10 Home Renovations That Offer the Best (and Worst) Return on Investment

Remodeling may be a labor of love, but it’s also an investment that can seriously boost the value of your home.  Only by how much? Well, according to Remodeling magazine’s 2016 Cost vs. Value Report, you’ll recoup an average of 64% of what you paid for a renovation if you sell your home this year.

To arrive at these figures, Remodeling asked consultants in various markets to estimate the average cost for 30 home improvement projects, from adding a bathroom to replacing a roof. Then, they asked real estate agents nationwide to estimate the expected resale value of these renovations so that readers could compare their out-of-pocket costs to how much money they’d get back when it came time to sell their home.

So, what projects gets you the most bang for your home renovation buck? It may not be nearly as sexy (or fun!) as adding a chef’s kitchen or glam bathroom, but attic insulation gets the top spot. That’s right: Stuff some fiberglass insulation into the walls of a 35-by-30-foot attic, and you’ll pay an average of $1,268. But when you sell, you will rake in $116.90 for every $100. For you math-challenged out there, that’s a recoup of 116.9% of your costs. It’s the only home reno on this year’s report that redeems more money than you spend!

The next best-paying renovation on the list: manufactured stone veneer, offering a respectable 92.9% return.

Meanwhile—sorry, luxury tub fans—the home improvement project that reaps the worst ROI is the addition of a bathroom, at 56.2% (although the “added value” of an extra bathroom for anyone who’s ever had to wait their turn for one is, of course, priceless).

Take-home lesson? If you’re looking for a general rule of thumb, it’s that less is more: Lower-cost projects  generally reap bigger returns, with four of the five projects that cost less than $5,000 ranking among the top five for money back when you sell.

Check out the best (and worst) returns for home renovations in the two charts below, including how much you’ll pay and get back if you sell your home this year.

Shared from:  http://www.realtor.com/advice/home-improvement/heres-how-much-remodeling-pays-off/

What Is Escrow?

One of the most confusing processes for the uninitiated to go through can be buying a home. At times it may seem that people are speaking a different language than they have ever heard before. This situation to often leaves a home buyer having to take on blind faith that the brokers, attorneys, escrow agents, inspectors and mortgage agents know what they are doing and acting in the buyers best interest.

The real estate agents at Ballen Network don’t want their clients to ever feel like they are in the dark. Here is a very short course to help spread a little light on the escrow process.

When Do You Enter Escrow

The escrow or closing process actually begins once you, the  buyer and the seller have agreed on a price and all the conditions for the sale. At the same time that the sales agreement is signed your real estate agent will collect an agreed upon percentage of the sale price from you and deposit it into an escrow account with an escrow agent.

This known as earnest money and as the name implies it is to show that you are earnest in your desire to buy the property. Think of it as a deposit.

What is an Escrow Agent

An escrow agent is a neutral third party who actually handles all of the funds and documents associated with the buying and selling of the property. Not being a party to the sale, in any way, their function is to make sure that all parts of the sale are executed in an equitable and legal manner. Like a referee or umpire the make sure the rules are followed and that everyone plays fair.

Steps of the Escrow Process

1. Entering Escrow- Set the sells conditions, sign the sells agreement, open and escrow account and deposit earnest money.
2. Bank Appraisal– You should be preapproved before you start looking for a home. Still the bank is going to want their own, independent appraisal to assure the property value will cover the loan amount. Note:  home buyer usually pays for this and if property cannot be sufficiently financed sale is cancelled and earnest money returned. This varies state to state and situation to situation. All is negotiable when creating the offers and counter offers.
3. Good Faith Estimate- Once financing is approved you will be given a good faith estimate detailing all of your finances (interest rate, closing cost, inspection fees, etc.) associated with the sale.
4. Obtain inspections– These may or may not be required depending on what area you are purchasing a home but a general home inspection is always a good idea. Some other inspections you may consider or be required to have are pest inspection, environmental inspection.
5. Acquire Homeowners Insurance- This is a condition of any mortgage but you don’t have to use their recommended insurance company. Shop around to find your best deal and coverage.
6. Receive Title Report and Title Insurance- These assure you that not one else other than the seller has any claim on the property. In real estate parlance, that the property is unencumbered.
7. Final Walk-Through– One last look around the property.
8. Review Form HUD 1- This is the finale detailed report of all cost associated with the purchase. Check it closely against the good faith estimate to make sure that no mistakes have been made or added cost tacked on.
9. Closing- The last step. Where all the money and finale paperwork gets taken care of. Be prepared to spend half a day signing your name

Shared from:  http://theballengroup.realtytimes.com/advicefromagents1/item/38695-what-is-escrow

5 Biggest Home-Buying Fears (and How to Face Them)

Buyers’ biggest real estate fears sometimes hold them back from buying — not just around Halloween, but throughout the year. The scary thing is, these fears are sometimes well-founded.

