Setting the Foundation for Buying a Home in 2013

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Most people realize this is an incredible time to buy a home.   Buying a home is a major milestone in most people’s lives.  How do you put yourself in the best position to make that dream a reality?

There are a few things to be prepared for in terms of getting a mortgage.  Lenders will review your credit, employment, income and assets.

Check out your free credit score with one of the online services or call us to get an idea of where you stand.  We generally want to see at least a 640 credit score and no more than one late payment of over 30 days within the last 12 months.  Take a look at your credit card balances.  If they are more than 30% of your total credit allowed then you need to have them paid down.  The first reason is that this has a significant impact on your overall credit score.  Secondarily, if you are carrying a large percentage of non-tax advantaged debt you should consider putting a plan in place to reduce those balances before getting a mortgage.

Lenders like to see consistency in your employment with at least two years in the same line of work.  Why is this a concern?  If you have a little job security then you are a risk of losing your ability to pay for the mortgage debt.  If the economy has caused you to move around within your field in the last two years but you are consistently employed at the same income level you should be ok.  Large and/or unexplainable gaps in employment may add to the scrutiny in terms of getting you approved.  If you are considering a career change or think there is a chance that your employment may change, you may want to rent while you are waiting out the changes.

Lenders allow 29% of your gross income when they qualify your mortgage amount.  This percentage is for your principal, interest, taxes and insurance on your potential home.  Having a consistent two year history of income is the easiest way to be approved.  If you have additional income like overtime, child support, etc. it needs to be a consistent two years in order for this to be added to your overall ratio.  Generally, your consistent base salary is going to set the tone for your approval.

Assets determine your ability to pay a down payment or pay for closing costs.  Even if you are using a no money down loan and having the seller pay your closing costs, having the assets available make it so that you aren’t limited to one product over another.  Also, the assets are considered reserves.  This means that if you lose your income due to injury or job loss, how many months could you survive?  This isn’t necessary to have but creates much less scrutiny as well as flexibility with your allowable ratios which could make the difference in getting the house that you desire.

Lastly, be prepared for a longer closing time.  I have closed loans in as little as eight days and have seen a general cycle at around 30 days.  However, there is a significant increase in the scrutiny on buyers and the homes to be purchased.  Combine this with the huge volume of people refinancing at every lender due to the low interest rates and you are now looking at a 45 and sometimes 60 day cycle.  If time is important to you, don’t delay your decision to move forward.

Not sure if you’re ready yet?  Give us a call.  We will review all four factors in qualifying for a mortgage with you and give you tips and time lines if you aren’t in the best position yet.  The process takes very little of your time and we are always happy to help you achieve home ownership.

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Our Give Thanks Winner

With 208 votes we are happy to announce that the Athol Animal Control has won our first ever Give Thanks Contest!!!!

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Thanks to all the hard work of our three non profits chosen for this contest!

The Final Vote Tally’s

– Athol Animal Control – 208 votes
– North Quabbin Chamber of Commerce –  198 votes
-Montachusett Veterans Outreach Center – 83 votes

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Buying in a Fall Market.

All of the pundits have been pushing the “historically low rates” and this “is the best time to buy in years” for what seems like two years to me.  I’m hear to tell you that NOW is finally the best time to buy.  Here’s why.

There are a number of things pointing to this being the crest of the time to buy.

Some are obvious.  Yes, rates are lower than they have ever been.  While this seems like it’s a good thing for buyers, it has led to another issue for buyers.  The combination of low rates and low prices has opened the door for many people that haven’t been able to be a part of the market in the past to now be able to buy homes.  Adding this supply of buyers saturating the purchase market is that fact that even though many home values have leveled off, several sellers are still underwater with their mortgage and cannot sell or feel like they need to recover more value before they can sell.  Large supply of buyers and smaller supply of houses is causing a transition into a sellers’ market for the people that can afford to sell.  Buying ahead of this rush will prevent potential bidding wars and help to secure the best price possible for the house.

