process. If that’s not possible, then be sure to speak with your loan officer or processor and map out a strategy to document assets properly. It’s okay to use tax refunds, gifts, etc., however, you should know prior to depositing these funds whether you're making the process easier or more difficult on yourself.

Best of luck on your home purchase!

Current historically low interest rates have contributed to a significant improvement in the housing market over the past few months. It was good news for housing when
data for pending home sales showed an unexpected 5.9% jump in May, 2012 vs. April, 2012. Many have taken this as a signal that interest rates are nearing their bottom, and will likely begin to increase over the next several months. In addition, while some area markets are stabilizing, the S&P/Case-Shiller Index of Property Values showed that the decline in home prices during the month of April, 2012 was at its lowest since November, 2010, indicating that although home prices are starting to stabilize and are soon expected to increase, they are still down even as the housing market sees some improvement.

“Investors are quickly swallowing new foreclosure supply, limiting shadow inventory and creating a floor for home prices,” Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients. “We expect any further decline in inventory to serve as a platform for price appreciation, further aiding sales.”

"Shadow Inventory" refers to real estate properties that are either in foreclosure and have not yet been sold or homes that owners are delaying putting on the market until prices improve. Shadow inventory can create uncertainty about the best time to sell (for owners) and when a local market can expect full recovery. Also, shadow inventory typically causes reported data on housing inventory to understate the actual number of properties in the market. The fact that Shadow Inventory is being limited in combination with the foreclosure supply being reduced is an indication that the supply of real estate properties is truly declining.

This would certainly suggest that there will probably never be a better time to either buy another home or refinance your existing home. If you are considering going forward with either anytime in the near future, you should contact your mortgage loan officer to help assess your current situation and determine which options are available to you.

Your debt-to-income ratio, or debt ratio, is typically represented as the percentage of your income that goes toward paying your debt. A lot of lenders, especially mortgage and auto lenders, use your debt ratio to evaluate your credit worthiness, i.e., how much of a loan you can handle. For example, a mortgage lender will use your debt ratio to figure out the mortgage payment you can afford after your other monthly debts are paid. Debt ratio considerations are as important as your credit score. While your credit score reflects how responsible you are in paying your bills, your debt ratio gives potential creditors additional insight into your personal finances. Your debt ratio shows just how much debt you're juggling as compared to your income. It's possible that someone with a good credit score could be turned down for a mortgage or home loan because lenders feel the borrower is simply carrying too much debt, despite a steady history of on-time payments.

Information Needed To Calculate Debt Ratio

1. Gather recent paycheck stubs. Add up total gross monthly income. If total income varies from month to month, calculate the monthly average for the past two years.
2. Determine the total housing cost, such as mortgage principal and interest or apartment rental, mortgage insurance premium, property tax, homeowner's insurance premium, hazard insurance premium, and any homeowner's association dues.
3. Gather statements from all other monthly recurring bills. This includes revolving debts (the minimum monthly credit card payments listed on the credit report), installment loan payments (including such things as vehicle loan or lease payments and student loan repayments), alimony payments, legal judgments, etc. Any installment debt with fewer than ten payments remaining is not to be counted unless it is a vehicle lease payment; lenders believe another vehicle lease agreement will be signed when the current lease expires.
4. Add the amounts from these other monthly recurring bills to the total monthly housing cost to calculate the total monthly debt obligation. Do not include ongoing living expenses such as groceries, gas, or utilities, as these are not considered debts.

Let's go through an example to demonstrate how to calculate debt ratio. Assume the following monthly financial situation for an applicant: 

• Gross wages of $5,000
• Principal and interest payment of $1,000
• Property tax of $150
• Homeowner's insurance of $65
• Homeowner's association fees of $45
• Total credit card debt of $225
• Vehicle loan payment of $350
• Student loan repayment of $125

Now we are ready to calculate the debt ratios.

There are two different debt ratios which mortgage lenders use when evaluating a borrower for a loan.

Primary Debt Ratio

The primary or front-end ratio is the monthly housing cost divided by gross monthly income.

In this example, the total housing cost is $1,260 ($1,000 + $150 + $65 + $45 = $1,260).

Gross monthly income is $5,000.

The primary or front-end debt ratio is 25.2% ($1,260 / $5,000 = 25.2%).

Secondary Debt Ratio

The secondary or back-end debt ratio is the total of all recurring monthly debt (housing cost plus all other monthly recurring debt) divided by gross monthly income.

In this example, the total recurring monthly debt is $1,960 ($1,260 + $225 + $350 + $125 = $1,960).

The secondary or back-end ratio is 39.2% ($1,960 / $5,000 = 39.2%)

Lenders like these ratios to be low – generally, the lower they are, the greater the chance you will be able to get the loans or credit you seek. Talk to your lending professional about the debt ratio requirements for the type of loan for which you’re applying. If your ratios are higher, you should take action to reduce them.

Finally, lenders have policies in place on how to calculate income, so be sure to speak with your lending professional to determine what monthly income figure they’ll use.

Anyone serious about increasing their credit scores should first take the time to understand how scores are calculated. By doing so, any effort put forth to increase credit scores is maximized. According to Fair Isaac Corporation (FICO), the percentages of importance in determining credit scores are:

1. 35% Payment History
2. 30% Amounts Owed
3. 15% Length of Credit History
4. 10% New Credit
5. 10% Types of Credit Used

Let’s examine each of these categories in more detail to learn more:

Payment History – 35%
In simplest terms, credit that has an on-time payment history is better than credit that’s been past due — we all understand that. However, did you know that an open account that is currently past due is WAY more damaging than an account that has been past due recently but is now current?

An easy way to get a bump in scoring is to get any OPEN accounts that are past due current. However, that doesn’t necessarily mean you want to pay off any open collection accounts. Be sure to speak with your loan officer or credit professional prior to paying off any closed derogatory accounts, since doing so can create documentation issues and actually even decrease your score.

Amounts Owed – 30%
This category is easily the least understood by consumers. Considering the importance (30%) in deriving credit scores, knowing more about how this affects your credit is critical.

The are many different components that make up the “Amounts Owed” category, such as the total debt owed, number of accounts that have a balance, and percentage of credit utilized on revolving accounts. The last one, percentage of credit utilized on revolving accounts, is often times that easiest to manipulate on the consumer’s behalf and therefore can impact scores quickly. To understand more, let’s examine the following scenario:

Consumer A has a $1,000 credit card balance with a $5,000 credit limit. Consumer B has a $1,000 credit card balance with a $1,000 credit limit; all other credit is the same. Which one has a better score? If you guessed A, you would be correct, and the difference would be significant!

Consumer A owes 20% of their limit on this account while Consumer B owes 100%. The scoring models view consumer B as being riskier, given they’re “maxed out” on their credit card. A good rule of thumb is attempt to owe no more than 30% of the limit on any credit card; for example, keep your balance at $300 or less on the card with the $1,000 limit. A good strategy is to continue to pay all bills on time and work with the creditor to increase your credit limits while retaining small balances.

Length of Credit History – 15%
Another straightforward category — the longer you have credit the better your score is and vice versa for shorter credit history.

New Credit – 10%
This category is different from Length of Credit History, as it examines how old (or new) individual accounts are. Older accounts are scored better in comparison to newer accounts. Additionally, new credit inquiries can impact your score negatively if there are an abundance of them. The advice here is to consider keeping open established accounts even if it means retaining a small balance in order to do so.

Types of Credit Used – 10%
Examples of different types of credit include revolving (credit cards), installment, and mortgage accounts. To increase scores, a mix of these accounts normally works best. For example, someone who has only three credit cards accounts would typically have a lower score than someone with a mortgage, installment, and credit card account even if all accounts have the same balance and all are current.

Word of Advice
As always, talk to your loan officer or credit professional PRIOR TO making changes on your credit to ensure you’re making the right choice to increase your credit scores. And remember, you may have to document changes, especially those in which you pay down debt, with proof of how you obtained the funds to make the payment in order to have the improvement in your credit score considered by the lender in the lending decisions.

In February, 2013, Americans bought existing homes at the fastest pace in three years, as mortgage interest rates, remaining near record lows, continued to drive a housing market revival.

The median forecast of 77 economists surveyed by Bloomberg for existing-home sales called for an increase to a 5 million pace.   This was supported by data from the National Association of Realtors, which showed that purchases increased 0.8 percent to a nearly five million annualized rate, the most since November 2009.

