Untangling the gifted down payment puzzle…

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If you want to buy a home, are short on down payment funds, and have a relative with the money and the desire to help you, it’s time to celebrate! However, you will need to follow a few rules.

First, the IRS: Under current Federal tax laws, any individual can give any other individual up to $15,000 per year without being subject to a gift tax. And yes, it’s the giver who pays the tax, if any, not the recipient.

What that means to you is that Grandma and Grandpa can each give you and your spouse $15,000 to go toward that down payment. That’s $60,000. If that isn’t enough, they can give you more without being subject to gift tax, but they will have to file IRS Form 709 to disclose the gift. The excess will then count toward a lifetime maximum that presently stands at $11.4 million.

Should the gifts exceed $11.4 million the giver would be subject to a tax of anywhere from 18% to 40%.

It is important for givers to disclose any gifts in excess of $15,000 to any one individual. If they fail to file the gift tax return, then the IRS can and likely will assess a gift tax, plus penalties and interest.

As far as the IRS is concerned, you could receive gifts from any number of people, as long as they follow the rules.

Banks have their own set of rules regarding gifted down payments.

First, the giver must be a relative. It can be a parent, grandparent, sibling, or spouse.  If you are engaged to be married, your significant other can also give you $15,000.

Next, you will have to write a gift letter to the lender, providing detailed documentation regarding the gift. That would include the name of the donor, their relationship to you, the date and amount of the gift, and bank records showing the deposited funds. The giver will also need to make a written statement verifying that the money was a gift and they have no expectation of repayment.

Banks have always wanted assurance that no part of your down payment was borrowed funds. Thus, they might also require documentation showing that the gift money was “seasoned.”

If you anticipate receiving a gift (or gifts) for your down payment, discuss the issue with your lender.

Different loan programs have different rules that you must follow. In general, if you are putting down 20% or more of the purchase price, the money can all be gifted. If you’re paying less than 20% down, you may have to show that a portion of the down payment is your own money.

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Will checking your credit harm your credit rating?

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CREDIT SCORE CONCEPT

When you’re planning to purchase a new home, you naturally want your FICO credit score to be as high as possible. As a result, you may be getting plenty of advice on what to do and what not to do.

You’ve heard that every inquiry into your credit can lower your scores.

That’s only partially true.

Checking your own credit does no harm at all, as long as you order your credit reports through an organization authorized to provide reports to consumers. Today some banks offer their customers instant access to credit reports and even alert consumers to big changes in their scores. It’s a good idea to check your credit reports regularly, if no other reason than as an early warning of identity theft.

Note that the scores they provide may not be accurate with regard to your FICO scores. The FICO score is specifically used in mortgage lending. Different scoring formulas are used by credit card companies, insurance agencies, car dealerships, etc. However, they’re all a fair indicator of your credit worthiness.

Credit inquiries made by companies that are considering offering you credit also do not lower your scores. You’ll still see these inquiries on your credit report, however.

Credit inquiries made in response to your application for credit will reduce your scores.

While the impact on each person is different based on their unique credit history, for most a single inquiry will take less than 5 points from their FICO scores.

Multiple credit card inquiries or the fact of opening several credit accounts in a short period of time CAN  do significant harm. This action labels you as a poor credit risk. Statistics show that those who apply for 6 or more credit lines within a short period of time are up to 8 times more likely to declare bankruptcy than those who have made no new credit applications.

However – there is an exception to this.

Credit bureaus and lenders recognize the fact that consumers do (and should) shop for rates. With this in mind, inquiries from multiple mortgage lenders, automobile dealers, or student loan lenders all made within a short period of time will be treated as a single inquiry. A “short period” can be anywhere from 14 to 45 days, depending upon which FICO scoring formula your lender wants the credit agency to use.

Credit inquiries play but a small part in your overall FICO scores.

More important factors are your bill-paying history and your percentage of debt to credit available.

That being the case, do pay all of your bills on time and do keep balances low on credit cards and other revolving credit accounts. Many experts suggest that your credit card balances should stay below 30% of your available credit.