Here are some of the issues that commonly keep home buyers awake at night, and what you can do about them.

“The house has a cracked foundation, dry rot, or a leaky roof”

Renovating, fixing and repairing are on few buyers’ wish lists. When faced with the home of their dreams, they fear the inspection. What if there is dry rot, or a roof or foundation issue?

Most homes will need routine maintenance, and a good inspector will point this out. But it’s important not to let your fears get the best of you. Much of what the inspector comes up with during the inspection is for informational purposes only. Every problem does not need to be repaired right away.

The inspector’s job is to point out every issue he sees in the house. Ask him to explain how bad the issue is, and how long it can go before needing replacement or repair.

If an issue arises that needs immediate attention, go back to the seller and see if they will repair or credit you back to repair after you close.

“I’ll lose my deposit”

Buyers typically put in an earnest money deposit with a signed contract. Typically, this is 3 percent of the purchase price. The seller does not cash the check. Instead, the money sits in an escrow account and can’t be released without both parties’ signatures.

It’s nearly impossible for a buyer to lose their deposit. If you have an inspection, disclosure review or loan contingencies, work closely with your real estate agent to mark those timeframes.

If you need to remove these contingencies in writing, plan to firm things up a day in advance. If you are in negotiations around a contingency date, be sure to extend the contingency date to keep yourself under contract.

“I’ll lose the house”

If you find the home of your dreams, you may have to move fast. Particularly in competitive markets, many homes sell before the first open house to quick acting and super-motivated buyers.

If you see a new listing hit the market, be sure to let your agent know right away. Try to make an appointment to see the home as soon as possible.

Also, find out immediately how the seller’s agent plans to handle any offers received. Sometimes they will take the first offer, especially if it’s a good one. More often than not, the seller and the agent will have an offer date to review offers or ask for best and final offers by a certain day.

If you are travelling or busy with work, be sure not to miss out on your dream home. Be in constant contact with your agent, and flag potential homes that look like a great fit.

“My agent doesn’t have my best interest in mind”

Great agents are always on the prowl for new properties, checking out the market and protecting your best interest at all times.

Some buyers fear that their agent might have different motivations, or that they aren’t on the same page. If you have doubts, change agents. Never settle or take any random agent that comes along as your buyer’s agent.

You and your agent should be committed to each other. Sit down before you begin the process and speak to your agent, much like a job interview. And if you have any doubts about your agent’s abilities or motivations, find another agent.

“We’ll never find a house in time for…”

A real estate purchase should never be rushed. If you have a firm deadline creeping up, make a plan B.

For example, many buyers face an expiring lease or a school application deadline. If you are three months out from a deadline and you haven’t found a house, take the pressure off by putting an alternate plan in place.

Home buying is an expensive and complicated transaction. You don’t want to rush into a purchase and make a mistake. It’s much easier and safer to get another rental or find a temporary address or try some out-of-the-box idea. It may be a little inconvenient, but you can handle it.

If something scares you about a home, the buying process, or a third-party involved in the sale, voice your concerns. Listen to your voice of reason, and stick with your gut.

Many home buyers’ initial fears will fall by the wayside as the buyer gets into the market. Take it slow, and don’t be afraid to take a step back to allow time and space to think things through. It’s better to take your time than to let buying your dream home become a nightmare.

Shared from:http://www.zillow.com/blog/biggest-home-buying-fears-184728/

Should You Rent Your Home To Others?

With rental prices rising, you may be wondering if now's the time to become a landlord. There are advantages to renting your current home while you purchase another to live in.

The advantage to renting your home is that you're likely paying a homestead mortgage interest rate, which will make it easier to make a profit than if you purchased rental property with a mortgage at a higher interest rate. As you've owned your home, it's likely appreciated in value, allowing your home to compete well in the rental market so you can use profits to put back into the home to keep it rentable.

Assuming you're current on your mortgage, have the credit scores to buy another home, and have saved enough cash for a down payment, now may be the ideal time to add a rental investment to your portfolio.