Higher housing demand, combined with limited supply, is driving increased property values, resulting in gains in household confidence and wealth, which in turn are helping increase consumer spending.  The figures corroborate the Federal Reserve’s view that labor conditions are on the mend and residential real estate is picking up along with the broader economy.

Consumers’ views of the economic outlook brightened in March.   “Americans are growing more confident about their own financial and economic situations,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “A quicker pace of employment growth, a modest wealth effect, and what looks to be a decline in gasoline prices has likely bolstered future expectations on the economy.”

“The fundamentals that usually drive housing activity, such as job growth and interest rates, those are favorable, and they suggest that we should continue to advance,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who correctly forecast the February pace.  Still, “the inventories are said to be tight in many markets, and that’s holding sales back to a degree.”

Gains in home prices added $1.4 trillion to household wealth in 2012, and further appreciation this year will boost net worth by as much as $1.7 trillion, according to forecasts by Lawrence Yun, the National Association of Realtors® chief economist. The increase will lift consumer spending by anywhere from $70 billion to $110 billion in 2013, he predicted.

Resales, tabulated when a contract closes, accounted for about 93 percent of the residential market in 2012, when a total of 4.66 million previously owned houses were sold.  That was the most since 2007 and up 9.4 percent from 2011.

The strength in demand has bolstered sales of new properties as well.  Lennar Corp., the third-largest U.S. homebuilder by revenue, said orders rose in their fiscal first quarter.  “Current market conditions are driven by strong demand resulting from low interest rates and attractive home prices, which have led to very affordable monthly payments, compared to increasing rental rates,” Chief Executive Officer Stuart Miller said in a statement on March 20^th of 2013.  New orders, deliveries and backlog have “shown strong increases,” he said.

According to Zillow®, home values nationwide rose for the 16^th straight month in February of 2013 to a Zillow Home Value Index of $158,100.  In further support of the claims that the housing market is indeed recovering, the 30 largest metropolitan areas across the country covered by Zillow recorded both annual and monthly home value appreciation in February.

Below is a sampling from the Zillow Home Value Index for those 30 areas for the twelve months ending in February of 2013:

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• New York City, Boston, Miami- Fort Lauderdale, and Atlanta increased by an average of 5.7%

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• Chicago, Pittsburgh, and Cleveland increased by an average of 2.6%

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• Dallas-Fort Worth and St. Louis increased by an average of 4.6%

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• Los Angeles, San Francisco, Las Vegas, and Phoenix increased by an average of 17.8%

Bottom Line
It is extremely important for all people who are planning to buy a home in the near future to continue to keep in touch with your mortgage loan officer for advice and suggestions on how to be sure you stay on track for home ownership.

As most of us are already aware, homeowners get significant tax breaks that are not available to renters; however, tax laws are continually changing.  While accurate at the time of this writing, it is critical that the taxpayer verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

Mortgage interest rates are still near record lows, and home prices are still well off the peak prices of just a few years ago, so if you do not currently own your own home, now is an excellent time to become a homeowner.  

Mortgage Interest and Points Deduction
The U.S. tax code allows homeowners to deduct mortgage interest from gross income, which results in lower taxable income.  Additionally, some of the closing costs you paid when you purchased your home (e.g., origination points or discount points), may be deductible as well.  This may apply to mortgages on first and second homes as well as home equity loans, regardless of how the proceeds from the home equity loan are spent.

Property Tax Deductions
The U.S. tax code also allows homeowners to deduct real estate property taxes from gross income, which, like mortgage interest, results in lower taxable income.

Itemizing Deductions
Increasing total deductions to the point where it is advantageous to itemize them is another advantage that often results from home ownership. When you file your taxes, you have two options when claiming deductions that will lower your taxable income. You can claim a standard deduction, which is a flat amount determined by your filing status, or you can itemize your deductions.  If you are a homeowner, itemizing your deductions, including your mortgage interest and property taxes, often results in a lower amount of income that is subject to taxes.  This is especially advantageous during the first few years of your mortgage when you are paying significantly more each month in interest than you are in principal.  This can save you a substantial amount each year in federal and state income taxes. 

Example
If your mortgage payment consists of principal, interest, and property taxes of $1,200 per month, you will pay $14,400 in total payments over the course of a year.  If annual property taxes of $1,800 ($150 per month) are included in that payment, the remaining $1,050 monthly payment consists of principal and interest.  Since the majority of your house payment is interest in the first years, you will have easily paid at least $8,600 in interest during that year.  This interest payment, combined with the property tax paid, gives you $10,400 in home ownership-related deductions.  If you are in the 28% incremental tax bracket, this will either reduce your taxes by or provide you with a refund of more than $2,900 as a result of owning a home. You could easily have paid $1,200 each month in rent during that same period and would have no tax advantage whatsoever.  Any tax advantages as a result of being able to deduct some of the closing costs when you purchased your home would be in addition to this.

Preferential Tax Treatment Upon Selling
Another major advantage of home ownership is that, in most cases, you don’t have to pay taxes on any capital gains (profit) you make when you sell your principal residence, provided you (and your spouse, where applicable) have lived in that house for at least two of the previous five years.  The law, which was introduced by President Clinton, allows you to exclude from taxes up to $500,000 in capital gains (profit) from the sale of your principal residence for married taxpayers filing jointly and up to $250,000 for single taxpayers or married taxpayers who file separately.  This exclusion also covers the sale of a parcel of land adjacent to your house, unless it’s used for business.

These full exemptions can only be claimed once every two years.  Even if you don't meet the requirements for the above full exemptions, you may still be able to claim a partial exemption if you are forced to sell before you meet the two-year residency requirement due to some qualifying unforeseen event such as a job change, illness, death of a spouse, divorce, disaster, war or some other hardship.

For qualifying unforeseen circumstances, you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early.  For example, if you only live in your home a year (half the two-year requirement) before you are forced to sell because of some qualifying unforeseen event, you can exclude from taxes up to $250,000 (half the exclusion) in capital gains if you are married and file jointly or $125,000 for separate and single filers.

If you are fortunate enough to receive more profit on the sale of your home than the allowable exclusion, that "excess" profit will be considered long term capital gains, provided you owned your home for more than one year. Long term capital gains receive preferential tax treatment compared to ordinary income or short-term capital gains.

The New 2013 Real Estate Tax
A new 3.8% tax, which was passed in the final days of negotiating the Affordable Care Act that has come to be known as Obamacare, took effect at the beginning of 2013, and is intended to help fund the costs that will be incurred as a result of Obamacare.  It’s a 3.8% tax on certain profits made on selling real estate.

This new tax will NOT affect all Real Estate transactions, but it may effectively impose a tax on some interest, dividends and rents (less expenses), and capital gains (less capital losses).  The tax will only be applicable to married couples filing jointly with Adjusted Gross Income (AGI) higher than $250,000 and to single taxpayers and married couples filing separately with AGI higher than $200,000, although being in those high income brackets does not necessarily mean that you will be paying this tax.  Certain investment income above these income levels might be subject to the 3.8% tax on a portion of that income. Whether the tax applies or not depends on many factors having to do with the kind and amount of the total income the taxpayer(s) receives.

The $500,000/$250,000 exemption on capital gains from the sale of a primary residence is still in effect.  This means that profits from the sale of a primary residence under $500,000 for most married couples filing jointly and under $250,000 for most single taxpayers or married taxpayers filing separately are still exempt from the capital gains tax.  Just to be clear, it's capital gains (profits), not the sale proceeds.

The new tax adds an additional 3.8% surtax to those transactions if you exceed those exemption amounts for all applicable capital gains, but only for those taxpayers whose AGI exceeds the $250,000/$200,000 AGI levels outlined above, and only for the amount that exceeds the $500,000/$250,000 exemption.

Again, tax laws are continually changing.  While accurate at the time of this writing, it is critical that the taxpayer verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

Bottom Line
When you consider that you can often finance a home and keep your monthly payments to approximately the same amount you pay in rent each month, it's still true that you can really come out ahead with home ownership.

Housing Starts
Housing starts rose to their highest rate in more than four years in October of 2012.  U.S. builders started construction last month on the most housing units since July of 2008.  The Commerce Department said that builders broke ground on homes in October at a seasonally adjusted annual rate of 894,000. That's a 3.6 percent gain from September.  The median forecast of 82 economists expected groundbreaking to slow to an 840,000 pace.  Housing starts are 87 percent above the annual rate of 478,000 in April of 2009, which was the recession low, providing more evidence that the housing market has decisively turned around after an unprecedented collapse that landed the economy in its worst recession since the Great Depression.

