Talking Credit – Give Yourself a Chance to Have a Great Future

Improving your credit score is like preparing to run a marathon; one cannot just show up the day of the event and expect to run.   When running a long race the athlete will have spent a lot of time, energy and a diet of a healthy variety of food in order to be ready.   So it is with your credit; you will need time to clean it up or improve it, energy spent keeping it up and need to understand the varieties of credit that can be used to improve or maintain your credit score.

One of the greatest assets you can have can also be one of your most bitter enemies; your credit score can either improve or detract from your quality of life.  Banks and Financial Institutions are becoming stricter than ever when it comes to your credit score.  The rate you pay for credit cards, insurance premiums, as well as auto and homes loans are all impacted by your credit score.  Building up the strength of your credit score is more than just paying your bills on time. 

 One of the most common credit scores used today is the FICO score, created by the Fair Isaac Corporation.   The credit score ranges from 350 to a high of 850, the higher the score the lower the interest rate you will pay on borrowed money, which will save you thousands of dollars over your life.  The current magic number is 720, but is currently moving up to 740.  Almost half of Americans maintain a score above 720.   As your score moves farther below 720, interest rates may begin to rise.  If you are below 580 you may not be able to take out a mortgage even if you have one currently.

Many think that the credit scoring models are an exact science unfortunately people need to gain understanding of the moving pieces associated with credit scoring as it is more of an art form.  Each credit bureau has its own proprietary formula.  While we do not know the exact formula we do know the following.

Five Credit Elements

1.   Payment History

Paying your bills on time makes up 35% of your score, we can call this your track record.   If you pay your payments a few days late and incur a late fee, this will not impact your score.  It a good rule of thumb to pay them on time or early if at all possible.  If a payment reports “late” on your credit that means the specific account is 30 days or more past its due date.  The more “lates” you have on your credit report the lower your score will go.  If a bill becomes 60, 90, 120 days late, the score quickly decreases.

If you have “late” payments currently reporting on your credit, understand the more time that passes between the last reported “late” the better.  The mortgage industry still has two major thresholds one at 12 months and the other at 24 months.   As each milestone is achieved better financing options become available to you.  Mortgage “lates” are much more serious than an auto payment or credit card payment being “late” and will have a larger impact than on your credit score.  If you are ever in a spot where you need to choose between making your mortgage payment and making your credit card payment, you should always choose to make your mortgage payment.

2.    Amount Owed

How much you owe is a 30% factor of your score.   Many think if they owe less they will have a better score.  This is not always the case; the part of your score is determined by a balancing act between your types of credit you use (mortgage, car loans and credit cards), how much you owe, and how much you have available.   Having too many credit cards could have a negative impact on your score, as well as not having more than one credit card.   Having a credit card that has a large available limit can improve your score.  This rule can also apply to home equity lines of credit for limits that are less than $35,000.  If you have lots of credit available to you use it but never maintain high balances.  The closer your balance is to approaching your limit the lower your score can go. 

 3.   Credit Type

The different types of accounts that you use make up this part of your score.  Many people do not want to use credit cards again if they had trouble in the past.  That is absolutely the wrong thing to do, you need to learn how to use credit properly and take control of your budget.

 4.   Credit Maturity

How long your individual credit accounts have been maintained is 15% of your score.   The longer you have had credit is one element, as well as how long have you had each individual account.   The longer the individual accounts have been established the stronger your score will be.  If you have old accounts that you have not used in the last 6 months the account will become inactive.  Should this occur it is not giving you the maximum points that might be available to you in this section. 

 5.   New Credit

Credit that is less than 24 months old makes up the last 10% of your score.  Doing the credit rollover game, rolling balances from one card to the next is not a good idea.  It will start to show a shallow credit report and impact the Payment History section of your score.

 Now that you know what it is that makes up your score, there are two last ideas I need to share with you.   The National Association of State Public Interest Research Groups, states that 79% of all credit reports contain errors.  It is worth your time to check your credit at least once a year.  If you find something that is wrong, take it on as your second job to clean it up.  Remember the score you have will determine what you pay over your lifetime in interest. 

 The second idea is identity theft is becoming more prevalent, I suggest you sign up for a protection plan such as www.lifelock.com.    For the limited cost it will allow to not have to worry about your credit being messed up for years to come.