Real estate has always served as a hedge against inflation and against other investments, so the first thing to do is find out how rents compare to home prices in your area. Your real estate professional can provide you with market comparables that show you how much homes are renting for per square foot and how quickly they rent, as well as for what prices comparable homes are selling.

If the rental income is enough to cover your mortgage, you're in good shape, but there are other expenses to consider, such as income taxes, advertising, listing and management fees, and maintenance.

For income tax purposes, your current mortgage isn't considered a cost of doing business that you can deduct like office supplies or equipment purchases. You'll pay taxes on this gross amount, less repairs and management fees, if any. On the bright side, if you sell the property within five years and you've occupied the home two of those five years, you'll likely pay no capital gains at all up to $250,000 for an individual or $500,000 for a couple.

To qualify for a mortgage on another home, your ender follows a typical multiple home formula. Even though you may have your home rented, plan to deduct approximately 20% of rental income from your "investment." Why? Most homes have a period where they are not rented while they're on the market, which means no rental income. Your lender wants to make sure you can handle periods when your home isn't rented.

When you turn your home into a rental, it's no longer a homestead, but an enterprise. Tax laws require you to make a profit within three years of launching an enterprise, or otherwise you won't be able to take deductions associated with it. Also, expect to pay more in property taxes as you will also lose the homestead deduction rate, since you'll be applying for the homestead deduction on your new home.

On the other hand, one of the best ways to build equity is to have someone else pay your mortgage for you. The longer you own your home and the longer it's rented, the more the amortization tables turn in your favor. Every loan payment is made of principal and interest. The longer you own your home, the larger the percentage that goes toward reducing principal.

Based on the purchase price of your home, you can deduct "depreciation" from your income every year you rent it, but this amount decreases with time. You can also deduct some maintenance and improvement expenses which are not available to homesteaders. See your tax professional for more information.

There are other pros and cons of becoming a landlord. You'll be dealing with people who don't respect your home as much as you do and could cause damages. They may skip out without paying the final month's rent. You'll have two homes to maintain, and could get broken plumbing or appliance calls in the middle of the night. On the bright side, renters of single-family homes tend to be older, more responsible and remain occupants longer. Also many losses are tax-deductible to landlords.

Ask your real estate professional or someone else that you know who owns rental property for more insights. They'll be able to share real-life property management situations and costs that may help you to decide if this is the right step for you.

Shared from:  http://realtytimes.com/consumeradvice/homeownersadvice1/item/38854-20151002-should-you-rent-your-home-to-others-htm

Six Things New Homeowners Waste Money On

OK, we’ve said it time and again, but it bears repeating: Buying a home is a very big expense—and once you’ve kicked off all that spending, it’s easy to find yourself caught up in rampant lifestyle inflation. After all, you’ve got an enormous, shiny new house just waiting to be filled with all sorts of nice stuff, right?

Well, take some quick advice: Don’t keep spending.

Homeownership comes with its fair share of unique costs—property taxes and urgent repairs and energy bills, oh my. There’s no need to add to their cost by shelling out for unnecessary expenses. Here are six major cash outlays that buyers can avoid.

Too much house

This one requires some thought before you actually nail the deal: How much house do you really need? Just because you’re pre-approved for a hefty purchase price doesn’t mean you should go as big as you can.

“The house that you can afford with the money you’re lent can make the budget go out of whack,” says Andrew Gipner, a financial adviser at Longview Financial Advisors inHuntsville, AL.

Not sure where to trim? Consider having less closet space, buying fewer bedrooms, or—especially—eliminating a formal dining room.

“You don’t use the dining room nearly as often as you think,” says Noelle Hans-Daniels, a Sotheby’s Realtor® in Indianapolis. “It’s kind of a wasted space.”

Fixing up your outdoor space ASAP

Once you close on your home and move in, you might be itching to host your first late-season barbecue. Or maybe you’ve been dreaming about a koi pond, like, forever. But hold on: Updating your outdoor space shouldn’t be your first priority, especially if you’re tight on cash. Unlike couches and beds, which are essential to a functioning house, landscaping and decor can be put on pause.

That goes double if you’re building new: According to Hans-Daniels, building your backyard at the same time as your home can cost “a lot more than if you did it after the fact.”

So exercise some caution before committing: Try pricing out your plans with a landscape contractor, and consider rolling them out in phases.

