How to Prepare Yourself for Making a Down Payment

On December 21, 2014   /   Finance  
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save for a down payment

Down payments frustrate a lot of would-be homeowners. Coming up with a large sum of cash can seem impossible, but it doesn’t have to be.

Setting up a savings plan now will help you get the down payment you need and show lenders you’re a responsible borrower.

For Down Payments, Bigger Is Better

Sound financial planning can help you amass a large down payment, which has several benefits:

Make Saving a Habit

Saving for a down payment is tough, but there are some strategies you can use to making saving money a habit—not a chore:

  • Budgeting is important, because if you don’t know where your money goes, you won’t know where you can cut back.
  • Set up a payroll deposit into your savings account or set up an automatic checking-to-savings transfer on payday to make things easier.
  • Consider certificates of deposit (CDs), money market funds and other low- to no-risk savings or investment vehicles to help your savings accumulate faster.

Give Yourself a Boost

Saving for a down payment one paycheck at a time can be frustrating. To help you get there faster, use some of these tricks:

  • Cut back on nonessential spending. Do you really need to pay for Starbucks, name-brand items or subscriptions to magazines and cable TV? There could be many items you can eliminate from your budget, and the savings would be substantial.
  • Reduce your credit card debt to save credit cards for emergencies only.
  • Adjust your tax withholding to make sure you’re not overpaying. It may feel good to get a tax refund in the spring, but that really is a free loan to the government. The money you get back is cash on which you could have been earning interest. The IRS website has a calculator to learn how much in taxes you should have withheld from your income.
  • Liquidate expendable assets. Saving for a home may be just the reason you’ve been looking for to unload stamp, coin, baseball card and comic book collections or other items that are collecting dust in your closets, safe deposit box or storage space.
  • Get another job. If you are already squeezed, consider working retail during the holidays, selling on eBay, taking on freelance work or finding some other source of income solely for the purpose of saving for that down payment.
  • Organize. That’s right: Sell all that stuff you never use that won’t be a good fit for your new home. Clear the clutter—an organized home is a time-saving home, and time is money.

Updated from an earlier version by Broderick Perkins.

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How to Approach Homeownership Based on Age

On December 8, 2014   /   Home Buying  
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homeownership based on age

By: Jonathan Smoke

Homeownership is a crucial component of building wealth, as seen in recent research, but it means different things for different age groups.

For example, seniors who are in the best financial situation to handle expenses after retirement are homeowners who have no remaining mortgage—they have the value of their home as a cushion in their household wealth, and they spend less on housing than seniors who rent.

Although owning a home can benefit consumers of all ages, specific homeownership strategies should differ based on your stage of life.

Here’s a summary of guidelines for approaching homeownership applied to today’s biggest generations.

Millennials

Understand the advantages of owning a home. Save for your down payment. Work on your credit score. See what you can afford to buy. Seek the advice of a local REALTOR® to advise on local demand and supply to ensure you can get a home that fits your needs at an appropriate market price. Time is on your side.

Forecasts for the economy and housing are positive, but even if there are down years in the future, your investment should outpace inflation and help you build wealth—in addition to enjoying your own home while avoiding ever-escalating rents.

To benefit most from the compounding gains of homeownership, it is best to start sooner rather than later, assuming you can afford to buy today and qualify for a mortgage.

Gen X-ers

Ensure you have a game plan to pay off your mortgage by the time you intend to retire. If you refinance to lock in lower rates, make sure you get a shorter term than 30 years.

If you were a victim of the foreclosure crisis, work on your game plan for re-entering the property ladder. You also still have time to reap the longer-term benefits—plus you are approaching your peak earning years such that shorter-term mortgages like a 15-year or 20-year loan would work. Shorter-term mortgages would enable you to retire while owning your home free and clear.

Boomers

Think about your plans for retirement and if that aligns with the remaining term on any mortgages you hold. You may also be considering retirement homes and second homes. Buying sooner rather than later will help you lock in today’s lower prices and mortgage rates while enabling you to enjoy your dream home sooner.

Plus, those young millennials you raised, taught, coached and now manage may want to buy your existing home: It’s a great time to sell.

 Jonathan Smoke is realtor.com®’s chief economist.

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Mortgage Brokers vs. Banks: Who Gets Your Business?

