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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Mortgage Advice You Should Ignore

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When you start talking about buying a new home, you’ll start getting advice. Some will tell you where and what to buy and others will give you mortgage advice. Before you listen, check it against our list of 5 pieces of mortgage advice you should ignore.

“Look no farther than your local bank. They’ll treat you right.”

Sure – they might. But do look farther. Some local banks have good loan programs, with rates and terms that will be beneficial to you. Others do not. A mortgage broker has the ability to “shop” programs from many banks in order to find the program that’s just right for you.

So check your local bank. Then check with one or two mortgage brokers. Get good faith estimates from each of them, then choose the lender who offers you the best rate and terms.

“Don’t bother to see a lender until you’ve found the house you want.”

This is really terrible advice. Seeing a lender should be your first step.

Why? Because choosing your lender and becoming pre-approved for your loan before you begin to shop for a home will benefit you in three ways.

First, it will show you whether you need to make some changes to increase your credit score before you make an actual loan application. If that is the case, your lender will (should) give you some advice to make that happen.

Second, it will enable you to know your spending limit. It’s horribly disappointing to fall in love with a house only to learn that it is definitely out of your range.

Third, having a loan pre-approval in hand when you make an offer will assist in getting your offer accepted. Why should a seller take a chance on someone who may or may not be able to buy? These days, most will not.

“Always choose the loan program with the lowest interest rate.”

On the surface this looks like good advice – but it isn’t always true. Sometimes the lowest rate is an adjustable rate, which means it can and more than likely will increase at some later date. Thousands of people learned this lesson the hard way during the mortgage crisis.

“Base your purchase price on your maximum loan approval amount – go for the gold!”

No, no, no. You may be approved for far more than you should spend. Base your purchase price on the price of a house that will satisfy your needs.

For one thing, your mortgage lender knows only about your monthly obligations. He or she doesn’t know about the other ways you enjoy spending your income.

You might want to take an annual vacation, send your children to expensive summer camps, or buy season tickets to the opera. You may get great enjoyment from dining in 5-star restaurants or attending ball games or concerts. You may have charities you want to support, or love going whole-hog with gift giving during the holidays. These are things that add spice to life, and if your house payment makes them impossible, you’ll soon come to resent that house.

Leave room in your budget for those things that are important to your enjoyment of life.

Second, you never know what life might bring. If you’re obligated to spend every dollar that comes in, a setback such as job layoff or an illness would be a catastrophe.  Give yourself a cushion – and put some money away each month. You’ll breathe easier when you know that you could keep your bills paid for a few months even if you were off work.

Take a close look at your finances. Consider your obligations, think about how you like to spend money, and decide how much you’d like to save each month. Then create a budget and go for a mortgage payment that fits comfortably within it.

“All that fine print in a mortgage contract is just standard jargon and it takes a long time to read. Don’t bother.”

This is really poor advice. Instead, you should read every word, and get clarification on any sentences you don’t fully understand. Even if it takes a few hours, do it. It’s your money and your future on the line.

I always think of the young couple who wanted a new home and thought they had equity in the home they were selling. What they had instead was an early payment penalty that required them to pay almost all of their equity to their lender. They took it well, saying “It’s our own fault. We were young and stupid. We should have read the fine print before we signed.”

Read the fine print. If there’s something there that could damage you in the future, get it changed or get a different lender.

 

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3 Reasons to Talk to a Lender Now if Buying a Home is a Long-term Goal

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There are three good reasons why:

  1. Preparing ahead means you’ll get the best loan when the time comes.

    A good lender will show you what you need to do now and in the coming months to assure that you’ll qualify for the very best rate and terms available.

The better your credit score, the better the interest rate, and your lender will explain ways that you can raise that score. Even if you’ve had financial difficulties such as an account that has gone to collections or a previous short sale, he or she will help you overcome the obstacles and put your credit score on an upward trajectory.

Your lender can also help you find ways to document necessary income or assets and establish a record of on-time payment to companies that don’t report to the credit bureaus.

