Friday, March 24, 2017
Tuesday, March 21, 2017
Do You Know How Many Credit Scores You Have?
Your credit rating is the biggest factor when it comes to applying for a mortgage. Many people get taken by surprise by their credit rating if they haven't done a little research first. There are ways to manage your credit before you apply for a home loan and knowing how your credit is rated is half the battle.
1 Thing You Probably Didn't Know About FICO Credit Scores
Do you know how many FICO scores you have? If you said three or fewer, you need to read this.
By Matthew Frankel
How many different FICO credit scores do you have? Many people think they have just one, since there's only one FICO score included in many sources, such as the free score offered by several credit cards. Others think there are three -- one from each credit bureau. While this is true, each bureau actually has several different versions lenders can see. It may surprise you to learn that, in all, you have more than two dozen FICO scores.
Why use FICO and not anything else?
There are several different types of credit scores, but the FICO score, produced by the Fair Isaac Corporation, is the most widely used by far. In fact, the FICO scoring model is used in more than 90% of lending decisions.
To be clear, I'm not saying that non-FICO credit scores can't be useful. The second most popular scoring model, Vantage Score, and others are based on the information in your credit report and can give you a good general idea of where you stand -- great credit, so-so credit, etc. However, it's important to remember that these scores are most likely not what a lender is going to see when you apply for a new credit account.
Within the FICO scoring model, however, you might be surprised at how many different credit scores you have.
The three credit bureaus
There are three different credit bureaus that use the FICO scoring method to generate credit scores from the information in your credit report -- Equifax, Experian, and TransUnion.
Over the past few years, more and more credit card issuers are offering "free FICO scores" as a perk of card membership. While these scores are the real thing, they only represent one of the three credit bureaus (TransUnion seems to be common).
While the only way to see your scores from all three bureaus side by side is usually to pay for it, you can view your full credit reports from all three bureaus once per year, absolutely free, at www.annualcreditreport.com. This is truly a free service -- not a sales gimmick for a credit monitoring service, so take advantage to make sure that all three of your credit reports are error-free.
But that's not all
In addition to having FICO scores from all three credit bureaus, there are several versions of your FICO score generated by each one.
For starters, these include updated versions of the FICO scoring model, as the formula has been fine-tuned over the years. The most popular version currently in use is known as FICO Score 8, but FICO recently released FICO Score 9, which incorporates certain changes. To name the major differences, FICO Score 9 doesn't count paid collection accounts against you, places less emphasis on unpaid medical bills than the previous version, and counts payment histories on rental housing if it's reported. Some lenders have started using FICO Score 9, but it's not widespread just yet.
There are also industry-specific FICO scores for auto lending, credit card decisions, and mortgage lending. For example, an auto-specific FICO score might emphasize a borrower's previous history with auto loans and leases over other credit information.
Wait, I have how many different FICO scores?
Between all three credit bureaus, and including the different versions of the FICO score that are used by various types of lenders, there are 28 different FICO scores. And this just includes versions that are commonly used by lenders today -- there could be lenders using outdated versions of these scores as well.
The bottom line is that even if you know what your FICO score is, there's no way of knowing specifically which version a lender is going to be looking at. You can see all your FICO scores on websites such as myFICO.com (for a fee), and there may be some variation between the scores, so it may be worth checking out the full picture of your FICO situation if you're planning to make a large purchase anytime soon.
To view the original article, visit The Motley Fool.
1 Thing You Probably Didn't Know About FICO Credit Scores
Do you know how many FICO scores you have? If you said three or fewer, you need to read this.
By Matthew Frankel
How many different FICO credit scores do you have? Many people think they have just one, since there's only one FICO score included in many sources, such as the free score offered by several credit cards. Others think there are three -- one from each credit bureau. While this is true, each bureau actually has several different versions lenders can see. It may surprise you to learn that, in all, you have more than two dozen FICO scores.
Why use FICO and not anything else?
There are several different types of credit scores, but the FICO score, produced by the Fair Isaac Corporation, is the most widely used by far. In fact, the FICO scoring model is used in more than 90% of lending decisions.
To be clear, I'm not saying that non-FICO credit scores can't be useful. The second most popular scoring model, Vantage Score, and others are based on the information in your credit report and can give you a good general idea of where you stand -- great credit, so-so credit, etc. However, it's important to remember that these scores are most likely not what a lender is going to see when you apply for a new credit account.
Within the FICO scoring model, however, you might be surprised at how many different credit scores you have.
The three credit bureaus
There are three different credit bureaus that use the FICO scoring method to generate credit scores from the information in your credit report -- Equifax, Experian, and TransUnion.
Over the past few years, more and more credit card issuers are offering "free FICO scores" as a perk of card membership. While these scores are the real thing, they only represent one of the three credit bureaus (TransUnion seems to be common).
While the only way to see your scores from all three bureaus side by side is usually to pay for it, you can view your full credit reports from all three bureaus once per year, absolutely free, at www.annualcreditreport.com. This is truly a free service -- not a sales gimmick for a credit monitoring service, so take advantage to make sure that all three of your credit reports are error-free.