Why buy in the fall?  Nine years in a row my busiest time of the year for purchases has been October through December.  The large lot of people selling wait until school is back in session, vacation season is over, yet want to be finished with their house sale before the holiday season or want to start the New Year in a fresh location.  Almost half of my business occurs in these three months.  If you’re interested in being a home owner, don’t stand on the sidelines while the other buyer’s take advantage of the most aggressive time of year for sellers.

How about the need to make sure there are no hidden surprises?  This is the safest time to buy in terms of being able to see what the home truly looks like.  With a New England winter soon to set in, home roofs and landscaping will be covered in snow.  Last winter may have been mild but two years ago we didn’t see the ground for over three months.  Getting ahead of that to be able to see landscaping, paved driveways, etc. can prevent costly surprises in the spring.

If you want to make sure you are part of this buying season you need two things.  You need to get your financing in order and contact us for your mortgage pre-approval.  Knowing your financial options is paramount.  Second, you need a professional real estate agent on your side.  Too often people want to contact the seller’s agent directly or just search on their own.  Professionals can tell you what specific markets look like, areas with a high or low percentage of price cuts, and ratios of sales to asking prices.  This is all part of the effort of helping you negotiate the best price for a house.  Once we have your pre-approval done, ask us who the best real estate agent will be for you.  We would be happy to put you in touch with the best person to help you, your family, and your friends achieve their dreams of home ownership.

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Credit Score Tips

The type of credit that you have open – 10% impact on your score. A good mixture of auto loans and leases, credit cards and mortgages is always best. Too many credit cards is not a good thing, and having a mortgage does increase your score.

Practical steps to improve your score in this area are:

  1. Having 3-5 revolving credit cards open is optimal.
  2. Having a good mix of auto loans, credit cards and mortgages is positive for the score; rather than having a concentration in credit cards only.

The number of recent inquiries that have been made by creditors – 10% impact on your credit score. Inquiries affect the score for one year from the time the inquiry is made. Personal inquiries do not count toward your score. In other words, you can check your credit report as often as you like and that won’t affect your score. The score is only affected if a potential creditor checks your credit. Potential creditors include credit card companies, auto finance companies, department stores and mortgage companies.

The reason that inquiries impact your credit score is because the scoring system assumes that if you have many recent inquiries, you must be strapped for money and in some type of “panic” mode, trying to get credit wherever you can find it. The system also assumes that all these inquiries will eventually result in new accounts being opened, and as stated before, the system doesn’t like you to open new accounts and punishes you by giving you a lower credit score.

Here are three practical steps that you can take to improve your credit score in this area:

  1. Multiple auto and mortgage inquiries are treated as only one inquiry if made within 14 days of each other. So, it is better to shop for a car or a mortgage over a two week time-frame, rather than to prolong it over a longer timeframe.
  2. Don’t apply for a lot of credit or open multiple credit cards at the same time.
  3. If you are thinking of applying for a mortgage within the next 90 days or so, it would be good to wait until after your mortgage closes before you apply for any new credit.
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What happens to my mortgage if I die?

In meeting with clients, a common question that surfaces is what happens to my home if I pass away and still owe a lender money.

The easy answer is that the mortgage still needs to be paid, whether by a surviving joint owner of the property, personal representative of the estate of the decedent, or by the trustee of a trust if the property was owned by a trust.  This is the case because the mortgage follows its collateral, the real estate, and not the person that has passed away.

Unless there is a surviving joint owner who is also on the mortgage, the estate created at the death of the borrower has an obligation to pay off the mortgage.  Most lenders have language in their mortgages and notes that call for immediate payment upon the death of the person that took out the mortgage.  However, the reality of the matter is that most estates do not have the liquid funds available to pay off the mortgage debt in full.  The personal representative of the estate will first use any funds in the estate to pay off the mortgage or at least keep the payments current.  In most instances, unless someone is continuing to live in the home, the house will then be sold in order to discharge the mortgage debt, if possible.  In this case, if there are any excess funds from the sale, then they will be placed back into the estate and treated like other estate assets.   If after the sale, part of the mortgage debt is still remaining, lenders may be able to apply to the estate for further payment, but with the collateral gone and the borrower deceased, the debt is typically satisfied after the sale of the real estate.