Open new accounts only as needed, but do not close old accounts. Instead, use them occasionally and pay the balances when due.

If you want to buy a home in the near future and aren’t sure how you stand, call us at Homewood Mortgage, the Mike Clover Group. We’ll be glad to talk with you about your situation, look at the credit report you’ve obtained, and make suggestions for getting your credit scores in top shape before you begin shopping.

Call us today at 800-223-7409

If you know you’re ready, you can either call or

Apply on line at www.mikeclover.com.

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How to choose the right mortgage lender for you

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When you want to purchase a home, the two people most important to your success are your real estate agent and your mortgage lender. Your agent will be instrumental in helping you find the right house, then negotiating the most favorable price and terms.

Your mortgage lender will be instrumental in helping you in two ways. The most obvious is finding a loan with the lowest interest rate and fees. Less obvious is the role your lender will play in helping you understand the process and get through it smoothly.

Visit your mortgage lender and become pre-approved for your loan before choosing a real estate agent. This will keep your agent focused on showing you the correct homes and will put you in a position to make a confident offer when you find your dream home.

There is no such thing as a one-size-fits-all mortgage.

The mortgage loan that will be best for you depends upon:

  • Your income and assets.
  • The amount of your down payment.
  • Your credit rating.
  • Your current debt.
  • The price of your new home.
  • The type of loan you need will affect your choice of lenders.

While all mortgage lenders will help you with a standard conventional loan or a FHA loan, not all offer Jumbo loans, VA loans, or U.S. Department of Agricultural loans.

Conventional Loans are the best choice for many borrowers.

Conventional loans generally offer the lowest interest rates, and with a down payment of at least 20%, carry no mortgage insurance premium. Conventional loans can be obtained for as little as 5% down and require a credit score of at least 620. At Homewood Mortgage, the debt to income ratio can be as high as 50%.

Your debt to income ratio (DTI) is obtained by dividing the total of your monthly debt obligations (including your new home payment) by your monthly income. For example, if you have $1,000 in monthly debt obligations and earn $6,000 per month, your DTI ratio would be 17%. With the addition of a $1,250 mortgage payment, it would rise to 38%.

The second-most popular home mortgage loan type is FHA.

A FHA (Federal Housing Administration) loan can be obtained for as little as 3.5% down, and the qualifications are much looser. For instance, the borrower’s credit score can be as low as 580. FHA also allows higher debt to income ratios.

However, FHA loans do come with a monthly mortgage insurance premium.

Both Veterans Affairs loans and U.S. Department of Agriculture loans can be obtained with a zero down payment. However, only veterans, active duty service personnel, and some reservists qualify for a VA loan, and USDA loans are only available in specific locations.

Homewood Mortgage, the Mike Clover Group, can help you with Conventional, VA, FHA, and USDA loans. We also write Jumbo Loans and construction loans.

Within each of these loan types you’ll find more choices. For instance, fixed rate mortgages of varying lengths, adjustable rate mortgages, mortgages with balloon payments, etc.

A good lender will help you examine these choices to determine which is best for you in your personal situation.

Your choices in choosing a mortgage lender…

  • The branch of a national lender, such as Bank of America or Wells Fargo
  • A credit union
  • A smaller bank or mortgage company, such as Homewood Mortgage
  • An online lender

While your primary concern will be the cost of the mortgage, including rates and fees, service does play an important role in your success.

When you need a lender who will help you make the right choice from among the many loan programs available, you’ll want a smaller bank or mortgage company. Here you’ll be served by someone who will explain the programs, guide you in improving your credit rating (if necessary), and be available to answer questions from loan application through closing.

Note that not all lenders are alike. Just as in any profession, some are more service-oriented than others. Choose a lender who makes you feel comfortable when talking about your finances, who returns your calls, and who shows a genuine desire to help you make a good choice.