On November 9, 2014   /   Home Buying, Home Finance, Mortgage  
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mortgage

By: Angela Colley

When you’re looking for a mortgage, you can use a mortgage broker or deal directly with the bank.

Each choice has pros and cons, and depending on your personality, you’ll have to decide which is right for you.

Going it Alone

If you go it alone, you deal with the bank directly. If you’re a regular customer and have a great relationship with your bank, you might receive better terms and interest rates.

If you don’t have a good working relationship with a particular bank, you should shop around. Even if you do have a bank you’ve worked with, you should consider shopping around anyway—don’t trust your bank is automatically giving you the best deal.

Keep in mind that when you’re on your own, comparing rates and terms can be time consuming and complicated. You may not know how to compare mortgage products correctly or be savvy enough to slice through all the financial jargon.

Each bank typically offers just a few mortgage options, so in order to find the best one, you will have to research them each individually.

Pros of Using a Broker

Brokers are mortgage experts. They know the market, follow trends and know which institutions offer which mortgages products. They’ll also know which lenders are offering discounts or deals.

Importantly, brokers can save you time. A smart broker can identify the most appropriate lender for your specific circumstances and know which mortgages will be most appropriate. They also handle the hassle of paperwork and interaction with lenders, which can help relieve stress from the process.

This saving of time, work and stress is a big factor for many individuals who use a mortgage broker. Some brokers develop personal and professional relationships with lenders, which may accelerate the application process.

However, these relationships aren’t always a good thing.

Cons of Using a Broker

You may want to use caution if you pick a broker. Here are three reasons why.

1. Mortgage brokers aren’t free. Broker fees typically range between 1% and 2% of the mortgage. You also need to consider who pays the broker’s fee. While many mortgage brokers receive payment from the lender, some charge sizable fees to the borrower. This is especially true if there’s a situation involving credit issues or other financial hurdles.

2. A bad broker can favor lenders, not you. The deep relationships that some mortgage brokers develop with particular lenders can work against you. For example, a broker might steer you toward a lender with whom they have a long history—and not the one that offers the best terms. Likewise, if a broker is more concerned with netting the highest commission, they won’t have your best interests in mind.

3. They’re not all created equal. Mortgage brokers aren’t equally skilled and knowledgeable. Some brokers may not know of all the deals and options, which means you won’t get the best deal out there. To find the best broker in your area, ask around. Recent home buyers and a REALTOR® may be able to steer you toward a broker who can get you better rates.

Updated from an earlier version by Moshe Pollock.

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Think You’re Playing Mortgage Rate Roulette?

On October 19, 2014   /   Mortgage  
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mortgage

By: Michelle Lerner for Realtor.com

If you’re shopping for a home, you’ve probably already met with a lender and obtained a pre-approval letter based on your credit history, income and assets.

Hopefully, your lender also explained to you that mortgage rates fluctuate daily and from one loan program to another. If not, make sure you ask for an explanation of what changing interest rates can mean for your home loan and housing payments.

For example, if you plan to borrow $250,000 for your home purchase and want a 30-year fixed-rate loan, your monthly payments for principal and interest at 4% will be $1,194.

If your interest rate is 5%, your payments will rise by $148 to $1,342 per month. Even more importantly, you will pay an additional $53,465 in interest over the life of your loan at the higher rate.

While everyone wants to find the lowest mortgage rate, you need to understand the rate you’re quoted depends on whether you’re paying one or more discount points to bring down the rate. A discount point, equal to one percent of the loan amount, can bring down your interest rate by varying amounts.

When you compare mortgages, be certain that you’re being quoted an interest rate based on the same number of points—or zero points.

Why Mortgage Rates Change

Mortgage rates are heavily influenced by economic trends as well as supply and demand. When other interest rates are low, mortgage rates also tend to stay low, but they can fluctuate based on employment reports, consumer confidence and, in particular, investor activity in the bond markets.

Often, bad economic news will drive investors to purchase more bonds, which sends yields lower along with mortgage rates. The Federal Reserve’s decisions about interest rates also have an impact on mortgage rates.

When mortgage lenders are experiencing a period of low volume of mortgage applications, this also can send mortgage rates lower.