Alternative arrangements – Some people take out a life insurance policy that is effectively deemed mortgage insurance.  Its purpose is to discharge the mortgage in the event that the owner/borrower passes away prior to the mortgage being discharged.  This is a relatively inexpensive way to insure that your beneficiaries are not burdened with an encumbered property should someone die prematurely.  Also, some lenders are willing to alter notes and mortgages to allow surviving children or others to assume the mortgage at the death of the original mortgagee. This allows heirs to keep the property and start paying off the mortgage themselves.  In either case, it is a more desirable scenario than being forced to sell real estate in order to satisfy a mortgage obligation.

For more information, please visit my website (www.daviaulaw.com), e-mail me (nick@daviaulaw.com), or call my office (508-797-3010).

Also, visit my elder law blog at http://worcesterelderlaw.blogspot.com/

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How you can make low mortgage rates work for you?!?

Just when we thought rates couldn’t go lower we saw another dip at the end of May.  With stocks oversold, we have seen a change in direction for mortgage backed securities and rates have increased again.  Even with taking that into consideration, rates still remain near all time records for lows but the forecast is that we can’t expect these conditions to remain.  Now is the time to make these low mortgage rates work for you.

Maybe your top concern is monthly cash flow.  With a down economy with high prices for virtually every commodity it can get harder and harder to make ends meet.  Maybe you have dipped into your savings in the last few years to get by and are ready to start replenishing your emergency fund.  Maybe the kids just got accepted to college.  What ever your reason, the most common reason to refinance is to save on a monthly basis.  As an example lets use a $175,000 mortgage.  At 7% the principal and interest payment would be $1164.28, at 6% it would be $1049.21, at 5% it would be $939.44, and at 4% it would be $835.48.  Depending on where your current rate is you could be saving over $300 a month.  What type of impact would this have on your finances?

Maybe your financial goal is to pay off your mortgage quicker.  There are two ways to accomplish this.  First we can put you into a shorter term mortgage.  Having a shorter amortization period will make your monthly payment go up in most cases but with a big reduction in interest rates that will absorb a sizable portion of that.  If we return to the previous example and we say that you have a 30 year mortgage at 6%, your payment is $1049.21.  If we take the same amount and drop it to a 15 year mortgage at 3.5%, you can pay off your mortgage in half the time for an additional payment of $201.83 (payment of $1251.04).  If you don’t want to be forced into the higher payment but want to shorten, we can drop your rate and put you into another 30 year mortgage but you can continue to make the same payment.  The savings amount under this premise would be applied directly to the principal of your mortgage you can take a considerable amount of time off or your mortgage as well.

Is your retirement plan to retire at a cabin or beach house?  Is your retirement plan to buy more real estate for rental income?  Just because you already own a home doesn’t mean that it isn’t a buyer’s market for you too.  Home prices, especially investment properties and typical second home areas, are depressed and the cost of money is inexpensive.  Your best bet maybe to refinance for cash flow or cash out on your primary residence and use the additional funds towards making your future real estate dreams come true.

Want help with achieving your financial goals?  Give us a call for your free personal evaluation.

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Another Credit Score Tip!

How long your accounts have been open make a difference!

Your Credit History, or how long your accounts have been opened – 15% impact on your credit score. The longer your accounts have been opened, the higher your score will be; newly opened accounts will bring your score down.