The recovery, marked by rising home sales, prices and building activity, is being driven by pent-up demand, record low mortgage rates, and a lower risk that property values will keep falling, and is expected to continue to attract buyers.  In addition, permits for the construction of single-family homes also advanced to the highest level in four years.

A steady rise in the number of U.S. households, which fell during the 2007-2009 recession as financially strapped Americans moved in with friends and family, is also supporting the housing sector.  Economists at Goldman Sachs estimate that household formation -- the net increase in the number of households each year -- will increase to a 1.2 million rate in 2013 from 1 million currently.  They forecast housing starts rising from the current monthly rate (894,000) to 1 million by the end of next year and 1.5 million by the end of 2016.

The Federal Reserve has targeted housing as a channel to boost U.S. growth, announcing in September that it would buy $40 billion in housing debt per month to keep down borrowing costs.  "It seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years," Fed Chairman Ben Bernanke said recently at the Economic Club of New York.

Builder Confidence
Builder confidence rose to its highest level in six and a half years, according to a survey by the National Association of Home Builders/Wells Fargo. Their index of builder sentiment rose to 46 this month, up from 41 in October. It was the highest reading since May 2006, just before the housing bubble burst.

The index has been rising since October 2011, and has surged 27 points in the past 12 months, the sharpest annual increase on record.

Home Sales
Sales of previously occupied homes rose 2.1 percent to 4.79 million in October, the National Association of Realtors said.  Sales are near their highest level in five years, excluding temporary spikes in 2009 and 2010 when a homebuyer tax credit boosted purchases.

A key factor fueling the gains is a gradually improving economy, which has increased the number of people looking for homes.  At the same time, fewer homes are available for sale, which is helping to push up prices.

As mentioned previously, mortgage rates have hit all-time lows; at the same time, rents are rising, making the purchase of a single-family home or condominium more attractive.

The Federal Housing Administration, or FHA, was established during the Great Depression with the primary objective of making home ownership possible for more people.  FHA mortgages are backed by the Federal Housing Administration in case you default on the loan.  The FHA does not actually lend people the money to buy a home – the FHA guarantees the loan, so if a borrower defaults on his mortgage, the FHA will reimburse the lender.  Mortgages obtained on the private market without FHA help are known as "conventional" mortgages.  With a conventional mortgage, lenders do not have the same guarantee.

Fannie Mae and Freddie Mac are also government sponsored enterprises (GSEs). Their objective is to provide stability and liquidity to the U.S housing and mortgage markets. These GSEs also do not lend directly to borrowers, but they help to ensure that the banks and mortgage companies have funds to lend at affordable rates. These types of loans are typically conventional loans.

In the past, FHA was viewed as an alternative form of financing for those with credit problems. However, because the conventional guidelines have become extremely restrictive, many people with excellent credit but lacking the 5% down payment to meet the conventional requirement are turning to FHA loans for home financing.

Conventional and FHA loans are similar, but there are important differences.  While this article addresses the primary differences between FHA and Conventional loans at the time it was written, changes to both programs are continually being made.  It is recommended, therefore, that you contact your loan officer in order to determine the best program for your situation.

The U.S. Department of Housing and Urban Development Web site (www.hud.gov) can help you find HUD-approved counselors in your area who can answer your specific questions regarding FHA loans.

Credit History
The FHA tries to help those with no established credit history and those with a less-than-excellent credit history.  The credit qualifying criteria for a borrower are not as strict for an FHA loan as for a conventional loan.  Also, borrowers who do not have an established credit history or credit score, or have a reasonable explanation for a few "credit problems", may still be eligible to qualify for an FHA loan if they can show a history of on-time payments with utility companies or other companies.

People with an excellent credit history will typically find it easier to qualify for conventional loans than those with shakier credit histories.  There is no credit score above which you are guaranteed to qualify for a conventional loan, but a score of 720 is generally considered excellent credit.  If a score is below the minimum standard, the borrower will be denied qualification, or may be offered a sub-prime loan with a higher interest rate.

The FHA uses a credit score of 620 to determine whether you can qualify automatically for a loan, but a credit score below 620 does not necessarily disqualify you, as it might with a conventional mortgage.  The minimum credit score that most lenders will allow on an FHA loan is 580.

Down Payment
The FHA requires a down payment of at least 3.5% for its guaranteed loans, though some lenders may require you to put down more money.  The minimum down payment on a conventional loan is 5% - 10%, although some lenders require down payments of as much as 20 percent.  On a positive note, the larger down payment means you will probably gain equity in your home more quickly with a conventional loan.  For a down payment of 5% to 10%, most lenders are requiring that the borrower have a minimum credit score of 720.

For an FHA loan, you might not have to come up with the down payment yourself.  It can be a gift from a family member or friend, although it cannot come from anyone who would benefit from the transaction, such as the home seller.  A conventional loan may require you to pay the down payment out of your own funds.

On a conventional loan, the seller can pay up to 3% of the purchase price toward the buyer's closing costs; however, they can only pay the non-recurring costs. They are not allowed to pay the recurring costs such as taxes, insurance or pre-paid interest.  On an FHA loan, the seller can pay both recurring and non-recurring costs.


Debt-to-Income Ratios
FHA loans have higher limits for debt-to-income ratios than conventional mortgages, meaning your monthly mortgage payment can take up a larger percentage of your monthly income.


Loan Limit
A drawback to FHA loans is that there is a maximum loan amount set.  The FHA sets limits on mortgage amounts by county, meaning that areas with higher real estate prices will have higher FHA loan limits.  If you want to buy a home that is above the FHA limit in your area, you will either have to make a larger down payment or try to qualify for a conventional, subprime, or other type of mortgage.  In general, conventional mortgage lenders do not place limits on the amount they will lend.

Mortgage Insurance
The biggest disadvantage of FHA loans is the mortgage insurance premium (MIP).  The FHA gets the money it uses to reimburse lenders when borrowers default from the borrowers themselves.  People who take out FHA loans with a down payment of less than 20 percent must pay insurance on the mortgage.  Speak with your loan officer regarding the requirements for removing the MIP.

Conventional loans may require insurance as well, which is called private mortgage insurance (PMI), but the rates will usually be lower than the FHA MIP rates.  In addition, on a conventional loan, you generally pay premiums for a shorter time, because of your larger down payment, and you pay premiums only until you reach 20 percent equity in your home.  Speak with your loan officer regarding the requirements for removing the PMI.

Other Considerations

1)  FHA loans are assumable, i.e., you can transfer your loan to the new owner if you sell your house, which allows the new owner to take over your FHA loan without having to incur the cost of obtaining a new loan.  In order to assume the loan, the buyer must meet the current credit standards for the loan.  This feature can make it easier to sell your home.  Your loan officer can explain the current rules for assuming an FHA mortgage.

It's very likely that interest rates will rise after the economy recovers, and having an assumable mortgage can be a great benefit for you if you decide to sell your home and the interest rates are several points higher than they were when you opened your mortgage. In addition to increasing the likelihood that your home will sell more quickly, it's not unreasonable to expect that homes with FHA financing will command a premium sales price in the resale market over the next seven to ten years.

2) There is also an Energy Efficient Mortgages program that allows homeowners to finance adding energy-efficient features to new or existing homes as part of either their home purchase or FHA refinancing.

3) Another benefit of an FHA loan is that a non-occupant co-borrower is allowed to co-sign on the loan.  The income of both the borrower and co-borrower will be combined and used for qualifying.

On a conventional loan, the owner occupant must qualify at the established debt ratios unless higher ratios are approved by the Automated Underwriting System.

4) Many loan products, including conventional loans, have pre-payment penalties, whereas FHA loan do not have such penalties.  In fact, FHA loans can be easily refinanced under the Streamline program.

 

By purchasing a home, you are moving in the direction of increasing your financial security; you are actually taking part in an investment that can appreciate similar to stocks or bonds.  When you first purchase your home, your down payment is your only stake.  With adequate maintenance, a home will usually increase in value each year.  And, of course, improvements to make the home more comfortable for you, will typically also add to the equity.  Equity is the difference between the market value of the property and the amount of the mortgage.

Probably the biggest advantage, though, is the fact that the principle you pay on the mortgage is like putting money in the bank, in the form of equity.