The national lenders: Shopping around to obtain good faith estimates from a variety of credit unions and national banks can be time-consuming. However, if you don’t want to choose a local lender or mortgage broker, it is important. Different banks have different programs with different costs to the consumer.

Do remember that you’re only one of thousands of borrowers when working with a national lender, so you shouldn’t expect personal service.

If yours is a complicated transaction, such as a mortgage for a self-employed borrower, a construction loan, or a bridge loan, you’ll probably want a smaller lender who sees you as more than just a number.

Many Millennial buyers prefer online lenders.

A study by NerdWallet found that 64% of millennial home buyers prefer to obtain their mortgage loans on line. While these loans might offer lower rates and fees, borrowers get no guidance and no one-on-one service.

Online lenders could be a good choice for some borrowers, but are not the right choice for everyone.

Here in Texas, Homewood Mortgage, the Mike Clover Group, is the local lender who will give you both personal service and the lowest rates and fees available in Texas.  We do take mortgage applications on line, and we do serve borrowers all over the state. At the same time, we offer one-on-one personalized service – whether in our office or on the phone.

Call us today at 800-223-7409
or apply on line at www.mikeclover.com.

Mike Clover
Homewood Mortgage,LLC
Mortgage Banker
1-800-223-7409
NMLS# 234770
18170 Dallas Pkwy
Ste. 304
Dallas, TX 75287

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What Affects Mortgage Rates?

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If you ever use the Internet or open a newspaper, you’ve seen ads from home mortgage lenders advertising their low interest rates. You may have even contacted one of those lenders, only to learn that the advertised rate only applies if you really don’t need to borrow the money.

The interest rate does matter.

The interest rate you agree to pay will determine both your monthly payment and the total amount of interest you’ll pay over the life of the loan.

For instance, if you get a 30-year on $200,000 with a 4% interest rate, your monthly payment would be 954.83 and you would pay $143,739 in interest over the 30 years. If your interest rate rises by one quarter of a percent to 4.25%, your monthly payment would be $983.88, and you would pay $154,197 over 30 years.

Mortgage interest rates change from day to day and from borrower to borrower.

The overall range of interest rates offered to borrowers across the country fluctuate based on things such as consumer confidence, employment statistics, fluctuations on home sales, and other economic factors.

When economic activity is sluggish, the Federal Reserve will provide more funding and interest rates will go down. This is what we saw after the mortgage crisis, and rates have still not risen to pre-crisis levels.

On a more personal level, the interest rate offered to you will first depend upon the strength of your local housing market.

After that, the loan type will come into play.

Conventional mortgages – those extended to borrowers with solid assets, a steady income, well-established credit, and high credit scores – have the lowest interest rates. FHA (Federal Housing Administration) loans, VA loans, and U.S. Department of Agricultural Rural Development Loans carry slightly higher interest rates.

Next is the type of interest rate.

Borrowers can choose a fixed-rate mortgage or an adjustable rate mortgage. While a 30-year loan is standard, they can also choose a 15-year (or other) term for repayment. Shorter term loans carry slightly lower interest rates. Naturally, loan payments are higher when the term is shorter.

A fixed rate mortgage carries an interest rate that does not change throughout the life of the loan. An adjustable rate loan starts out with a lower rate that adjusts to a higher rate after 3, 5, 7, or 10 years.

After those factors are considered, the interest rate offered comes down to the borrower.

When you apply for a loan the lender will examine everything about your finances, from your credit scores to your debts, your assets, and your income. The better you look, the lower the interest rate.

Your down payment is also a consideration. The more you put down, the lower your interest rate. In addition, if you pay less than 20% of the purchase price for a down payment, you’ll have to pay for mortgage insurance. This will add from 0.3% to 1.15% to your home loan.

What is a mortgage interest rate lock and why is it important?

Since interest rates do fluctuate and borrowers are approved based upon a specific mortgage payment amount, lenders offer “rate locks.” Rate locks protect buyers from a rise in rates (and payment) that would disqualify them from obtaining a loan.