Here are three practical steps for you to improve your score in this area:

  1. Do not close your credit accounts. If you have too many department store credit cards, close the newest ones – do not close the old accounts. If you keep your accounts open and use them every once in a while, your score will improve over time.
  2. Think twice before jumping on that latest 0% credit card offer or opening a new card just to get a 10% discount at a department store.
  3. If you don’t have much of a credit history, and you are planning on taking out a mortgage in the future, it would probably be a good idea to establish a few open credit lines with little or no balance on them. Although newly opened accounts tend to lower your score initially, they will improve your score once they have been open for awhile, somewhat active and paid off with little or no balance.
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How do you protect yourself from foreclosure?

Last night, as I was sitting through another show my wife had on the DVR, my mind started going on about what information that I wanted to get out to people this month.   The program we were watching  was called “Suits” on the USA Network.  It’s a show about a guy named Mike who had a childhood dream of becoming an attorney that was derailed after he was caught selling a math exam to the Dean’s daughter.  The premise is that he gets hired at a big law firm even though he faked his bar exam due to his natural intelligence and eidetic memory.

What made me think of this month’s topic was that during the “hardball” he was playing with a banking firm he stated, “after all, you’re the ones that got us into this economic mess in the first place.”  Even though I’m a broker within the banking industry and not an actual banker, it really reminded me of the scrutiny that the mortgage industry has been under and the blame that has been assigned for the housing crisis and rise in foreclosures.

Let me start with saying that there were certainly a lot of bad decisions combined with unscrupulous bankers and brokers, both in the financial and mortgage industries, which had a lot to do with the problems we now face with foreclosures.  However, the main reasons for foreclosures have remained the same through the years and have only been magnified by the current economy.  Here are some of the common causes and information on how you can prevent yourself from falling victim.

  1.  Unemployment – It’s pretty obvious that this is a huge factor in foreclosure.  Whether you have been working at the same places for decades or just a few short months, globalization and a down economy are going to affect you.  Living within your means and creating an emergency fund are the keys to avoiding this.  The standard was always 3 months of monthly expenses for wage earners and 6 months for self employed people.   I recommend 6 and 9 respectively, especially to protect you from recessions of this magnitude.
  2. Illness – short term illness and disability are the most common causes for income to stop for a family.  This is almost always something unforeseen that people ignore until it lands on their door step.  Every mortgage client I meet with is advised to make sure that they have a disability insurance policy that will create enough of a payment stream to cover their portion of household expenses if they get sick, even if that means scaling down the size of the house you are looking to buy in order to afford the insurance policy.
  3. Death – if you have a dual person income and your bills are based on that income and one person passes away, whether it’s expected or not, it’s going to have an effect on you being able to make ends meet.  Having proper life insurance is the key for anyone in this situation.  Depending on the professional you speak with, you will get varying information on how much you can carry but in order to avoid foreclosure the absolute minimum you should have should cover funeral expenses and the pay off of your mortgage.  I would recommend enough to give your partner a clean financial slate plus enough for an emergency fund.   In terms of affordability, I don’t think you can afford not to have life insurance.  Determine what the payments are going to be and scale down your other monthly expenses and/or buy a smaller house to make sure that your assets are protected long term for your family.
  4. Divorce – more people get divorced than stay married.  When all of your finances are based on two incomes and now one person‘s income is no longer there, you are going to face financial hardship.  I can’t give any financial advice to help you solve this one.  All I can say is work harder to communicate and get some counseling.  The grass isn’t greener and it’s always cheaper to keep her.  Or him.  Just making sure you’re still reading.

 

Other problems are balloon payments, major home repairs, predatory lending, credit card debt and financial irresponsibility.  Most of these problems can be avoided by following the advice in the four main causes.

Want to make sure you are putting your family in the best position?  Give us a call for a no cost review of where you are with your mortgage (or ability to get one) and your monthly cash flow.  We do not sell any insurances or securities, however, we work with several financial services professionals and can help put you in touch with someone to help you achieve, and maintain, your financial dreams.

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Should you be putting more money towards your mortgage to pay it off early?