Old, outdated insurance

Still using the same company that offered you renters insurance seven years ago? It might be time for a change. Shop around.

“You may stay with the same company, but you may find something that’s a little better price for the same thing,” Gipner says. “Sometimes, people may not want to shop around or may be married to a particular company.”

Just because the same company had a good deal on auto or renters insurance doesn’t mean it’s the best fit to protect your home. Go through all your options with a fine-toothed comb, looking for a deal that won’t crush you financially but also leaves your house and its belongings secure.

After all, now it’s not just your stuff—it’s your roof, yard, and foundation you have to protect, too.

Space-filling stuff

If you’re moving from an apartment, chances are good you’re astounded by how much space you have. There’s another bedroom and a dining room and … yet anotherbedroom!

Don’t feel like you have to fill it all at once. Give yourself—and your home—time for personality to emerge.

“A lot of people will go out and say, ‘Oh my gosh, I’ve got to fill this space and buy stuff,’” Gipner says. “I’m not against possessions, but the way some people do it can be seriously detrimental to their finances.”

Instead of immediately stuffing the TV room with a generic, new couch and coffee table, wait it out. See what you really need and what you really like. In the meantime, stick the money you save into a renovation fund.

Extended warranties

Many homes don’t come with appliances installed, so first-time homeowners might find themselves making large purchases (like a dishwasher or refrigerator).

Here’s a tip: You don’t need the extended warranty.

“I’m against them,” Gipner says. “What are the chances everything you own is going to break or not work anymore?”

Yes, something might break within the relatively slim service window—but the money you’ll spend fixing one thing will be far less than the extended warranties on all the things. Your average warranty costs about $123 for major appliances, according to Consumer Reports, and a single repair costs not much more (and might not even be covered). Just risk it—you’ll come out ahead in the long run.

Yard maintenance

Having your own yard is definitely exciting, and while it’s important to keep it healthy and watered, you don’t need to go overboard. Resist the pressure to hire additional help for your yard—even if you’ve lucked into an HOA that covers it.

“You can still be part of an HOA and cut your own grass,” Gipner says. “You don’t have to pay someone an exorbitant amount of money to come out and cut your grass.”

Don’t be tempted by the sales pitches you’ll inevitably receive after your purchase goes through. A gorgeous lawn is achievable—and it can be done all on your own. Really.

Shared from:  http://www.realtor.com/advice/buy/six-things-new-homeowners-waste-money-on/

Six Basic Mortgage Rules To Follow

Whether this is your first home or fourth, really understanding your mortgage and how it works is crucial. After all, it’ll probably be the biggest loan of your life!

What IS A Mortgage?

In the most basic sense a mortgage is a loan to buy a property. The process of securing a mortgage means lender approval based on your income, credit rating and other debt.

Understand Your Fixed Costs

Before you decide what you can—or should—spend on a mortgage it’s important to take stock of your habits and your true fixed costs. Be honest with yourself when putting together your household budget, if you’re going to be miserable without your daily premium cup of coffee, then along with your student debt and car payments, consider that a fixed cost.

Be PITH Safe

According to the CHMC (Canadian Housing & Mortgage Corporation), your monthly housing costs should be less than 32% of your gross monthly income. These are considered your PITH or Principle and Interest (of your mortgage payments), Property Tax, and Heating bills.

Get A Mortgage You Can Afford

If you pass the PITH test, the second test of what you can afford mortgage-wise is that your entire monthly debt load (car payments, credit card debt, student loans, etc) should be less than 40% of your gross monthly income. The CMHC even has a handy Mortgage Affordability Calculator on their site: cmhc.ca.

Paying Off Your Mortgage

Once you’re approved for a mortgage and buy your home (congratulations!), now you have to actually start paying off the loan. There are several factors involved in this like your interest rate, payment schedule (monthly, twice a month, every two weeks, or weekly) and your amortization period, which is the amount of time you’ve selected to pay back the mortgage (usually ranging from 15-25 years).

Picking The Right Interest RateThe interest rate at which you select to pay off your mortgage varies from “fixed”—whereby the rate will NOT change for the term of the mortgage, and is generally a bit higher but considered more stable, or “variable” whereby the interest rate can fluctuate with the current state of the market.

Finally, owning a home can truly be an amazing thing. Thankfully there are many resources out there to help make the process a smooth one like mortgage brokers and financial advisors, so remember, you’re never alone through this daunting process!