This is a commitment from a lender to give you a home loan at an agreed-upon interest rate, provided you close your loan on or before a certain date. That date is generally 30 days from the date of approval. If you’re close to closing, many lenders will extend the lock as a courtesy while others will extend for a fee.

Do remember that at this point, the loan is still provisional. You have a loan approval and a rate lock, but that loan approval is based on a last-minute review.

So don’t do anything foolish.  Don’t quit your job, co-sign a loan for a friend, give your Social Security number to a salesman for any reason, apply for a new credit card, deplete your bank accounts, or run up the balances on your current credit accounts.

In other words, until your mortgage loan is finalized, don’t do anything at all to change your financial picture.

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What Homeowners Need to Know about Capital Gains Taxes

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First, what is a capital gain? It’s the profit (if any) that you make on property, such as a personal residence, that you sell after owning it for a year or more.

Capital Gains Tax is the tax on that profit.

The new Tax Cuts and Jobs Act made changes to the Capital Gains Tax, so even if you understood it in the past, it’s a good idea to brush up on your knowledge.

The $250,000 exclusion didn’t go away.

The IRS still gives each person a tax-free exemption for up to $250,000 of the profit on a personal residence. Thus, a couple with joint ownership could exclude up to $500,000 in gains, as long as they meet the residency requirements.

  • They must have owned the home for at least two years.
  • They must have occupied the home as their primary residence for at least two of the past 5 years.
  • You must not have used the exclusion within the past two years.

Other partial exclusions do exist, so if you don’t meet these requirements, consult your tax advisor and/or review IRS Publication 523.

If your capital gain exceeds the exclusion…

Let’s assume that you and your spouse have owned a home for a number of years and your gain after paying all the costs of selling will come to $600,000. You qualify for the exclusion, so you now owe Capital Gains Tax on $100,000.

How much tax you will pay will depend upon your income. (In the past, it was dictated by your tax bracket.)

If you and your spouse earn less than $78,750 (or you as a single filer earn less than $39,375) you owe nothing.

A 15% tax will apply if you’re a single filer earning up to $434,550, joint filers earning up to $488,850, or the head of a household earning up to $461,700.

If your earnings exceed these numbers, your capital gains will be taxed at 20%.

Do keep in mind that some states also impose a capital gains tax, and very high earners could owe a 3.8% net investment income tax.

What if you inherited the home you’re selling?

If you inherited recently, you should owe little or no capital gains tax, because the tax basis of a home “steps up” upon the death of the owner.

Even if your parents paid $50,000 thirty years ago for a house that is now worth $1,000,000, you won’t owe capital gains unless it appreciates in value between the date of their death and the date of the sale. As far as the IRS is concerned, the tax basis of that home is now $1,000,000.

This “step-up” in tax basis is the reason why probate specialists advise heirs to cancel any sale that was pending prior to the owner’s death.

Careful bookkeeping can help you avoid capital gains

Since the real estate market can be volatile, you never know how much your home might appreciate over a few years. That’s especially true if you make major improvements.

Just to be on the safe side, do document those improvements and keep all the receipts with your other documents related to the home.

You can’t count repairs to the AC or replacing a torn window screen, but things like adding a deck, finishing the basement, remodeling the kitchen, replacing the flooring, installing new roofing, or trading out to energy-efficient windows and doors do count.

Those improvements do increase the value of your house and their cost will become part of your base for taxation – as long as you have the documentation to prove it.

Can real estate investors avoid capital gains tax?

Yes, but it is more complicated, and it only works if you intend to stay in the real estate investment business.

By using an IRS approved 1031 Exchange, you can sell one property and buy another without recognizing the gain – and thus not having taxable gain.

The process is complicated and is subject to strict rules and timelines, so consult with a tax advisor and/or real estate attorney well in advance of making such a move.

 

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Expenses to prepare for as a First Time Homebuyer

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If you’re a first time homebuyer, you may have thought ahead to a few of the expenses you’ll face over the next year. For instance, if you now own a lawn, you might have set aside money for a lawn mower or added a lawn maintenance service to your anticipated monthly budget.