What Is A Conventional Mortgage

We have all heard of conventional mortgages, but we get asked all the time what a conventional mortgage actually is. These days, you really need to have either 20% equity or a 20% down payment to qualify. These are the loans that are purchased by Freddie Mac and Fannie Mae.

One of the best parts of qualifying for a conventional loan is the fact that you probably won’t have any upfront mortgage insurance or monthly mortgage insurance with most programs. The conventional rate and the FHA rates are pretty similar most days but they can fluctuate away from each other a bit. They also do come in 30-year,25-year,15-year, etc, and ARM loans as well.

Down Payment how much is too much?

Down Payment how much is too much?
This is one of the oldest questions faced when purchasing real estate. The rule of thumb has always been to put down 20% of the purchase price if you can. Of course, if you had more available, then you were advised to increase the amount. The general principle behind a large down payment is that you will have a smaller mortgage and therefore a smaller mortgage payment. While that may be true, the operative question is: does a large down payment make the best use of your money?

In order to address this question, we must first visit a common misconception regarding home equity and its rate of return. No matter how much (or little) equity you have in your house, the rate of return is always the same: zero. This is important to understand because you would not put your hard earned money into a mutual fund that advertises a 0% rate of return, so why put it into your house? It is dead money that provides the same return as it would if you had literally buried it in your backyard or put it under your mattress.

Now you might think: How is that possible? I put down $100,000 on the purchase of a $500,000 home five years ago and it is now worth $600,000. This is a 100% return on my investment of equity. The common mistake most people make is confusing return on equity with the appreciation of real estate values. True, the house went up in value, but you would have realized this gain regardless of whether you had a mortgage on the property. Indeed, you would have realized it even if you had financed the entire purchase. A home’s appreciation in value does not depend upon the size of the down payment. Real estate values go up and down irrespective of the size of down payments and mortgages. Real estate value is a factor of market supply and demand. The analogy is that boats on the bay will rise and fall with the tide no matter how big or small they are.

Let’s tell the tale of two brothers ready to buy their next home Smart Sam and Nervous Nick. Each has $150,000 available to use as a down payment and are buy a $250,000 home. The Nick decides to follow conventional advice and make a big down payment to reduce his monthly mortgage payments. He will only have a $100,000 mortgage. The Sam on the other hand is privy to the smarter way to purchase his home and he only places $50,000 down. He then invests the remaining $100,000 he had available in a long term investment account. The illustration further assumes that both homes will appreciate at 4% over the next 10 years.  It further assumes 6.5% growth on the money invested in long term investments (most indexes average over 10% per year historically).  They both take out an interest only mortgage at 5.5% (this makes the math simple to follow).  Nick will invest the difference in monthly savings into a long term investment as well.  The monthly difference is $390 at 6.5% growth.  Both brothers are in the 15% tax bracket.

TEN YEARS HAVE PASSED
Projected 10 years into the future both homes will appreciate to the same value of $370,061. Remember, the value increases or decreases based upon market demand. It has nothing to do with the size of the mortgage or the amount of equity in a home. If they both then decided to sell, at the closing they would both have the same gain. Nick would pay off his mortgage of $100,000 leaving him with $270,061 from which they will deduct their original down payment of $150,000 leaving them with a gain of $120,061. Sam on the other hand will pay off his $200,000 mortgage leaving him with $170,061 from which he will deduct his original down payment of $50,000 leaving them with a gain of $120,061. As for the long term investments Nick’s account grew to $65,677 ($390 per month for 10 years); Sam’s grew to $191,218 (remember the $100,000 up front lump sum investment).

Nick’s Net Worth $335,738 could pay the house off in 13.50 years

Sam’s Net Worth $361,279 could pay the house off in 10.75 years

As counter intuitive as it seems, this illustration proves that regardless of the size of the down payment, the gain is always the difference between the original purchase price and the future value of the home. After 10 years of the home appreciating at a rate of 4% per year, both homes have gained $120,061 in value despite the different down payments. This analysis demonstrates that home equity has a 0% rate of return. One thing I would like you to think about, you would not put your hard earned money into a mutual fund that advertises a 0% rate of return. Why would you do the same with down-payment funds?