Building Equity
Since interest rates on home equity loans are generally lower than interest rates on most other types of loans, many people use home equity loans to pay down short-term, higher-interest debts, resulting in a savings for the homeowner.  Another advantage of doing this is that interest paid on home equity loans is usually tax deductible.

Like any investment, the real estate market fluctuates.  However, if you're in it for the long term, the value of your property is likely to appreciate over time, and contribute to your overall wealth.

When you purchase a home with a fixed-rate mortgage, except for relatively minor adjustments due to rising costs of insurance or property taxes, your payments will remain the same over the entire life of the loan, even as the housing market fluctuates.   As a renter, you would be likely to see rent increases in the range of 4% to 6% per year.   Such annual increases would result in rental rates that double every 12 to 18 years.  Clearly, owning your own home can result in significant savings.

One possible use for all these savings could be to make additional principal payments and therefore build equity in your home even more quickly.

Another benefit of building this equity is that it can help you make home improvements, invest in other properties, trade up to a nicer house, or finance major purchases such as a college education or a new car.

Tax Benefits of Home Ownership
While accurate at the time of this writing, it is critical that the borrower verify the information provided regarding tax benefits with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

When tax time rolls around, you have the benefit of being able to deduct the interest paid on the mortgage throughout the year, and if you have paid discount or origination points, you are able to deduct these as well.

When you decide to sell your home you probably won't have to pay tax on the proceeds (assuming it's your primary residence).  If you've lived in your house for two of the past five years, up to $500,000 (if you're married and filing jointly) or $250,000 (if you're single or married and filing separately) of your profit from the sale of your principal residence will be tax-free.

Conclusion
Clearly, owning your own home can be an excellent investment and a great way to increase your overall wealth.

 

Homeowners get significant tax breaks that are not available to renters; however, tax laws are continually changing.  While accurate at the time of this writing, it is critical that the borrower verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

Mortgage Interest and Points Deduction
The U.S. tax code allows homeowners to deduct mortgage interest from gross income, which results in lower taxable income.  Additionally, some of the closing costs you paid when you purchased your home (e.g., origination points or discount points), may be deductible as well.  This may apply to mortgages on first and second homes as well as home equity loans, regardless of how the proceeds from the home equity loan are spent.

Property Tax Deductions
The U.S. tax code also allows homeowners to deduct real estate property taxes from gross income, which, like mortgage interest, results in lower taxable income.

Itemizing Deductions
Increasing total deductions to the point where it is advantageous to itemize them is another advantage that often results from home ownership. When you file your taxes, you have two options when claiming deductions that will lower your taxable income. You can claim a standard deduction, which is a flat amount determined by your filing status, or you can itemize your deductions.  If you are a homeowner, itemizing your deductions, including your mortgage interest and property taxes, often results in a lower amount of income that is subject to taxes.  This is especially advantageous during the first few years of your mortgage when you are paying significantly more each month in interest than you are in principal.  This can save you a substantial amount each year in federal and state income taxes.

Example
If your mortgage payment consists of principal, interest, and property taxes of $1,200 per month, you will pay $14,400 in total payments over the course of a year.  If annual property taxes of $1,800 ($150 per month) are included in that payment, the remaining $1,050 monthly payment consists of principal and interest.  Since the majority of your house payment is interest in the first years, you will have easily paid at least $8,600 in interest during that year.  This interest payment, combined with the property tax paid, gives you $10,400 in home ownership-related deductions.  If you are in the 28% incremental tax bracket, this will either reduce your taxes by or provide you with a refund of more than $2,900 as a result of owning a home. You could easily have paid $1,200 each month in rent during that same period and would have no tax advantage whatsoever.  Any tax advantages as a result of being able to deduct some of the closing costs when you purchased your home would be in addition to this.

Preferential Tax Treatment Upon Selling
Another major advantage of home ownership is that, in most cases, you don’t have to pay taxes on any capital gains (profit) you make when you sell your principal residence, provided you (and your spouse, where applicable) have lived in that house for at least two of the previous five years.  The law allows you to exclude from taxes up to $250,000 in profit from the sale of your principal residence for single taxpayers, or married taxpayers who file separately -- $500,000 for married taxpayers filing jointly.  This exclusion also covers the sale of a parcel of land adjacent to your house, unless it’s used for business.

These full exemptions can only be claimed once every two years.  Even if you don't meet the requirements for the above full exemptions, you may still be able to claim a partial exemption if you are forced to sell before you meet the two-year residency requirement due to some qualifying unforeseen event such as a job change, illness, death of a spouse, divorce, disaster, war or some other hardship.

For qualifying unforeseen circumstances, you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early.  For example, if you only live in your home a year (half the two-year requirement) before you are forced to sell because of some qualifying unforeseen event, you can exclude from taxes up to $250,000 (half the exclusion) in capital gains if you are married and file jointly or $125,000 for separate and single filers.

If you are fortunate enough to receive more profit on the sale of your home than the allowable exclusion, that "excess" profit will be considered long term capital gains, provided you owned your home for more than one year. Long term capital gains receive preferential tax treatment compared to ordinary income or short-term capital gains.

Bottom Line
When you consider that you can often finance a home and keep your monthly payments to approximately the same amount you pay in rent each month, you can really come out ahead with home ownership.

 

When it comes to making that move, either into buying a home for the first time, or moving up into another home, you'll need to establish a solid plan for yourself.

Determine Your Financial Situation
You need to determine whether you have enough money saved up to cover the down payment and the closing costs, and whether you'll have enough income to cover the new mortgage payment and all of your other bills. This will determine the price range of a home which you're capable of buying.

Once you have a realistic target in mind, you can start working toward an actual goal. This involves three views:

1. Your income -- This includes all income, from all sources, less any taxes you’ll owe on that income.
2. Your assets -- This includes only highly liquid assets – in other words, money in checking and savings accounts, stocks and bonds, mutual funds, etc. It does not include assets held in IRAs or 401(k)s.
3. Your liabilities -- This includes credit card debt as well as monthly payments, such as automobile loans, or alimony payments.

This will enable you to determine how much you can afford right now as a down payment, and how much you can afford as a monthly mortgage payment. The difference between where you are now and where you want to be is what you need to work on.
Your loan officer will be happy to help you determine your monthly mortgage payment. As a Nestablish customer, you can also use the free Nestablish mortgage calculator, which is specially designed to determine the total monthly payment a buyer can expect, by taking into account mortgage insurance, real estate taxes, HOA assessments, homeowners insurance, and other factors. This is a great way to determine your price range, based on your budget and your ability to pay the mortgage each month.

There are two steps to take in order to get from where you are now to where you want to be:

1. Increase your savings, if necessary, for the down payment. Figure out exactly how much extra you need, how long you have until you actually want to purchase a home, and simply divide the total you need to save by the number of pay periods you will have between now and then. For example, if you need to save $5,000, are paid bi-weekly, and you want to buy a home in one year, you will need to save approximately $200 each pay period.
2. The second step is to figure out by how much you need to reduce your regular monthly spending in order to be able to afford the monthly mortgage payment. Start by creating a budget, and grouping your spending into categories such as eating out, entertainment, utilities, etc. Then figure out where you can cut back. For example, ask yourself how much you are spending on gifts. Consider making some presents instead of buying them. Are you spending a lot on phone calls or your cell phone bill? Try to call during cheap or free rate times, and take a close look at your cell phone bill to determine whether you can cut back on some of the features for which you are being billed; use e-mail more.

It is never easy to cut back, but sometimes the only way you’ll be able to afford the home you really want is if you figure out where you are right now, and make the adjustments that will get you to where you want to be. If you already have a mortgage payment, simply increase the amount you allocate to make your current payment to the amount of the predicted monthly mortgage payment, and save the difference.

You should also calculate your debt-to-income ratio, which shows the amount of your income that goes toward paying your debts. The higher your ratio, the less likely you will qualify for a home loan. This can help you determine whether you can get a mortgage before you spend time searching for your home. If your debt-to-income ratio is more than 36 percent, you should think about getting out of debt, or at least reducing your debt immediately.

Please visit the following blog posting and read the article titled "Calculating Your Debt Ratio" to find out how to calculate your debt ratio:
https://blog.nestablish.com/home-buyers/debt/.