Your first step is to have a frank conversation with your lender about your finances and your financial history. Be absolutely honest in revealing your income, your expenses, and your overall budget. If you’ve been in financial trouble in the past, co-signed a loan for someone, or owe a debt that isn’t going to show up on your credit report, disclose it.

Don’t be shy or embarrassed to disclose this information. Your lender will help you work through these problems, but can only do so if you’ve been honest.

Your lender will do a “soft” credit check in order to see exactly what is shown on your credit report. He or she will explain how to correct any actual mistakes and show you why specific accounts are pulling your credit rating down – and what to do about it.

You’ve probably heard that too many credit inquiries reduce your score, and if you were applying for multiple credit cards, that would be true. However, the soft check will do you no harm.

Next the lender will need to review your financial documents, including your bank statements and any investment or retirement accounts you may have.

  1. You’ll know what you can afford and what you’ll need for a down payment.

While changing interest rates will affect what you can afford later on, you’ll still come away with a very good idea of the price range you can afford.

You’ll also know whether you will qualify for a loan with a low down payment, whether there are down payment assistance programs available to you, and how different down payment percentages will affect your monthly payments.

  1. You’ll understand the mortgage process.

This process can be intimidating, especially for first time buyers. However, once you’ve gone through all these steps with your lender, you’ll know what’s required and what to expect when you’re ready to become pre-approved for a home loan.

You may find that you’re ready now.

After going through these steps, you and your lender may determine that you are already in a good position to purchase a home.

It just might turn out that “Someday” means 2019!

Whether you’re ready to become a homeowner now or want to prepare for a purchase at some time in the future, Homewood Mortgage, the Mike Clover Group is here to help.

We’ll be glad to sit down with you and go through everything outlined above – including the help and advice.

Call today: 800-223-7409

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What is a Credit Freeze – and Should You Get One if You’re Going to Need a Home Mortgage?

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As evidenced by the many security breaches in recent years, consumers can no longer trust that their information is safe with banks, retailers, credit reporting agencies or even the Veteran’s Administration. No one knows where the next security breach may occur.

An identity thief could have enough confidential information about you to open new credit in your name, leaving you stuck with huge debt that you didn’t incur. While it’s true that you can usually prove the theft and straighten it out, it isn’t easy, fast, or cheap to do so. You could be waiting a year before once again becoming credit-worthy in the eyes of lenders.

The safeguard against this is a credit freeze.

What this means is that you opt to deny access to your credit report. Since no banks or retailers issue credit without first accessing the report, a freeze makes it impossible for anyone to open new credit. That, of course, means that when you want a home mortgage, a car loan, or even a new credit card, your legitimate would-be creditors won’t have access.

In the past, this posed a problem, because it could take weeks to freeze and unfreeze a credit report. Consumers in most states also had to pay a fee to each credit bureau each time they made a change.

Now that has changed.

After the Equifax data breach, Congress took action. In September 2018 they passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which helped  guard consumers credit reports in two ways:

  • Freezing and unfreezing credit reports is now free.
  • Freezing and unfreezing credit reports is now fast.

The credit bureaus are now required to respond to online or phone requests to freeze credit within one business day, while requests via postal mail must be honored within 3 days. If you contact the bureaus online or by phone to unfreeze your credit – so that you can make a loan application – they must respond within one hour.

What’s the procedure?

The first step is to contact each of the three major credit bureaus: Equifax, Experian, and TransUnon. Create an account with each, then request the freeze. Be SURE to safeguard both your PIN and your password, as you will need these in order to unfreeze your accounts when you want to establish a new credit account.

Remember that you are the only one who can unfreeze your credit. Some consumers assume that since they’ve authorized a lender to access their credit, the lender will be able to do so. They cannot.

Before you begin your home search, visit your lender to be pre-approved for the mortgage loan. Tell the lender that your credit is frozen and ask which credit bureau will be used to verify your credit. It may be one or it may be all three.

Call each credit bureau that will be used and instruct them to unfreeze your credit. Then stay in touch with your lender. As soon as he or she informs you that your credit has been pulled – usually within a week – call back and refreeze your accounts.