Now that we have illustrated this critical point, let’s get back to the original question: how much should you put down? Don’t put all of your money down on a house, put as much as you need to, so that you are able to afford the payment.

Use Your Mortgage to Pay for College

These are not the total costs of attending college. In fact, tuition and fees constitute only 67 percent of the total budget for full-time students enrolled in private four-year, private colleges and 36 percent of the budget for in-state, public, four-year institutions. The additional costs come from things like transportation, books, supplies and basic living expenses. Multiply those figures by the average 6.2 years students attending a four-year public college take to earn their degree and the total add up to more than $100,000!

The key to keeping a six-figure financial bump from sidetracking long-term plans could be right under your nose – or more literally – over your head. Your home equity could ease the pending burden and improve your tax situation if properly structured. That is where a Certified Mortgage Planner can help. A good one can advise you on:

• College aid… grants, loans, scholarships, work study, etc.
• Test preparation resources
• College selection tips
• FAFSA and CSS application filing
• Calculators for Expected Family Contribution and strategies to lower it via equity management
• Analysis of financial aid packages
• Completion of Stafford or Plus loan applications
• Ongoing consulting services

Case Study
How much of a difference can a Mortgage Planner make? Let’s look at an example. The Greens attended a college funding workshop when Mrs. Green lost her job, putting their dreams for sending their children to school in jeopardy. They had saved $200,000 in a mutual fund account to fund educational expenses for their daughter. This was a big head start compared to the average person who has saved less than $10,000 for the purpose.

Their daughter wanted to attend Emory University in Atlanta – a school where the total yearly expenses will be around $42,500. Not a problem with the money they have saved, but they wanted to check on their options to see if they could avoid spending the entire amount in light of their new, lower income. That inquisitive streak made a six-figure difference in the Green’s financial picture.

Prior to the workshop, the Greens were not aware there was an “expected family contribution” (EFC) or that they could qualify for aid of any type. The EFC is a government calculation that dictates how much a family is expected to contribute to the education costs.

The husband owned a gas station which allowed him to keep a pretty low taxable income through business deductions. That gave the couple an EFC of $20,500. In essence, that means they can receive some form of aid (grants or low cost loans) for the amount above the EFC. Better yet, because Emory has such a large endowment (not uncommon for the prestigious private schools) they typically cover 95 percent of need above the EFC.

Additionally, this family had a significant amount of their assets positioned such that they were not able to take maximum advantage of the potential aid available. They had over $400,000 in assets (home equity and mutual funds) and their “asset protection allowance” – the amount of assets allowed before registering a negative impact on the aid allowance formula was $53,000. That is why it was important for them to reposition these assets. A new mortgage allowed the couple to convert a portion of their assets to an investment vehicle that was invisible to the aid formulas.

By doing this, the Greens lowered the EFC from $20,500 to $5,500. Let’s add up the savings. The Greens had planned on paying $42,500 a year. If we assume their daughter graduates in just four years, the total costs come to $170,000. Thanks to the advice of a Mortgage Planner, they now have an EFC of $5,500! As I said earlier, Emory typically covers 95 percent of need above EFC or $35,150 of the remaining $37,000, leaving the Greens only paying $7,350 a year or a total over four years of $29,400! That’s less than the cost of one year with a total savings of $140,600 over the entire college experience.

VA Loans How Do They Compare?

The VA home loan programs that around since 1944. it allows veterans to purchase a primary residence without putting any money down towards the mortgage with a down payment.  You do have to have a qualifying income for the VA loan program and the home must meet the VA appraisal amount or below.

You will need money for your earnest money and for your closing costs, but you can work the closing costs amount into the purchase of the loan by having the sellers pay for your closing costs.

Depending on how many times you have used your VA loan privileges, you have a VA funding fee that changes each time.  You can also have this funding fee waived if you are a disabled veteran.

Rates are typically very close to conventional and FHA loans, but make sure you talk to an educated VA lender or broker before you move forward to see which loan works best for you and costs you the least in the long run.

Mortgage Loans Bank or Broker

A very good question that a lot of people have when they’re searching for a new home loanis whether they should go through their local bank, or work through a mortgage broker. There are some advantages and disadvantages to both.