Should you be putting more money towards your mortgage to pay it off early?  I get this question every single time I sit with a client to talk about a purchase or refinance of their home.  There are varying degrees of answers unique to each person, however, this will speak to the vast majority of people that feel like the key to their financial future is to attack the monthly burden of a mortgage payment.  However, most of these same people push extra money into their mortgage without consideration of their overall financial health and goals for their future.  There is a lack of consideration for being properly insured for life and disability, lack of concern for adequate monthly savings for retirement to maintain what they consider to be a satisfactory lifestyle, or lack of concern with other long term financial concerns like higher education for their children.

The key here is looking at your full financial picture.  If you are applying $250 monthly to your mortgage principal what are you losing in valuable compounding of that money towards your retirement nest egg?  If you don’t have adequate disability or life insurance because you “can’t afford” it, what will you do if you or your spouse gets hurt and can no longer earn enough income to help pay your mortgage; what would happen to all the extra principal you had been applying if those life changing events occurred?  What are you losing in potential tax savings through the mortgage interest deduction, or are you the only person out there that actually enjoys paying more taxes?
Here are some questions you need to ask yourself?

  1. Do I have enough in my emergency fund?
  2. Am I insured properly to protect my family?
  3. Am I maxing out my Roth IRA?
  4. Am I participating fully in my 401K?
  5. Am I sure that I am currently in the best mortgage to meet my goals?

Even though our business is built on mortgages our focus is always your financial health.  With that in mind we work with several well qualified financial planners and insurance providers that we can link you up with to help you work towards your financial future.

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This Months Credit Score Tip!

The Balance You Owe vs. Your Available Credit Lines – 30% impact on your credit score. Keeping your credit balances below 50% of your available limit is very important. Keeping your balances below 30% of your available credit is even better. This is perhaps the single most misunderstood part of credit scoring. There are a lot of misinformed people that don’t understand how the credit scoring systems work, and yet they insist on pretending to be experts in this area. Here are just a few of the common myths:

  1. You should close all your credit accounts if you are not using them.
  2. You should not have credit accounts appear on your report after they have been closed.
  3. You should not have any open credit card accounts at all.
  4. You should not have high limits on your credit lines.

First of all, the credit scoring system looks at the percentage of debt that you owe compared to your overall credit lines – not the amount of credit that you have available to you. For this reason, most of the time it is better to leave your credit accounts open. By not using the credit that is available to you, the system regards you as having enough financial restraint and discipline not to overload on debt.

 

Remember, the credit scoring system looks at the percentage of debt you owe compared to your overall credit line.

For instance, if you owe $10,000, and you have $100,000 of credit available to you, you are only using 10% of your available credit line. On the other hand, if you owe $10,000 and you only have $20,000 of credit available to you, you are using 50% of your available credit line. This is negatively interpreted by the credit scoring system as being a strong dependence on credit. Furthermore, if you owe $10,000 and you only have $10,000 available to you, you have “maxed out” your available credit and your credit scores will be very negatively impacted. Therefore, it is not how much you owe, but how much you owe compared to what you are able to borrow.

Additionally, if you have no debt and no credit lines open or available to you, you will end up with a lower score than someone who has no debt and a few lines of credit available to them. Financing is a game of percentages and ratios. The credit scoring system does not look at the dollar amount of debt you have; only the balance you owe, compared to how much credit is available to you.

Here are three practical steps to improve your credit score in this area:

  1. Do not close your credit accounts unless it is necessary to do so. It is better to have many open accounts with little or no balance than to have just one or two accounts regardless of the balance.
  2. Do not concentrate large balances on just a few accounts. Pay outstanding debt down as close to zero as possible, and evenly distribute the remaining balance across all your open credit lines. The key is to keep the balances down below 30% or at the very least 50% of your available credit line(s).
  3. Call your credit card companies and try to increase your available credit lines if they can do so without pulling a new credit report.
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