Review Your Credit
Your mortgage lender will obtain copies of your credit report and credit score to determine how much they're willing to loan you. It makes sense to conduct your own credit review, long before you submit your first mortgage application. Please visit the following blog posting and read the article titled "Credit Scoring Models" to find out how to get your credit score and your free annual credit reports:

In a previous post, we suggested paying bills down by paying all bills on time, and by paying more than the minimum amount due on the bill with the highest interest rate.  While this is an excellent strategy, it is only one of many that can be used to pay down your debt.  In this post we will present several other good strategies for getting your debt paid down.

Do not Acquire New Debt
When trying to pay down your debt, do not apply for new credit cards or loans until you have brought your finances back in order.  Also, during this time, avoid using your credit cards when you're making a purchase.  Instead, use cash, checks or debit cards to pay for a purchase.  It's difficult enough to pay down credit card debts even when you're not accumulating new debt.

Balance Transfer
Consider transferring the balances on high interest credit cards to a card having a low interest rate.  You may be able to consolidate multiple credit card payments into a single payment.  In case you don't have a low interest card, you may want to look for one.  You may even get a card with a 0% introductory rate.  However, you need to check the duration for which the introductory rate would remain at the low rate.  If it's quite long, then you'll probably have enough time to pay off a good chunk of your credit card bills at the low rate of interest. That could save you a lot of money in interest charges.

If you request a balance transfer, ask your creditor if they charge a fee for the transfer. Request that the fee be waived as a one-time courtesy.

Before you act, however, be sure to examine the offer closely.  If the interest rate after the introductory period is higher than the rate you're paying now, you may have to switch again at that time.  Be aware that banks have caught on to the charge card hoppers who switch from card to card to take advantage of the low introductory rates.  Many of these offers now stipulate that if you transfer balances from the new card within a 12-month period, the normal interest rate will be applied to all outstanding balances retroactively. That could result in wiping out all or most of the benefit of the balance transfer.  Be sure to read the fine print.

Pay Off the Lowest Balance First – The “Snowball” Effect
A tactic many employ is to pay smaller bills off first, then take that payment savings to attack other bills.  Here’s how it works -- start with the account having the lowest balance and make extra payments (pay more than the minimum) toward it every month.  Continue to pay the minimum amount due on other accounts.  As soon you pay off the account with the lowest balance, move on to the account with the next lowest balance and repeat the same process.  While this approach may not get all your bills paid off as quickly as directing the additional payments to the card with the highest interest rates, it can provide the reinforcement you need in order to continue making the additional payments by seeing your accounts paid off more quickly.

Use Savings and Investments
It sometimes makes sense to make withdrawals from your savings and investments and use the proceeds toward debt repayment, particularly when the after-tax return on the savings or investments are lower than the after-tax interest rate expense on your debt.  With most savings accounts currently paying extremely low interest rates and most other investments earning very low or even negative returns, this is often the case now.   As an example, if you are in the 25% tax bracket and you are paying interest rates of 15%, unless the return on your investments is more than 20% before taxes, it may make sense to use those funds to pay down your debt; and these days, very few savings or investment accounts are earning anything near 20%.  Using those funds to pay off that debt is essentially the same thing as earning that 20% return without any risk on your part.  In general, the higher the interest rate on your debt, the more attractive using savings and investments to pay off your debt becomes.

Borrow from Your 401(k)
If you have a 401(k) plan you may be aware that most such plans have a feature that lets you borrow against the retirement account.  Interest rates are usually much lower than the rates on credit cards.  Thus, 401(k) plan loans may be a good source of funds for paying down debt.  Another benefit to this approach is every penny in interest paid on a 401(k) loan goes directly into the borrower's 401(k) account, not to the administrator of the account.

But there are drawbacks to borrowing from your 401(k).  The loan and interest will be repaid with after-tax dollars, and the interest you paid will be taxed again when you withdraw money from the 401(k) years later.  Additionally there are other potential issues you should be aware of such as limits on terms, repercussions if you leave your employer, etc.  We recommend speaking to a CPA if you’re seriously considering this approach.

Borrow Against Your Insurance
If you have life insurance with a cash value, consider taking out a loan against the policy to apply toward reducing your debt. The interest rate on such a loan is typically well below the commercial rates.  In order to avoid a benefit reduction, however, be sure to repay it as soon as you are able.  If you were to pass away before the loan is paid off, the outstanding balance plus interest would be deducted from the face value of the insurance, and only the remaining balance of the benefit would be paid to the beneficiary.

Borrow from Family or Friends
Perhaps you have family or friends who could provide you with a loan.  If so, there's a good chance that they would be willing to give you a very favorable interest rate.  They may even tolerate a late payment or two.  But you should always have a written agreement, in which the interest rate and repayment schedule are clearly spelled out in order to avoid any misunderstandings.  Also, be sure to strictly adhere to that schedule

Change Your Lifestyle: If you're thinking of using credit cards to cover your daily expenses (such as gas, utility bills and groceries), it's probably time to change your lifestyle.  Find a part-time job, use public transportation as much as you can, and consider relocating to a less expensive home, before resorting to using credit cards for your daily expenses. You may also be able to sell some of your old items online in order to earn some extra cash to help repay credit card bills.

Renegotiate Terms with Your Creditors
If you've done all you can, i.e., savings and investments are gone, you don't have anything left in a 401(k) to borrow against, and you've borrowed all you can from friends and relatives, what's left?  Seek legal protection?

Let your creditors know your situation. Tell them that if you are unable to renegotiate terms, you'll have no other recourse but to declare bankruptcy.  Ask for a new lower repayment schedule and/or request a lower interest rate.  Your creditors want to receive payment; faced with the possibility that you may seek legal protection, they will do what they can to protect themselves against a total loss.  It's worth a try.  If you don't wish to do this yourself, there are organizations that can help you do it.

When you succeed in paying off your accounts and the balances reach zero, consider contacting your creditors to close the accounts one-by-one.  However, if you're thinking of buying a home or a vehicle, or making other major purchases in the near future, avoid closing the accounts because it will reduce the length of your credit history and reduce your credit score. This in turn, will adversely affect your chances of qualifying for a loan with the best possible terms and conditions.  So, depending upon your financial goals, you may not wish to close your accounts immediately after you've paid off the balances.  Just avoid incurring more charges on those accounts until you're in better control of your finances.

When dealing with your credit, the best approach is to head off problems before they occur.  If you are having problems paying your bills, contact your creditors immediately and try to work out a modified payment plan with them that reduces your payments to a more manageable level.  Don’t wait until your account has been turned over to a debt collector.

If you have already incurred credit problems, here are some tips for resolving those problems:

• Be skeptical of businesses that offer instant solutions to credit problems -- there aren’t any.
• While you have the right to perform many, if not all, of the same approaches to resolving credit issues as credit repair companies, understand that it will take time and diligence to fix credit reporting errors.
• Be sure to keep all your original documents, especially receipts, sales slips, and billing statements.  You will need them if you dispute a credit bill or report.  Send copies only -- never send the original receipt.  It often takes more than one letter to correct a problem.
• In order to dispute a credit report, bill or credit denial, write to the appropriate company and send your letter “Return Receipt Requested”.
• If you are disputing a billing error, include your name, account number, the dollar amount in question, and the reason you believe the bill is wrong.
• If you are in doubt about the validity of a charge, in writing, request written verification of the debt. .

You should try to create a workable budget and stick to it, work out a repayment plan with your creditors, and keep track of mounting bills.  If it’s apparent you can’t handle your bills on your own, consider contacting a credit counseling organization.  Many such organizations are nonprofit and work with you to help resolve your financial problems.  Unfortunately, not all are reputable.  For example, just because an organization claims “nonprofit” status, there’s no guarantee that its services are free, affordable, or even legitimate.  In fact, some credit counseling organizations charge extremely high fees, or hide their fees by pressuring consumers to make “voluntary” contributions that can cause even more debt and credit issues.

Most credit counselors offer services through local offices, the Internet, or on the telephone.  If possible, find an organization that offers in-person counseling.  Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension System (https://www.csrees.usda.gov/financialsecurity.cfm) operate nonprofit credit counseling programs.  Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops.  Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting.  Counselors discuss your entire financial situation with you, and can help you develop a personalized plan to help resolve your money problems.  An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Making your money work is a very important aspect of saving money and building wealth. One way to facilitate this is by setting up an online savings account. For the most part, online savings accounts function in the same way as normal (brick-and-mortar) bank savings accounts. However, in the case of online savings accounts, you do not ever have to visit a bank physically in order to transact business. Online savings accounts offer a number of advantages -- in the past few years, millions of people have signed up for them. As you might expect, there are also disadvantages of online savings accounts.