The biggest advantage working with a mortgage broker is the fact that they typically can hunt for more loan programs that may fit your needs.They can also get several different rate quotes for you from different banks which could save you some money in the long run if you’re able to lock in at a lower rate. Read more

Your Home Loan Pre-Approval

A huge mistake a lot of people make when they’re looking to buy a new home is the fact that they start searching for homes before they know how much money they can actually spend. Knowing what you are preapproved for with your next home loan is probably the very first step you should take before you even think about actually looking at homes.

Not only should you know what you are actually preapproved for, but you should know exactly what your payment is going to be based on that loan amount. Make sure to add in your taxes and insurance when calculating your payment. Although this number is not going to be 100% accurate it should give you a good idea of how much you want to borrow. Just because you’re preapproved for $400,000 does not mean that you should spend the entire preapproval Read more

FHA vs Conventional

When you’re looking for new loan products, it’s important to understand some of the basics between FHA loans and conventional loans. Commission refers to any loan under the FHLMC and FNMA lending limits. Some other terms for conventional loans could be conforming, a paper, BC, A-, and other terms that mortgage brokers and lenders use in industry.

When people hear FHA loan, they typically think of a first-time home buyer loan. These days, FHA loans are more common than ever and are available for people who want to change their rates and term of their loan, or even get cash out when they  refinance. Read more

How To Read A Good Faith Estimate

As an experience mortgage, one of the things that really don’t like to hear is the “can you send me a good faith estimate” idea. Don’t get me wrong, I think that good-faith estimates are a way that’s consumers can compare lenders, but the sad part is, most consumers don’t really know how to read a good-faith estimate and therefore don’t really know how to compare lenders accurately.

So the way I look at it, I provide a good-faith estimate I am potentially shooting myself in the foot because I realize that my good-faith estimate is going to be accurate, but the other lenders that they’re comparing against most likely will not be accurate which means under estimated.

As a consumer or a potential borrower, the very first thing that you need to realize is that a good-faith estimate is just that, an estimate. Everything in a good-faith estimate is subject to change and it is not a written in stone commitment to lend you money. So in other words, just because Ted at XYZ Bank gives you a good-faith estimate with a interest rate of 2.8%, it does not mean that you are locked into that 2.8% interest rate.

The nuts and bolts of a GFE.

When you look at a good-faith estimates are broken into three major components. Section 800 deals with lender fees. Any fees charged to you by the lender will be listed here and sometimes listed under different names. The important part is not what these fees are actually called, that what you are being charged as a total from the lender. This is pretty much all that the lender really has control of in the transaction as far as your fees go. The next sections will be “third-party” fees which the lender is required to quote you on but has no control over.

Section 900 and 1000.  This is the section that’s shows you what you must pay in advance to obtain the loan. This is called your prepaid items section. Most lenders require that you prepay some interest and some taxes so that they can start your as for account for these items. You may also be prepaying some of your home insurance these.

Section 1100, title fees: this is the section that shows you what the title and escrow fees are going to be. These fees are regulated state by state and should be very very close to the same with every good-faith estimate that you see. If you don’t see these fees you better start asking questions because they have to be paid at closing by somebody.

Section 1200, government and transfer charges: in this section you’ll see any fees associated with the government. This depends on which state you live in.

So to all comes down to it, the only section that you need to really pay attention to when you’re comparing lender fees to lender fees to section 800 of your good-faith estimate. The rest of the sections will be exactly the same regardless of which lender you go through regardless of what it says on the good-faith estimate.

Keep in mind, when you’re getting good-faith estimates many lenders will show you the minimum so that it will appear that their good-faith estimates each out all others, and that’s just not right. That’s why we always recommend that you also choose someone based on their knowledge, their trust, and their experience.

Citibank Mortgage

Citibank mortgage is a top residential mortgage lender in the US. Does all this business through a network of branches spread throughout the United States. His main incomes come from wholesale loans and Internet marketing. Recently, Citibank mortgage got out of the wholesale mortgage business and reduce the number of brokers it will work with to about 1000.

During these tough economic times, being a mortgage company is not easy. Citibank mortgage seems to be hanging in there. Which is more than we can say for many other banks.

To apply for a loan click here.

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