Hopefully you’ve also planned ahead for your first expense: New locks for your house and garage.

Just because the sellers gave you all of their keys doesn’t mean there are no more keys floating around. Repair people, babysitters, house cleaners, dog walkers, friends, and relatives may also have keys. I’m not suggesting that any of those people might be thieves, but you never know. AND you never know who might have taken a key from them.

Depending upon the kind of locks you want, the number of locks you need, and whether you have the skill to make this change yourself, this could cost anywhere from $100 on up.

Some first time homebuyer expenses you may not have considered are:

Smoke and carbon monoxide detectors. If yours is a new home, these are probably hardwired in and have battery backup, so all you’ll need to do is make sure the batteries are fresh. If you’ve purchased an older home, with older detectors, it would be wise to replace them. It would also be wise to add detectors to more rooms, such as bedrooms.

Fire Extinguishers. Keep one of these in the kitchen – at a minimum. If yours is a 2-story house or has a basement, keep one on each level – and be everyone in the household knows where to find it and how to operate it.

HVAC Filters. For highest operating efficiency, filters should be changed monthly. Prices can range from around a dollar up to $15 each, depending upon the quality of the filter and whether it has allergy reduction elements.

Pest Control. Even if your new home passed a pest inspection, you could be in for a surprise. Some insects go into hiding over the winter and suddenly appear in droves when the sun begins to shine. Depending upon whether the infestation is insects or rodents, you can expect an initial expense of $50 to $75. Since extermination generally kills the adult insects but doesn’t always kill the eggs and larvae, you may need 2 or 3 treatments.

Duct Cleaning is an often overlooked task, but it should be addressed. Dust, pollen, and pet dander accumulate in heating and air conditioning ducts, where it is blown out into the house every time the fans come on. Even if no one in the household suffers from allergies, the excess dust is an annoyance, so duct cleaning is a wise investment for first time homebuyers. Expect the cost to be upwards of $400.

Fireplace / chimney cleaning. If your new home has a fireplace, do pay to have it and the chimney cleaned, even if you don’t plan to use it often. A dirty chimney IS a fire hazard.

Tree trimming or removal. If your new property has trees on the grounds, keep an eye on them. Branches that may rub on the roof and any damaged branches should be removed by an expert. If a tree is diseased, the entire tree should go. Removal is expensive, but having a large branch or a tree crash through your roof is not a happy experience. If you’re not sure whether your trees are safe, consult with an expert.

If you’re thinking of becoming a first time homebuyer, your first step is to become pre-approved for a home mortgage loan. We at Homewood Mortgage, the Mike Clover Group would love to provide that service to you.

Call us today at 800-223-7409
or apply on line at www.mikeclover.com.

 

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The Population of Texas is Exploding. Why?

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About 14% of U.S. citizens migrate from one state to another each year, and for the past several years, Texas has been one of their most favored destinations. Last year, the two fastest growing population centers in the U.S. were Houston and the Dallas/Fort Worth metro area.

While new residents come from all over the country, the largest numbers seem to be arriving from New York and California.

What’s the big draw?

Zero personal income tax in Texas is one, especially for residents of New York, with a top rate of 8.82 and California, where the top rate is 12.3.

Jobs. In 2018 Texas saw a net private sector job growth of 3.6% – compared to 2% growth for the country overall. Unemployment is also lower. While the U.S. now stands at about 4%, Texas unemployment is just under 3%.

Business-friendly government. With fewer regulations, lower business taxes, and more freedom for companies to grow and thrive, increasing numbers are either founding business in Texas or relocating their companies to Texas from other states.

While these companies come from all over, research by Spectrum Location Solutions LLC revealed that 1,800 companies left California in 2016 and the primary destination for those relocations to more business-friendly states was Texas. That trend continues.

McKesson Corp., the nation’s sixth largest company and largest pharmaceutical distributor, announced in November that it will relocate its headquarters from San Francisco to Irving, Texas in April. Exxon Mobil is also headquartered in Irving.