Advantages of Online Savings Accounts

• The single biggest advantage of dealing with an internet-only bank is that since they do not have to deal with the expense of having branch locations, they generally have lower costs and are able to pass on their savings in the form of higher rates of return on savings accounts, usually significantly higher rates, than brick-and-mortar banking institutions.
• In addition to the interest rate, another important factor to consider when you compare savings accounts is minimum balance requirements. Some banks require consumers to keep a minimum balance in an account to avoid any type of maintenance fees or other service fees. In addition, some banks also require that a minimum deposit is required to open an account. For some banks, this amount can range from several hundred to several thousand dollars. Although this is not a major obstacle for some people, it may be more than some people are able or willing to deposit. This is especially true if the savings are intended to be for short-term rather than long-term use. Online savings accounts typically require much lower minimum opening and ongoing balances (some have no minimum balance requirement) than traditional savings accounts in order to avoid fees; and fees are generally much lower for those who do have fees.
• There are a number of ways to deposit funds into your account. A check can be mailed in to the bank or the ACH (Automated Clearing House) debit facility may be used, which allows one to transfer funds from an existing account without having to make a trip to the post office or the bank. It is extremely easy to transfer funds between an existing account in a brick-and-mortar bank and an online savings account.
• Many online banks also provide the ability to send free demand drafts or money orders online, free electronic funds transfer, and bill payment. 24-hour access for services or transactions and consolidated statement of accounts add to the convenience of online savings accounts.
• You don’t really need to be particularly computer savvy to operate an online account; and the higher interest rates and convenience are often worth the effort of learning to understand the computer better. The interfaces in general are very easy to use.
• With so many choices, it shouldn't be hard to find an online savings account that meets your needs. There are online savings accounts that not only offer a competitive interest rate, but also require no minimum balance. If you have a lot of money to invest, you might want to look at one of the savings plans that requires a higher balance in order to avoid fees, but also offers a higher interest rate than do the plans with no minimum balance requirement. Spend a little time doing some homework, and with some informed savings account comparisons you may be able to find just the right banking institution for you.

Disadvantages of Online Savings Accounts

• Many people hesitate to sign up with internet-only banks because they are intimidated by the internet. If you still feel nervous about making online purchases, then internet banking may not be for you. 
• After the initial sign-up with an internet-only bank, you usually have to wait several days for a direct-deposit verification.
• It can take a few days to transfer money from your brick-and-mortar bank account to your online bank account and vice versa.
• Even though online banks use the highest online security standards, you are transmitting sensitive information over the Internet. If your username and password are stolen, someone could have access to your account information. Users need to be aware of phishing scams and other scams to protect themselves. In addition, hackers, viruses, stolen passwords and system malfunctions can potentially interrupt access to your online funds for days. Traditional brick-and-mortar banks are generally less susceptible to such attacks, and require documented proof of identity to grant account access. Identifications such as licenses and passports are much harder to counterfeit or duplicate than computerized passwords.
• Online bank accounts are usually only accessible by means of electronic devices, such as a smartphone, computer, tablet, or ATM. In the event you find yourself with a dead battery, a power outage, a broken computer, etc., accessing the funds in your online bank account can be extremely difficult, if not impossible.
• Keeping funds in a brick and mortar bank account normally allows individuals much quicker access to cash than do internet-only banks in the event of an emergency. Having a bank account with a nationwide chain of brick-and-mortar banks can also allow you immediate access to funds when traveling via ATMs, often without fees, or with relatively small fees.
• Many online banks are not directly affiliated with ATM networks, which results in many ATM transactions being accompanied by large fees. Many online banking customers are required to pay a withdrawal fee to both their online bank and the physical institution whose ATM they are using.
• Customer service for online banks is often outsourced to call centers or automated phone systems, which can be frustrating to interact with and difficult to understand. Online banking customer service often has lengthy hold times, particularly during times of system malfunction when many customers are calling in. Traditional brick-and-mortar tellers allow for easier face-to-face communication when you have questions or concerns. Additionally, consultants and loan officers at brick-and-mortar banks can more easily offer individualized advice to customers in a way that online banks cannot.

No Longer an Advantage of Online Savings Accounts

• A few years ago, online savings accounts also had the advantage of being able to conduct many more of the transactions typically performed by users than brick-and-mortar institutions without the need to use mail or physically go to the bank. Traditionally, banks fixed working hours during which they operated and people had to travel all the way to the bank from wherever they lived to open accounts, make deposits, withdraw money or for any other banking needs. Any emergency need for banking, except for ATM transactions, had to wait until morning when the bank opened.
• Things are different now. With the increase in competition, many brick-and-mortar banks have also begun to offer online banking services, as well as all the associated transactions, to afford as much convenience as possible to their clients, as a way to attract new customers or retain existing customers. With the advent of the internet, customers can transact their business via accounts with brick-and-mortar banks while they sit in the comfort and convenience of their homes.

A typical real estate purchase transaction varies somewhat with the various state laws and regional customs and is quite complicated, requiring high levels of understanding about the process.  Knowing what is involved can help both buyers and sellers by taking a lot of stress and guesswork out of the process.  The following steps are usually involved in such a transaction:

1. Prearranging Financing

The buyer will usually prearrange financing.  A loan preapproval makes the process go quickly and smoothly, while at the same time letting the buyer know the limit of his financing, and hence, the maximum price of the property he can purchase.  Most real estate agents prefer to have your preapproval in hand prior to showing you property.  Don’t take this as a negative; understand that if you’re financing your new purchase, today’s mortgage market is much more restrictive than mortgage markets were in the past.

2. Finding a Property

A buyer typically will meet with a buyer's real estate agent to represent his interests, but sometimes will contact the selling agent directly from the listing.  Working with a buyer's real estate agent can help you determine locations, past property values, and price ranges that would fit within your buying power.

Researching a property prior to scheduling a viewing will save you time and money in the long run by narrowing down properties in which you will have the highest level of interest, and weeding out properties that will not meet your needs.  Real estate agents have resources available to them that the average buyer does not have.  They can help you by preparing a complete market analysis of only those homes within your search area that meet your search criteria and provide professional guidance on which properties would be the best fit and why.

3. Making an Offer

Once a property is found, the real estate agent will prepare an agreement to purchase the home, based on your criteria and buying power, ask you to sign it, and then submit it, along with earnest money, to the seller's agent for review.    A good real estate agent will guide you on making an aggressive offer based upon the property itself, the location of the property, recent sales of similar properties in the area, and other relevant criteria, while ensuring that the offer is not so aggressive as to insult the sellers of the property, thus prompting an abrupt "no" as an answer.

The seller's agent will then prepare an estimate of settlement costs for their seller and submit the offer along with an estimate of the charges and proceeds that the seller will receive. This estimate will often be the determining factor on whether or not the seller accepts the offer on the property as is, or whether they would like to counter.

4. Counter and Acceptance

Expect to receive a counter offer on the property.  With an aggressively placed offer, the seller will often counter with their best price as well as the best deal on the property in question; sometimes, however, more than one pass is required in order to reach agreement.  Once you have reached agreement, you can begin the next phase of the purchase, which is acceptance of the counter offer.

Once the counter offer has been accepted, the contract will be taken to the pre-selected title company to open up escrow on the property. This begins the process of transfer of ownership from the seller to the buyer.  At this time, the contract is also presented to the lender for the buyer to begin the final work-up of the loan and make the necessary closing preparations.

5. Inspections and Appraisals

Once the sales contract has been accepted by the seller, the buyer typically has ten days to have the property inspected and appraisals performed.  This is commonly known as the option period.   Findings during the inspection and appraisal can result in requests to have defects corrected or adjustments made to the selling price.

If the seller is unwilling or unable to make adjustments based on this information, the buyer is not obligated to complete the purchase during the option period and can walk away from the purchase at that time. If a proper inspection is not performed, the buyer becomes obligated to the transaction, based on the accepted offer, regardless of the condition of the property.  At the end of the option period, if all aspects are agreed upon and accepted, the transaction will move forward.

As part of the appraisal, the property is often surveyed to ensure its description in the title is accurate.  If the appraised value of the property is not equal to or higher than the purchase price, the loan will not be approved, often resulting in further negotiations over the selling price, or requiring the buyer to make a larger down payment.

At the end of the option period, once repairs have been agreed to and other items addressed from the inspection and appraisal reports, the transaction moves into a pending status.