Shared from:  http://www.hgtv.ca/realestate/article/mortgage-rules/

Things You Need To Know About Real Estate Investing

Investing in real estate can be very profitable if you have the right information, but many people don't take the time to learn the correct way to do it. It begins with great advice and careful study. Keep reading for some of the best tips for investing in real estate investing.

You need to decide the type of real estate you want to invest in prior to beginning your first property. You might find that real estate flipping ideal for you.

Be sure that you spend enough time on the endeavor to really understand it. You might have to give up some leisure activities in order to make more money over the long haul. Ditch poker night or softball league that you go to in order to become a better investor.

 Location is critical in terms of successful real estate investment. Property conditions and other factors are usually subject to change. Properties that are within depreciating areas will almost always result in a wise investment. Always do your research property before investing any money.

Get to know other people who invest in the real estate. It's important to reach out to others and to hear what kinds of advice from those more experienced than yourself. It can be useful to have contacts who know a few real estate investor friends. You can find some online. Join a few forums and make an effort to meet some of the users.

Be certain to choose investment properties that have good reputations and where lots of people want to live. This is important because it could give you the best amount of resale value when you make your purchase. Try looking for properties that can be kept up easily.

 You may be shocked to find most people do the negotiating for you if you sit back and let them. Also, because you are listening, you will be able to pinpoint the time when you can grab the exact price you are looking for.

This will help you get on the right foot. There is nothing worse than you having to cover part of the mortgage payment from your own pocket because a renter is behind.

 Don't spend your money in real estate without researching the field first. Errors in investing can be extremely costly.

 Consider the possibility of renting the house out when you're projecting how much you'll make off of rent when considering how much a property is worth. This can elevate the property value and also give you plenty of money for you. Then you could resell the house for a larger gross profit.

 It may even be illegal to dig before checking for lines, and it pays to find this out up front.

 Now that you have the information in this article, real estate investing should be much simpler. Everybody can be successful when sticking to what works well. It's always smart to keep learning about these things, so always look for more advice on the subject like what you've gone over above.

Shared from:  http://ravichauhanweb.realtytimes.com/announcements1/item/38241-things-you-need-to-know-about-real-estate-investing

6 Basic Mortgage Rules

Whether this is your first home or fourth, really understanding your mortgage and how it works is crucial. After all, it’ll probably be the biggest loan of your life!

What IS A Mortgage?

In the most basic sense a mortgage is a loan to buy a property. The process of securing a mortgage means lender approval based on your income, credit rating and other debt.

Understand Your Fixed Costs

Before you decide what you can—or should—spend on a mortgage it’s important to take stock of your habits and your true fixed costs. Be honest with yourself when putting together your household budget, if you’re going to be miserable without your daily premium cup of coffee, then along with your student debt and car payments, consider that a fixed cost.

Be PITH Safe

According to the CHMC (Canadian Housing & Mortgage Corporation), your monthly housing costs should be less than 32% of your gross monthly income. These are considered your PITH or Principle and Interest (of your mortgage payments), Property Tax, and Heating bills.

Get A Mortgage You Can Afford

If you pass the PITH test, the second test of what you can afford mortgage-wise is that your entire monthly debt load (car payments, credit card debt, student loans, etc) should be less than 40% of your gross monthly income. The CMHC even has a handy Mortgage Affordability Calculator on their site: cmhc.ca.

Paying Off Your Mortgage

Once you’re approved for a mortgage and buy your home (congratulations!), now you have to actually start paying off the loan. There are several factors involved in this like your interest rate, payment schedule (monthly, twice a month, every two weeks, or weekly) and your amortization period, which is the amount of time you’ve selected to pay back the mortgage (usually ranging from 15-25 years).

Picking The Right Interest RateThe interest rate at which you select to pay off your mortgage varies from “fixed”—whereby the rate will NOT change for the term of the mortgage, and is generally a bit higher but considered more stable, or “variable” whereby the interest rate can fluctuate with the current state of the market.

Finally, owning a home can truly be an amazing thing. Thankfully there are many resources out there to help make the process a smooth one like mortgage brokers and financial advisors, so remember, you’re never alone through this daunting process!

Reposted from:  http://www.hgtv.ca/realestate/article/mortgage-rules/

Seven Tips for First-Time Home Sellers

Putting your house on the market isn't intimidating if you plan ahead & enlist the right help.