Lower housing prices. While prices vary from city to city, the median home value in Texas stands at $195,000. In Dallas it’s $211,600, and in Austin $364,100.  In California the median is $393,000. In Los Angeles it’s $689,500, and in San Francisco, $1.61 Million.  In New York State the median is $290,000, with the median in New York City at $680,000.

The quality of life is different in Texas.

It’s cleaner, for one thing. Trash everywhere and people using streets for toilets is not common in Texas. Add to that, we’re friendly. We even stop to help strangers.

We also have more elbow room per person. In Texas there are about 105 people per square mile. In California there are 251, and in New York 419. If you want to live where you don’t have neighbors within just a few feet, it’s easier – and less expensive – to find your spot in Texas.

When asked why he makes Texas his home, one resident replied “Great weather, no state income tax, pro business state, and homes are still affordable. We have mountains, ocean, rivers, and hill country along with some of the best food choices in America.”

Texas offers the geography/climate you want.

From the Gulf Coast, to the plains, to the mountains – we have it all, including a wide variety of trees, plants, and wildlife.

Some migrate to Texas because they simply feel safer here.

Texas is not a “Sanctuary State.” Senate Bill 4 bans sanctuary cities in the state and allows police officers to question the immigration status of anyone they arrest or detain, including during routine traffic stops. It also allows police to honor requests from immigration authorities to hold detainees suspected of being in the country illegally.

Gun laws are citizen-friendly. Any citizen who is not a felon is allowed to own a gun and to carry it in his or her vehicle. Open carry permits are freely issued to any non-felon 21 years or older after completion of a 4-6 hour gun safety course.

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What is a FICO Score and Why Does it Matter?

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FICO is the credit score used by banks to determine whether they’ll grant you a mortgage loan and if so, what interest rate you’ll pay on that loan. FICO is just one type of credit scoring. Insurance companies and others use different scoring methods.

Before granting a loan, banks look at a borrower’s FICO score along with other factors such as income, employment history, and assets owned.

FICO scoring was created by the Fair Isaac Corporation to assess the likelihood that you will uphold you obligation to make regular payments on a home loan. It assigns borrowers a 3-digit score based on credit reports from each of the major U.S. credit bureaus: Experian, Equifax, and TransUnion. While these reports will be similar, they are generally not exactly the same because not all businesses report to all three credit bureaus.

FICO scores range from 300 to 850, with 850 being a perfect credit score. If your score is 750 or higher, your score is rated excellent and you’ll be in line for the best interest rates.  From 700 to 750 is good, while 650 to 699 is fair. Anything under 650 is rated poor. If you get a mortgage loan with a score under 650, you’ll pay the highest interest rates in the industry.

What this means to you if you’re planning to buy a home is that it is in your best interests to raise your FICO score as high as possible.

How is a FICO Score calculated?

35% is based on your payment history. Since this is the largest factor, it always pays to make every payment and to make it on time. One 30-day delinquency can drop your score by as much as 110 points.

Time does heal, so don’t panic if you’ve had late payments in the past. The negative notation will fall from your credit report after 7 years, and the greater length of time since the last late payment, the better your scores will become.

30% is based on your debt-to-credit percentages. Many would-be borrowers have cancelled credit card accounts in an effort to raise their scores, and it works exactly opposite. The more credit you have available that you don’t use, the better. The optimum number here is 30%. Do your best to pay every credit card down to less than 30% of the credit available to you.

What can you do to lower this percentage if you don’t have funds available to pay down the balances? Ask your current credit card companies to increase your credit limit – then don’t use the increase.

15% is based on the length of your credit history. If your track record of responsible payments is 20 years old you’ll be in much better shape than if it’s only 6 months old. More than one would-be homeowner has been dismayed to learn that they had low or no credit ratings because they’ve saved their money and paid cash for everything over the past 20 years.