Try our mortgage calculator to check what your monthly payments would be, with different interest rates, for a given loan amount. Keeping up with weekly or even daily reports of trends in mortgage rates on the realtor.com® News blog can be helpful as well.

The rates you see online are typically reserved for those with the highest credit scores. Your individual mortgage rate will vary according to multiple factors.

Locking In Your Mortgage Rate

Your lender is the best source of advice about when to lock in your mortgage rate and what the fee is for the rate lock.

Typically, loan lock-ins are for 30 to 90 days. Technically, you can lock in your mortgage rate when you are approved for a loan, but very few buyers choose to do so—because it can be difficult to know how long it will take you to find a home and have your offer accepted.

Many borrowers choose to lock in the loan rate when they have a ratified contract, because at that time you’ll have a better feel for when the settlement will take place.

However, if mortgage rates appear to be rising quickly, you should discuss with your lender locking in a lower rate as soon as possible. Your lender can tell you what the fee is for the loan lock and what will happen if interest rates drop while your loan is locked.

Some lenders offer a “float-down” if rates decline during the lock-in period. If the lock expires before you close on your loan, you may be able to extend the lock or you will have to relock the loan at current mortgage rates.

When you’re shopping for a home, it’s best to stay aware of mortgage trends and in close touch with your lender.

Updated from an earlier version by Emmet Pierce.

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Help! I Lost My Job While I Was Buying a Home

On September 28, 2014   /   Home Finance  
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purchase home

By: Credit.com

Help! I Lost My Job While I Was Buying a Home

Losing a job is tough enough. But what do you do if you find yourself out of work when you’re weeks or even days from closing on your dream home?

Brutal, but it happens.

Employment isn’t a requirement for getting a home loan—just ask retirees. The issue is ensuring there’s stable, reliable income that’s likely to continue. For most homebuyers, the source of that stream is a steady 9-to-5 job.

Needless to say, losing your job unleashes a wave of uncertainty into the loan process. It doesn’t automatically kill your deal. In fact, it may not even delay things. Whether you can salvage the purchase often depends on your overall income picture and how quickly you land a new gig.

And even then, you’re still at the mercy of an eagle-eyed underwriter already on high alert. Success in these situations comes on a case-by-case basis. Here are a few things to know.

Should You Tell Your Lender?

Your first inclination might be to see if you can sneak one past the goalie. That’s a bad idea for a couple reasons.

One, lenders verify your employment and income early in the loan process and again near the time of closing, sometimes just hours before. They’re almost always going to hear it straight from your (now former) employer.

Two, you could be committing mortgage fraud by failing to disclose your job loss. Borrowers usually sign documents requiring them to notify the lender about any significant changes to employment or income.

Three, even if you could keep it a secret through closing, would you really want to? Unless you’re hopping into another job, making those new mortgage payments might be a real challenge. Defaulting on a home loan can wreck your credit and hamper your financial profile for years.

In fact, missing payments on any debt can hurt your credit, and if your job loss results in late payments on other debts in the lead-up to your mortgage closing, your credit score will reflect that.

Monitoring your scores can help you keep up with what’s going on with your credit so you can address any problems with your creditors and your lender (and one way to monitor your scores for free is through Credit.com).

New Employment

You may be able to hang onto that new home if you swiftly land a new job. It’ll need to be similar to your old one, in terms of the field, the type of work and the pay. Written details and confirmation from the new employer can help.

Lenders may require you to be back to work for 30 days before moving forward, a wait that could affect everything from your closing date to your interest rate and more. In some instances, you might be able to convince the lender to move forward without delay, especially if you get a new job posthaste.

So much depends on your specific situation.

Depending on the loan type, you could also look to add a co-signer and count that person’s last-minute income. That person would need to meet the same credit and underwriting requirements you did.

Also, you should both fully understand the implications of being a co-signer, i.e. what happens if you miss a payment.

Talk with your loan officer and your real estate agent about your options. Remember that continuity is critical regarding the new job. Jumping into a new career will usually require a significantly longer wait before lenders are willing to count that income.

Other Income

Most people need their employment income to qualify for a home loan. But some borrowers may have other sources that can satisfy the lender.

Retirement income, disability income and rental income can all be considered. Lenders will want to verify these sources and have confidence that it’s likely to continue for at least the next three years.

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This article was written by Chris Birk and originally published on Credit.com.

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