                               

                 Make sure you price your house right from the beginning of the process.  A too-high price could mean your house sits on the market longer.

A number of economists are forecasting an increase in home sales this year, & some are predicting that more first-time buyers will be in the mix.  

That's great news for sellers, particularly first-time sellers most likely to have the kind of starter homes these buyers will want.  Below are tips for those selling a home for the first time.

Prepare for your own purchase

Before selling your home, give some careful thought about where you will live next, said Hedda Parashos, owner of Palisade Realty in Spring Valley, Calif. "Planning ahead will save the time & money associated with moving multiple times or trying to get out of a deal after you sign a purchase agreement," she said.  "Your Realtor can help you locate a new home or rental before you close escrow or negotiate a lease back."

If your plan is to buy another home & finance it, get pre-approved for a mortgage.  That way, you'll know what you will be able to afford - & can eliminate surprises, she added.

It's also getting more common these days - in certain markets - to purchase a home contingent ont he sale of your existing one, said Christina Esala, associate broker & team leader with Tierra Antigua Realty, in Tucson, Ariz.

Get the home move-in ready

If you can afford it, do whatever you can to make your home move-in ready.  That means replacing ripped screens, broken baseboards, leaky faucets & making cosmetics repairs, as well as updating landscaping.  Parashos said.  Your house needs to be in showing condition all the time, she added.

At this point, start looking at your home as a house - stripping all sentimental value from the place, since your buyer won't care about the tree you planted or the kitchen tile you installed yourself, said  Geoff Bray, real-estate agent & partner at the Reuter Bray Group of RE/MAX Results in Minneapolis.

Enlist the help of a good real-estate agent

Many people choose real-estate agents based on referrals from family & friends, but look beyond that to make sure you're working with someone who does a lot of business in your particular neighborhood.  While sales information for individual agents often isn't publicly available, you could check with your local Realtor association group for the date, call the local multiple-listing service or ask a brokerage about their top sellers.  

Online interviews of real estate agents can also be helpful, Esala added.  At the very least, get statistics from the agent, asking him or her how many homes they've sold recently, where the homes have been located & what the average sales prices have been, Esala said.

Price it right

A good real-estate will help you price the home right - from the start.  "Nothing will attract more buyers than making the right choice when pricing your home & nothing will deter buyers more than overpricing."  Parashos said.  Overpricing often means a longer stay on the market as well as future price cuts - which often makes a home listing look stale & less desirable.

Market the home appropriately

In addition to getting on the multiple-listing service, or MLS, as well as home listing sties online, your real-estate agent might recommend other methods of advertising, including open houses & direct mail postcards.  Ask the agent how he or she plans on marketing the property before hiring the agent.

Quality photography of the home is also important.  Those who use professional real-estate photos sell listed homes 32% faster than all other listings, according to VHT Studios, a real-estate photography network for homes & businesses.  Take it for what it's worth, a statistic from a company in the photography industry.  But also think about the homes that you spend the most time looking at online; chances are they're the ones with a variety of clear, quality pictures.

Make the house available

Some sellers create restrictions on when their home can be shown, but being inflexible on this point can hurt you. "People, if they want to see it now...they're going to contract that agent & going to want to see it immediately," Esala said.  "Make your home available for all of the daylight hours," she said.  Otherwise, within two days, prospective buyers will find another home & forget yours.

Plan your negotiation

Know what you will & won't give up when it comes to your sale, from price to closing date, repairs to closing costs.  "Knowing what outcome you want in advance will help you avoid haggling over minor items that could cost you the sale," Parashos said.

Finally, don't focus as much on the final sales price as on the final net price, Bray said.  Many first-time buyers ask for sellers to help with closing costs, for example, which affects net cost.

How To Decode Your Credit Score

 

A common complaint about credit scores is that they are a “black box” containing a set of mysterious secret formulas that can confuse even the most savvy of consumers.
While there are many ways in which trying to understand credit scores can be frustrating to consumers, for high scorers eyeing that elusive perfect score, part of the confusion often comes in the form of those seemingly “meaningless” reason codes that accompany almost all credit scores, good or bad.

By meaningless reason codes, I’m talking about the comments that accompany high (over 760 FICO)
credit scores, with such descriptions as “no recent bankcard balance information,” “too many bankcard charge accounts,” “lack of recent installment loan information,” and other messages that tend to make someone who is effectively managing their credit feel like they should be doing more.