6. Pending and Closing

During this period, the buyer arranges for homeowners insurance as required by the lender, which is often paid monthly as a portion of escrow payments to the mortgage lender.  If the buyer has not had the property inspected, the insurance company may require inspection of the property to ensure compliance with electrical and fire codes.  This sometimes requires updating electrical wiring, plumbing, adding smoke detectors, etc.  Distance to the closest fire hydrant, and qualifications of the local fire department are often factors in determining whether the property can be insured and at what rates. The mortgage lender may or may not require flood insurance and/or earthquake insurance.

The title company searches the records of the office of the recorder of deeds, usually found in the county courthouse, to find any documents that may address the property being sold.  The previous mortgage holder will have a lien, unless the mortgage has been paid off, which would also be recorded in the recorder's office records.  The title company checks to see that the title is clear of any outstanding liens and brings the title up to date. In some states, title abstracts summarize the complete ownership history of the property.  Finally, most lenders require title insurance, which insures against an undetected claim such as a long lost relative who claims to have inherited an interest in the property.

During this time, the lender processes all final documents for the transaction and prepares them for the title company. The title company will act as an independent third party to the transaction and will prepare all of the deed and finalized loan documentation for the buyers and sellers of the property. Once all documents have been received by the title company, the buyer and seller are clear to close on the property and can schedule a closing appointment.

Closing appointments typically take between one and three hours, depending on the details of the transaction.  Once the closing is completed, the lender will wire the funds to the title company to complete the purchase, and the title company will disburse the amounts accordingly to the seller and to the new owner of the property and/or the lender.   At this point, the title is transferred from seller to buyer, the buyer will receive the keys, and the transaction is considered closed.

Finally, the title is recorded in the recorder's office by the title company.

Even with the present condition of the housing market, it is still possible to obtain a mortgage with a low down payment requirement if you know how to go about exploring the available options.

Conventional Loans

Most conventional loans require a 20 percent down payment, but many lenders now offer conventional loans that require lower down payments -- sometimes as low as 5 percent.  Regardless of the loan type, if the down payment amount is lower than 20 percent, lenders usually require the homebuyer to purchase PMI (Private Mortgage Insurance).  PMI is essentially an insurance payment made to the lender as a means to set off any losses the lender may incur in the event that the monthly mortgage payments are not able to be satisfied.  Many lenders will allow a down payment of as little as 5% if PMI is paid.

FHA Loan

The FHA (Federal Housing Administration) is currently offering mortgages with low down payments to qualified applicants.  FHA loans generally require only 3.5 percent down payment from those who qualify, which can keep a lot of money to be used for other things in the pocket of the buyer.  In addition, the interest rates are currently well below 5 percent, which is extremely low by historical standards.   Of course, as mentioned above, PMI is usually required if the down payment is less than 20 percent.

VA Loan

VA (Veterans and Active Military) Loans are special home loans that are given only to those who are serving or have served in the Armed Forces.  For those who qualify, the VA Loan is an even more attractive loan, because it requires little or no money down and may even carry a lower interest rate than traditional home loans, resulting in a lower monthly payment.  In addition, the lending standards for a VA loan are generally more lax, making it easier to qualify for the loan.  For example, retired or active duty servicemen and women may qualify for VA loans with credit scores as low as 580.

Paying More Interest

As long you agree to a higher interest rate, some lenders will allow you exchange the higher interest rate for lower fees, which results in a smaller down payment.  Of course, this means you will pay more interest over the life of the loan, but it could make the difference between your buying the home and having to wait because you are unable to meet the down payment requirement.

Qualifying for a Low Down Payment

In order to be considered for a low down payment loan, you generally need to have:

• Sufficient income to cover the monthly mortgage payment(s)
• Sufficient cash available to cover the down payment, closing costs, and related expenses
• A credit score and history that indicates your willingness to pay
• A current appraisal which shows the property value is equal to or greater than the purchase price
• In some instances, a cash reserve equivalent to two monthly mortgage payments.

Fair Lending Is Required by Law

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.

Under these laws, a consumer may not be refused a loan based on these characteristics nor be charged more for a loan or offered less-favorable terms based on such characteristics. 25 2012-06-15 22:40:41 Paying Bills Down Almost everyone has bills to pay every month.  There are credit card bills, utility bills, car payments, mortgage payments, etc.  While it is very important that you pay at least the required minimum on all bills as they become due, break the habit of paying only the minimum required each month.  Paying the minimum is exactly what the banks want you to do.  The longer you take to repay the charges, the more you pay to them in interest, and the less cash you have in your pocket.  You can reduce the total amount of interest that you pay if you "bite the bullet".  Pay more than the minimum, apply the additional payment to the bill with the highest interest rate, and you can begin to pay down your bills and work toward getting them paid off.

Now that you understand the need to make more than the minimum payment each month, here is one approach you can take to pay down debt:

1. Look over your loans and credit cards and see which account has the highest interest rate.  This is the account you want to pay down first.
2. Make the minimum required payment on all accounts except the one which has the highest interest rate.  Pay as much as you can toward this specific account.  You'll find the next month's bill is slightly less than usual, thanks to the extra amount you paid toward the bill.
3. Repeat this process every month until you have finished paying off the highest interest rate account.  Then move on to the remaining account with the highest interest rate and begin placing all of your extra money toward this bill.  You can really put a dent in your total credit card debt by using this approach.

Planning to make additional payments is easy.  Figuring out where the extra money to make the additional payments is going to come from is the hard part.  There are plenty of ways you can get your hands on the extra money you need.  Here are just a few simple and relatively painless suggestions for saving the extra money you will need:

1. Skip eating out at lunch, and bring lunch from home instead.  This can easily save between $100 and $200 a month.
2. Eat one or two fewer dinners in restaurants each week.  This can easily save an additional $100 to $200 a month.
3. When you do eat out, eliminate appetizers and desserts.  This can save $10 or more each meal.  You can do the math to calculate your monthly savings.
4. At the grocery store, purchase store brand items.  They are generally of the same quality and taste as brand name items, but considerably less expensive.
5. Avoid "impulse" buys.  Ask yourself, "Do I really need this?"
6. We all have "luxuries" and you know what yours are – cut way down on them!
7. In general, stop spending money you don't need to spend.

Make a few sacrifices, and you will find the extra dollars needed to dramatically increase the payments on your debt.  Those increased payments will save you hundreds, if not thousands of dollars, in interest payments.  Is it fun to make those sacrifices?  Of course not, but getting out of debt and being a lot more in control of your personal finances certainly is.

Your credit report contains information about where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy.  A good credit rating is very important.

If you've ever applied for a credit card, a personal loan, or insurance, there's a file about you.  Companies that gather and sell this information are called Consumer Reporting Agencies (CRAs).

To find the CRA(s) that have your consumer report, search online under "credit" or "credit rating and reporting".  Since more than one CRA may have a file on you, contact each one until you have located all the agencies maintaining your file.

The most common CRAs are the three major credit bureaus: Equifax, Experian, and Transunion.  CRAs sell information to actual and potential creditors, employers, insurers, and other businesses in the form of a consumer credit report.

Businesses inspect your credit history when they evaluate your applications for credit, insurance, employment, and even leases. They can use it when they choose to give or deny you credit or insurance.  Sometimes things happen that can cause credit problems: a temporary loss of income, an illness, even a computer error.  Resolving credit problems may take time and patience, but it doesn’t have to be an ordeal.

Your credit report can influence your purchasing power, as well as your ability to get a job, rent or buy an apartment or a house, and buy insurance.  When negative information in your report is accurate, only the passage of time can assure its removal.

A credit reporting company/CRA can report negative information for seven years and bankruptcy information for ten years.  Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.  There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the relevant event took place.

There is no time limit on reporting information about criminal convictions, information reported in response to your application for a job with an annual salary of more than $75,000, or information reported because you’ve applied for more than $150,000 worth of credit or life insurance.

Anyone who takes action against you in response to a consumer credit report supplied by a CRA, such as denying your application for credit, insurance, or employment, must give you the name, address, and telephone number of the CRA that provided the report.  If you ask for it, the CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information.  The CRA also must give you a list of everyone who has requested your report within the past year (two years for employment related requests).

There is no charge for a copy of your report if a company takes adverse action against you, such as denying your application for credit, insurance or employment, and you request your report within 60 days of receiving the notice of the action. Otherwise, there could be a small charge (typically less than $10) for a copy of your report.