10% is based on your mix of credit. They like to see that you’ve had some mixture of credit cards, car loans, student loans, installment payments at department stores, personal bank loans, and of course, mortgage loans.

10% is based on new credit accounts, and this one is a negative. Opening new credit card or department store accounts within a short period of time seems to be a red flag, lowering your credit worthiness. A new account might lower your debt to credit ratio, but it will also lower the average number of years on your credit history. This red flag is the reason why real estate professionals and mortgage lenders caution borrowers not to go shopping and give any sales person their social security number. You don’t want any new credit inquiries on your report.

Do check your credit report regularly.

Reporting errors are common, and some errors could affect your scores. You may have a perfect bill-paying history, but if someone with the same name as yours does not, their missed payment could inadvertently appear on your credit report.

You can get a free credit report at CreditKarma.com and at AnnualCreditReport.com. In addition, some credit card companies now offer free credit scores and reports to their customers. Do take advantage of that service.

If you find an error you’ll need to contact the credit bureau that is reporting the mistake, then show them proof that it IS a mistake. After that it will take some time to remove the error, so don’t wait until you’re ready to buy a home to review your report.

If you’re just starting to think about buying a home, get in touch with us at Homewood Mortgage, the Mike Clover Group. We’ll be glad to get you pre-approved for a mortgage loan, and if your credit scores need to come up a bit in order to get the best interest rate, we’ll be happy to provide advice.

Call today: 800-223-7409.

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2018 Mortgage Advice Not Valid for All Borrowers Today

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Looking for advice about getting a home mortgage loan in 2019? Don’t ask someone who got a loan 10 years ago – or even last year. Advice that was valid then might not be right for you today.

As the economy changes and American’s lifestyles change, do does the “right” way to mortgage your home purchase.

For instance, because the population has become so mobile, and because first time buyers plan to “trade up” in just a few years, fewer people are buying a “forever” home.

Choosing an adjustable rate mortgage that doesn’t reset for 5 to 7 years can save borrowers hundreds of dollars per month. Those dollars deposited into an account earmarked for the move-up home can have homeowners selling and moving on long before the interest rate resets.

And speaking of down payments, it’s simply not true that buyers must come in with a 20% down payment.

It’s true that immediately following the mortgage crisis, banks were clamping down on loans and demanding higher down payments, in addition to higher credit scores and other qualifications.

For a while it seemed as if it would be impossible for young people to move into home ownership.

That skittishness has eased off now, and loans with 3.5% down are once again common. And of course, VA buyers can still purchase with zero down. Banks still want to see a good credit score, reasonable debt to income ratios, and evidence of solid employment, but 20% down is not a requirement.

FHA loans come to mind first when thinking of low down payments, but conventional loans are also available with down payments of 10% or less.

Why it’s not wise to wait and save for the 20% down…

Interest rates are still at historic lows, and they aren’t likely to drop. In fact, we keep hearing rumors of rising rates. What could that mean?

Let’s imagine that you’re looking at a house today for $250,000. You could purchase it with 3 ½% ($8,750) down. If you finance the remaining $241,250 at 4.125%, your Principal and Interest payment will be $1,170.

Instead you decide to wait, so you can save the remaining $41,250 for a 20% down payment. Perhaps you can accomplish this in 5 years. But by that time, interest rates have gone up to 5.625% (1 ½ points).

Your payment will be $1,151.

Meanwhile, you will have been paying rent for 5 years, and you won’t get the same house you could have gotten this year for $250,000. Assuming that we don’t have another runaway market, homes traditionally appreciate 5% per year, on average. That means your $250,000 house would now be priced at $300,000 or more.

Should you pay that loan off as fast as possible?

That depends. While it’s true that owning your home outright is a good feeling, it might not be the best use of your money. Back when interest rates were 12 and 16% it was a wise move, but now…

Are there places where you could invest the extra you would put down on the house that would pay you MORE than the interest rate you’re paying on your mortgage?

Even if you don’t want to invest, putting that money into a savings account could feel just as good as having the house paid off. After all, you could withdraw it at any time to make that payoff.