Be aware that lenders will often access your credit again just prior to closing. They want to make sure that you have not incurred new debt between the time of their approval and the closing date. So again – stay in touch with your lender and ask to be informed when the process will be repeated. Then be sure to unfreeze your credit by that date. You can refreeze it once your lender has given the clear to close.

Freezing and unfreezing your credit adds a step to the mortgage process, but it’s no longer a difficult step, and it could save you from having your good credit destroyed by an identity thief.

When you’re ready to begin your home search, give us a call at Homewood Mortgage – the Mike Clover Group. We’ll be pleased to get you pre-approved so you can shop with confidence.

Call today: 800-223-7409

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When You Need to Use the Equity in Your Home…

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When You Need to Use the Equity in Your Home…

When you need to exchange the equity in your home for cash, and assuming you have the income and the credit to obtain a new loan, you have three choices: A cash-out refinance, a Home Equity Loan or a Home Equity Line of Credit.

Assuming that you’d rather not refinance your entire home mortgage loan, you’ll probably choose to merely pull out the equity with a new, smaller loan.

First, the Home Equity Loan.

These carry lower interest rates than personal loans or credit cards, and the interest rates are fixed. That means you’ll get a loan for a set period of time with a predictable payment each month.

The most common reasons for obtaining a home equity loan are to pay for home improvements, to make a down payment on a second home or an investment property, to pay college costs when student loans are not available, or to consolidate debt. Using the cash to pay off high-interest credit cards and personal loans allows the borrower to pay down debt sooner, since less money will be going to interest payments each month.

Some, unfortunately, use the cash to fund a vacation or buy expensive toys – something no financial advisor would ever recommend.

A Home Equity Line of Credit (HELOC) is slightly different.

This loan acts like a secured credit card. In fact, if you choose a HELOC, you’ll even get a “credit card” to give you easy access to your money.

You have a set limit on how much you can borrow, and you pay interest only on the amount you owe each month. In most cases the interest rate will also be variable, so your minimum monthly payment can vary from month to month. Some lenders offer low introductory rates on HELOCs, after which the interest rate and monthly minimum payment can rise dramatically.

You can borrow the entire loan limit at the outset, or you can wait and take money out a little at a time or in a later lump sum. Most HELOCs have a loan term of from 5 to 20 years, after which payment in full is due.

Qualifying is similar for both loans.

You’ll need a sufficient amount of equity, a credit score in the upper 600’s or higher, and an adequate debt to income ratio.

Most lenders will allow you to borrow 80% of your home’s equity, and some will allow 90%. For example, if your house is worth $300,000 and you owe $200,000, you have $100,000 in equity. Most lenders will allow you to borrow $80,000, while some will lend $90,000.

As with all loans, the higher your credit score, the lower the interest rate you’ll be required to pay.

Different lenders have different requirements for debt to income, but in general, it should not exceed 43% of your gross monthly income.

What is a debt-to-income ratio? This is a simple equation in which you divide your monthly debt obligations by your monthly income. $1,000 in monthly debt divided by $3,000 in monthly income yields a 33% debt to income ratio.

Should you choose a Home Equity Loan or a Home Equity Line of Credit?

A Home Equity Loan is the right choice if you know how much you want to borrow from the outset and prefer the security of a fixed interest rate and a set monthly payment.  Since interest rates are rising slightly, this is a huge benefit for many.

A HELOC may be better if you’re unsure about the amount needed – as when starting a home remodeling project.

A home equity loan can also give you income tax benefits. Under the Tax Cuts and Jobs Act, you can deduct the interest paid on (combined) loans of up to $750,000 for a married couple of $375,000 for an individual as long as the money was used to buy or improve a first or second residence.

A home equity loan can be a good thing – as long as the money is used wisely.

The question to ask yourself is whether spending the money you’ll take out of your home’s equity will give you a long term benefit.

If the answer is yes, then give us a call at Homewood Mortgage – the Mike Clover Group. We’ll be pleased go over the numbers with you and show you your options.

Call today: 800-223-7409

 

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