For most people, buying a house is the largest purchase they will ever make.  But the potential payoff is huge -- a home of your own, a place for your children to grow up and, in the absence of another rare major market reversal, a good long-term investment.

One way to help ensure you get the most house for your money is to buy a foreclosed home.  The housing market has been glutted with foreclosed properties because of the recent recession, and many of the houses present discounted opportunities for savvy buyers.

On the surface, buying a foreclosed home appears to be as straightforward as buying a home in the traditional real estate market.  However, the foreclosures market is considerably more complex and requires buyers to proceed cautiously in order to buy a foreclosed home at a discounted price.

Get Preapproved for the Loan

This is the time to get your financial house in order. You’re planning to borrow a lot of money, and it’s important to do everything you can to make sure that your loan goes through without any issues.

Work with your loan officer to get preapproved for a mortgage loan.  If necessary, your loan officer can suggest ways in which you can improve your credit score and can suggest resources that will help you improve other aspects of your financial situation.

In most cases, the buyer of a foreclosed property has no more trouble getting preapproved for a loan than would a buyer in a traditional transaction.  Some lenders, however, are more cautious, and if the home was left in bad shape by the previous occupant, the lender might not be willing to lend on a property that’s in disarray.

Title insurance ensures the title to the house is free of any additional claims and is required on all purchases that involve a loan.  While it's not required if the sale is cash only, as is often the case in foreclosures, buying the insurance is still the prudent thing to do.  Your loan officer or real estate agent can advise you on this.

Begin Your Search with Information

Legal aspects of buying foreclosures varies by state and some states require steps which are far outside traditional buying practices.  Foreclosures are legal proceedings and are treated as such.  For example, in certain states the lender must actually bring suit against the borrower in order to get a court order to sell the property.  Granted this is on the selling end, but the legal aspects can certainly present hurdles to buying the home as well.  Rather than just jumping into auctions and foreclosure listings, buyers should do a bit of research on what is required in their state for a foreclosure sale.

People typically buy foreclosed homes directly from the lender, though some are sold at auction.  In either case, be sure to find a knowledgeable real estate buyer's agent.  Listing agents work for the bank -- you need a real estate agent with experience in buying foreclosures in your corner.  Some agents have special training to work with foreclosed properties.  As an example, the National Association of Realtors offers short sale and foreclosure certification (a short sale occurs in lieu of a foreclosure, when the lender allows a homeowner behind on payments to sell the house for less than the loan balance).  While certification isn’t mandatory, it is a good indicator that the agent has been formally trained on foreclosures.  With foreclosures averaging one out of every five home sales nationwide recently, there are very few agents that do not have at least some experience with foreclosures.

Focus Your Search for Foreclosed Homes

When you begin actively searching for foreclosed homes, do so with clear criteria in mind.  Especially in areas where prices rose the highest during the high-performing years of real estate, home values have fallen significantly as a result of the huge number of foreclosures coming onto the market.  In these areas, it is particularly easy to become overwhelmed with the sheer number of choices when considering a property. Knowing what you’re looking for ahead of time will make the search far more productive for you and your real estate agent.  Prepare two lists – one containing the "Must-Have" features, and one containing the "Nice-to-Have" features, and provide your real estate agent with a copy.  These lists can save both you and the agent a lot of time and effort.   Of course, you must also determine a price range for your home search.

In areas where foreclosures are rampant, you may have other options when it comes to seeking properties coming onto the market.  You can ask your real estate agent to focus the search on properties in a certain subdivision, or even on a certain street to ensure you’re getting the location you want.  You can aid in this search by continuing to gather information about the area.  If you’re watching an area closely, you might be able to buy a home from the original owner before foreclosure proceedings begin, but in these cases, be aware that you may have to tackle the liens that are often on the properties as well.

Seeing the Home

When you have found a property that meets your criteria, try to get an inspection in order to determine its condition.  The vast majority of foreclosed houses will be vacant, which usually makes it easy to tour the house and hire an inspector to determine what work is needed to bring it up to your standards.  Occasionally the house you’re interested in buying won’t be vacant, and often the owner or renter isn’t too happy about leaving.  The occupants might have to be evicted, which will likely add time to the process; and then there is a chance that when they leave they will damage the house.

Even if there is no intentional damage, many properties that have undergone foreclosure spend years in bad states of repair.  Often, the previous owners of foreclosure properties, struggling to make mortgage payments, didn’t have funds to perform much, if any maintenance.  There are often substantial cosmetic repairs and replacements needed.  In some cases, there are major structural problems as well, as a result of years of neglect.

In many cases, even if you get an inspection, you won't be able to get agreement for any improvements to be paid for.  Foreclosed homes often are sold "as is"; but knowing what improvements are needed ahead of time, will almost certainly be worth the effort, and help you to make the right decisions about the property.

If you’re looking for a property in really good condition, plan on a more difficult and lengthy search.

Making an Offer on a Foreclosed Home

Occasionally there is flexibility on the price of a foreclosed home, but with the already reduced listing price, there is usually not much room for negotiating when it comes to price.  Unless the home is priced higher than the comparable sales in the marketplace, plan on paying close to the asking price.  Your real estate agent can help you determine these values.

If you are unable to get an inspection before making a contract offer, be sure any offer you make is contingent on a satisfactory home inspection; that way you’re covering yourself for any surprises in the event there are significant problems that don't show up with a tour of the home.

Once you’ve gotten preapproved for the loan, found the house, and made an offer, there will be a wait for a response from the lender that now has possession of the house, which can take longer than a non-foreclosure transaction would take.  Additionally, in some cases, you might be competing against cash investors with deep pockets and intimate knowledge of the process who plan to resell or rent the house, which could further delay a decision.

If the lender does decide in your favor, it often wants to get the property off its books as soon as possible, so you may have to move quickly in closing the sale.

And finally – hopefully at a bargain price – the house is yours.

You've decided that at some point in the future, you want to own your own home, but you're not yet ready to do so.  Saving for a down payment on a house is no simple thing but it is certainly possible, especially if you have a plan.  While saving for a down payment cannot be accomplished overnight, it can be done in less time than you may think; and the sooner you begin saving, the sooner you'll be able to reach your savings goal with less strain on your budget.

Down payment requirements vary, depending on loan types; for example, FHA requires a minimum 3.5% while conventional financing requires 5% or more.  That often translates into at least a ten thousand dollar savings that is needed in order to make a good down payment on a house.  While saving that kind of money may seem unrealistic, especially when the interest rates offered by banks are as low as they currently are, contributing regularly to a savings account, as well as sacrificing in order to put as much money away as possible, will definitely have been worth the effort when your interest rate is lower and you will not be required to pay mortgage insurance.

Emergencies will happen, but you should plan for such emergencies with a separate account rather than the account that is reserved for your down payment.

Typically, when people think about saving for a down payment, they understand that every penny counts, but we normally will head to our local bank to open a savings account.  Today, that can be a short sighted option, with so many other possibilities open to us.  Using a higher yield savings account can help you add to your savings even faster by taking advantage of higher rates offered at some banks.  In addition, these accounts provide a great way to protect your down payment funds because of their backing by the Federal Deposit Insurance Corporation (FDIC).

Many of us are familiar with online bank accounts, as most of our regular banks offer them these days.  Not many people, however, are familiar with those banks that offer higher yield savings accounts online that are not directly tied to brick and mortar locations.   Some savings accounts are entirely online, and, therefore, do not incur the costs that a local bank may charge to maintain a savings account.  Also, having a higher yield savings account that is maintained online allows you to easily track your savings and watch it grow; and the psychological impact of seeing your down payment account continue to grow can be a great incentive to contribute even more to the account.

Other advantages of online higher yield savings accounts are that most of these accounts do not have minimum balance requirements and they also do not have minimum deposit requirements (which your local bank may in fact have).  Be sure to check for FDIC insurance on your deposits and conform to all requirements before you select a higher yield savings account in which to put your down payment funds.

An online search for "High Yield Savings Account" will identify many sources for such savings accounts.  Be sure to thoroughly research all that you consider using.

As you save additional funds, continue to check out alternate accounts to be sure that you're always getting the highest possible interest on your deposits, which will help grow your down payment account even faster.  Stay the course -- you will eventually get to where you want to be.

A closing tip: Consider having a certain amount transferred automatically each month from your checking account to your higher yield down payment savings account.  This is forced savings and something that can help your account grow even more quickly and painlessly.