It really depends upon your money management skills. If putting a few hundred extra on your mortgage payment each month means you’re building equity – and not doing it means you’ll just buy more toys or eat out more often – then put it on the house payment.

The Internet is filled with scammers – is it unwise to apply for a mortgage loan on line?

No, not necessarily. It’s only unwise to do business with any lender you haven’t researched. It’s also unwise to deal with a lender who is unwilling to speak with you and answer your questions over the phone.

A few minutes searching on line will tell you if the lender who is bombarding you with ads for “the lowest rates” is on the up and up or not.

Here at Homewood Mortgage, the Mike Clover Group, we invite borrowers to apply on line, simply because it’s easier for them. Instead of taking time from work, they can do it at home at any time of day.

We’re also willing to talk on the phone, or to meet in our office, if that’s convenient for the borrower. Since we place loans all over the state, and since Texas is a large state, that isn’t always convenient. The important thing is communication, because home purchasers do have questions.

We’re also willing to pre-approve borrowers, so they can shop with confidence and have the best chance of having their offers accepted.

If you’re thinking of making a home purchase, do apply on line at
www.mikeclover.com/ or call us at 800-223-7409

P.S. If you want to see what past clients have to say about our service, visit: www.mikeclover.com/testimonials.html

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Are You Required to Have a Mortgage Pre-approval Before You Choose a House?

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Is mortgage pre-approval required? Yes and no.

Legally, you can search for a home and write an offer without being pre-approved for a mortgage loan. However, many real estate agents won’t show you homes until you either show proof of funds to make a cash purchase or have a lender letter saying that you really can make the purchase.

Why? Because they don’t want to waste their time showing you homes if you’ll be unable to complete the transaction.

What is it and why is it important?

A mortgage pre-approval is an assurance from a lender that at this time you have the resources and the credit worthiness to purchase a home up to a specified dollar amount.

It is not a guarantee of a loan, because during the interval between becoming pre-approved and closing on a house, things could change. You could do something foolish that lowers your credit scores; you could empty your bank accounts; or you could incur debt that changes your debt to income ratios.

The process for gaining pre-approval is the same as for the actual mortgage loan application.

You’ll fill out an application and provide your lender with documents that verify your assets, along with your financial obligations and your income for the past two years. Your lender will also access your credit report and your FICO credit score. Then all the data will be analyzed to see if you qualify for a  mortgage, and if so, for how much.

At Homewood Mortgage, the Mike Clover Group, we put your application through the Fannie Mae Desktop Underwriter, just as we do for an actual loan application.

The only real difference is that you are not asking for a specific loan amount, but are instead seeking to learn what loan amount you will qualify for.

The pre-approval benefits you as much as it benefits your real estate agent.

Once you’re pre-approved you will know your spending limit. You can avoid looking at homes that you cannot possibly buy. As many have learned through experience, once you’ve fallen in love with a house that is far beyond your means, the ones you can afford will lose their appeal.

You’ll also know how much money you need to keep in reserve for the down payment and closing costs.

Note that it is not always wise to purchase at the top of your spending limit. Your lender has no way to know about the other ways you enjoy spending money. So look at your own spending habits and set your own top price.

Pre-approval will also give you an advantage when making an offer. If you are competing with another buyer over a house, the seller is much more likely to choose you if you’ve been pre-approved. Your offer might even be chosen over one that is slightly higher if the other party is not pre-approved.

But – if the seller knows how much you can spend, isn’t that a disadvantage in negotiations?

Yes, it could be, but you don’t have to tell the seller how much you can spend. You can ask your lender to issue a letter stating an approval price for only as much as you’re willing to spend on the house.

Here at Homewood Mortgage, the Mike Clover Group, we’re always willing to provide approval letters up to the amount for which you qualify.

If you’re thinking of shopping for a home, give yourself an advantage. Call us, and we’ll help you get started on that pre-approval.

Call today: 800-223-7409

 

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