Understanding Reason Codes

As a high-scoring Credit.com reader recently asked,  “I feel like I am penalized for owning my home and not being in debt. Where’s the logic in that?”
This is a good question, to which a logical response would be that these reason codes represent the scoring factors with the greatest difference between the number of points possible and the number of points achieved. In other words, these are the areas of the score where you “lost” the most points.
Reason codes can be valuable to consumers with scores in the lower-to-middle scoring ranges, as they point out the areas needing the most improvement, mostly within the payment history and amounts owed categories that together make up almost two-thirds of a FICO score.
For high-scoring consumers, who by definition have already been paying on time and keeping balances low — practices everyone should follow — reason codes tend to focus on the less important scoring factors that can help distinguish one high-scoring consumer from another to a lender, but that doesn’t make much sense to someone simply trying to do what it takes to raise an already good score.

Some Common Reason Codes

To illustrate, let’s take a look at some of these low-impact reason codes that tend to appear with high scores, and what might happen if you attempt to act on them:

• No recent bankcard balance information. This usually means there are no credit card accounts with balances on the credit report. To remedy this situation, you may be tempted to stop paying your balances in full each month, and instead make only minimum payments.  However, doing so is more likely to have the opposite effect of dropping your score and replacing that reason code with one such as “amount owed on revolving balances is too high.”

• Too many bankcard charge accounts. This one sounds pretty straightforward, but there’s a catch. Notice how this reason code doesn’t say there are too many “open” cards — just that there are too many cards on the report? People often interpret this reason code as “too many open bankcard charge accounts” and close one or more cards, not realizing that by doing so they raise the risk of higher credit utilization (balance/limit ratio) and a lower score, accompanied by the reason code, “proportion of balances to credit limits on revolving/charge accounts is too high.”

• Lack of recent installment loan information. This code is similar to the first one above, with loans replacing credit cards.  Taking out a new loan to satisfy this reason code is more likely to be counterproductive by lowering your score and telling you via the reason codes that your “ratio of loan balances to loan amounts is too high” and you have “too many accounts recently opened.”

So if these meaningless reason codes are starting to make some of you high scorers feel like you can’t win for losing, remind yourself that a 760 FICO score is likely to qualify you for the same credit terms that a perfect score will, and go back to managing your credit as you’ve been doing all along.  And if you’d like to get a better understanding of which credit score components you should be working on, get your free Credit Report Card from Credit.com or pull a free credit report once a year from each of the credit bureaus at AnnualCreditReport.com.


Reposted from:  http://blog.credit.com/2013/02/how-to-decode-your-credit-score/

New FHA Loan Rules

Federal Housing Administration loans look like a godsend right now. The FHA requires a down payment of only 3.5%, and it just lowered its mortgage insurance premiums by 0.5%. (You have to get mortgage insurance when your down payment is less than 20%.) It’s doing all this to attract more home buyers—especially first-timers—to the market.

Before you hop on the government loan bandwagon, know this: FHA loans aren’t for everyone. There are several things you should consider before applying for one. 

Limited loan amounts and types

FHA loans can be quite modest. In most areas, the limit is $417,000. In certain high-cost areas, the limit is $625,000. Depending on where you live, that might not get you the spacious house you’ve been dreaming about.

Credit requirements

To take advantage of the FHA’s low 3.5% down payment, you’ll need a credit score of at least 580. The official minimum for an FHA loan is 500, although borrowers with a score below 580 will need to fork over a 10% down payment.

While you’ll have an easier time getting an FHA loan with a low credit score, it usually means higher interest rates. But since the FHA backs these loans, you’ll get better rates with a poor score than you would with a conventional mortgage. However, it’s often just better to wait and boost your score instead of paying thousands more over the life of the loan.

Some lenders won’t lend to those with scores below a certain threshold, like 620. Others might change their requirements to adhere to a changing market, which is what Wells Fargo recently did when it lowered its FHA credit requirements from 640 to 600.

A life sentence of mortgage insurance

FHA borrowers are required to pay an upfront mortgage insurance premium (MIP). Currently, the fee is 1.75%. This fee is usually rolled into the total cost of the mortgage.

Additionally, FHA borrowers have to pay annual mortgage insurance. For most loans, this mortgage insurance remains throughout the life of the loan—you will need to refinance out of an FHA loan to get rid of it. In contrast, you can stop paying mortgage insurance on conventional loans after acquiring 20% equity. In January 2015, the FHA reduced its annual MIP rates to 0.85%.

Remember: The MIP rate you get at the time of your loan is the one you’re stuck with unless you refinance. If you had closed on a mortgage in December 2014 with MIP rates at 1.35%, your premiums would stay the same in January 2015 despite the reduction.

Fewer lenders

While many lenders are FHA-approved, not all are. This means you may have a smaller selection when it comes to finding an FHA-approved lender in your area. However, you should not have too difficult a time finding at least two to compare.

Stricter appraisal requirements

FHA appraisal guidelines are more rigid than those for conventional loans, and not all houses will get the green light for FHA approval. Usually this means the home needs some kind of repairs. If the seller isn’t willing to make them, then there’s no FHA loan for that property in your future.

Don’t limit your choice

If your credit is good and your payment history is solid, you should first look into a nongovernment-backed loan, if only for comparison. Many loans not backed by the FHA have more flexible terms, and lenders have a wider variety of options when they don’t have to adhere to certain government rules.

Reposted from:  http://www.realtor.com/advice/new-rules-make-fha-loans-look-tempting-theyre-not-everyone/

Preparing Your Credit to Buy a Home

As the housing market heats up in 2013 and more consumers consider buying a home, it’s important to consider the role that your credit score plays in your ability to secure a mortgage. Conventional mortgage lenders will typically want a FICO score of at least 720, or in some cases 740, but those with a score below 700 may still qualify for an FHA loan.

With that in mind, here’s a look at the steps you should take to prepare your credit before applying for a mortgage.

1. Review your credit report.

Several months before you plan to get a mortgage, check your credit report for any issues. If you generally pay your bills on time, then check your credit two to three months in advance just in case you need to correct any mistakes, says Carolyn Warren, author ofMortgage Rip-Offs and Money Savers and Homebuyers Beware. For those who know they have late payments or other derogatory items on their account, Warren suggests starting six to nine months in advance to clear up those issues.

2. Dispute any inaccuracies.

If your credit report contains errors—for instance, there’s an unpaid item that you’ve actually paid or an account showing up that isn’t yours—you’ll want to file a dispute with the credit reporting agency. A report from the FTC earlier this year shows that roughly a quarter of the reports examined by the commission contained at least one “potentially material” error.

3. Make sure you have several tradelines.

Conventional loans require at least three tradelines (any combination of credit cards, student loans, car loans, and so on) that have been active within the past 12-24 months. FHA loans require two tradelines. It’s fine to have more, but if you have fewer, you won’t qualify for a mortgage. If you need to open additional tradelines, Warren suggests getting a major credit card like a Visa or a Mastercard (not a store credit card) at least six months before you apply for a mortgage and using it for items you would buy anyway. “Never charge more than 30 percent of your allowed limit, and pay it off in full every time you get your bill,” she adds.

4. Leave older credit lines open.

Older, more “seasoned” tradelines help boost your credit score, so leave those credit cards open even if you don’t use them all the time. “A lot of people think, ‘I’ve got six credit cards, I’m going to close the four that I don’t use,’” says Warren. “But that’s a big mistake because your good accounts are adding positive points to your score.” Try to use those credit cards every few months and pay the balance in full so those tradelines remain active.

5. Avoid opening new credit lines.

Once you’re six months away from applying for a mortgage, stop opening new credit lines, as this can temporarily lower your score. “The credit bureau doesn’t know how you’re going to handle that new credit, so because there’s that uncertainty, it’s a risk factor,” says Warren. “Lowering your credit score is not worth that 10 percent discount you’d get from a department store for opening a new credit card.”

6. Stop buying on credit.

In the excitement of buying a house, some people rush out to charge new appliances or furniture before closing. But even if you’re in escrow, having a debt utilization ratio above 30 percent right before closing could disqualify your loan. “Unless you’re gonna pay cash, have patience for your new furniture until after your loan is closed,” says Warren. Also hold off on getting a car loan, as car financing tends to be more lenient than mortgage criteria.

7. Don’t shuffle money around.

When you apply for a mortgage, you’ll need to provide several months of bank statements for your checking and savings accounts. “If you suddenly shut an account or have a large transfer from one account to another, then you’re going to have to paper-trail that whole account too,” says Warren. “Leave your money and your accounts the same for at least three months. It won’t disqualify you but will make a paperwork hassle.”

Reposted from:  http://www.creditsesame.com/blog/how-to-prepare-credit-buy-a-home/