But that's not all
In addition to having FICO scores from all three credit bureaus, there are several versions of your FICO score generated by each one.
For starters, these include updated versions of the FICO scoring model, as the formula has been fine-tuned over the years. The most popular version currently in use is known as FICO Score 8, but FICO recently released FICO Score 9, which incorporates certain changes. To name the major differences, FICO Score 9 doesn't count paid collection accounts against you, places less emphasis on unpaid medical bills than the previous version, and counts payment histories on rental housing if it's reported. Some lenders have started using FICO Score 9, but it's not widespread just yet.
There are also industry-specific FICO scores for auto lending, credit card decisions, and mortgage lending. For example, an auto-specific FICO score might emphasize a borrower's previous history with auto loans and leases over other credit information.
- Auto lenders use the FICO Auto Score, and the version depends on the credit bureau. FICO Auto Score 8 is used with all three bureaus, but each has another, previous version available as well.
- Credit card issuers can use the FICO Bankcard Score 8 with all three bureaus, and versions 2, 4, and 5 can be used as well, depending on which bureau they're using to check your credit. In addition, Experian also uses FICO Score 3 for credit card purposes.
- Finally, mortgage lenders use one of three versions of the FICO score -- FICO Score 2 (Experian), FICO Score 5 (Equifax), or FICO Score 4 (TransUnion).
Wait, I have how many different FICO scores?
Between all three credit bureaus, and including the different versions of the FICO score that are used by various types of lenders, there are 28 different FICO scores. And this just includes versions that are commonly used by lenders today -- there could be lenders using outdated versions of these scores as well.
The bottom line is that even if you know what your FICO score is, there's no way of knowing specifically which version a lender is going to be looking at. You can see all your FICO scores on websites such as myFICO.com (for a fee), and there may be some variation between the scores, so it may be worth checking out the full picture of your FICO situation if you're planning to make a large purchase anytime soon.
To view the original article, visit The Motley Fool.
Wednesday, March 15, 2017
Building Equity
Equity is one of the best bargaining chips you can have when making important financial decisions for your future. There are many ways to build it. Making your regular monthly payments, maintaining your property and waiting for the market to increase your property value in time is one way. But if you're not the type of person who likes to sit around waiting, there are active ways you can increase it as well!
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How Homeowners Build Equity
By Justin Pritchard
Building equity is one of the main benefits of home ownership. You don’t notice it while it’s happening, but at some point you’ve got a valuable asset that can be used for almost anything.
What is Equity?
Equity is the amount of your home that you actually own. If you borrowed money to buy your home, you can calculate your equity by subtracting your loan balance from the value of your home. If you end up with a negative number, you’ve got negative equity – the home is worth less than you owe on it.
Example: your home is worth $250,000 and you owe $100,000 on your mortgage. $250,000 minus $100,000 equals $150,000 of equity in your home. This is the value you can do something with if you sold the home.
How to Build Equity
The more equity you have, the better. There are two ways to build equity:
You can take an active or passive approach to building equity, depending on your goals, your resources, and your luck.
Increase the Property Value
Your home’s market value is an important element in your equity calculation. If that goes up, you instantly have more equity. So how does your home rise in value?
Rising prices in your market: if you’re lucky, home values in your market might simply rise over time, without any effort on your part. This is most likely to happen in attractive neighborhoods and growing towns.
Home improvement: you can also invest in your home to increase its value.
Updating kitchens and bathrooms, improving landscaping, and making the home more energy-efficient can all pay off (but there’s an up-front cost, and you need to make sure you can more than recoup those costs). If you’re doing improvements mainly to build equity, pick projects with the highest return on investment (ROI).
Upkeep: routine maintenance is boring, but a home that’s falling apart is not worth much to anybody. You can actually see your home equity decrease if you fail to address issues like leaks and deteriorating roofing.
Decreasing the Debt
Monthly payments: with most home loans, you pay down your loan balance a little bit each month. A basic amortization table can show you the process in action. The longer you have your loan, the more principal you pay (more of each payment goes towards equity, and less of each payment is lost to interest charges). It’s actually pretty easy if you just keep making payments – and you build momentum (with larger and larger principal payments) without even trying.
But you might want to accelerate the process and build equity more quickly. There are several ways to do that.
Shorter term: shorter term loans cause you to pay down debt and build up equity more quickly than long term loans. For example, a 15-year mortgage would be better than a 30-year mortgage. As a bonus, those shorter term loans often come with lower interest rates – that, combined with the fact that you’re paying interest for fewer years, means you’ll actually spend less on interest over the life of your loan.
Extra payments: even if you have a 30 year mortgage, you can speed things up by paying extra. Each extra dollar you pay (above and beyond your required payment) reduces your debt and goes towards your equity – just make sure your lender applies those payments to the principal. There’s nothing stopping you from setting up a 15 year repayment schedule (see the link to the amortization table above) and making those payments on your 30 year loan. If things change at some point and you can’t afford to do that any more, you’ve got the flexibility to go back to the smaller 30-year payment. If that’s too complicated, just send an extra payment from time to time.
Leave it alone: second mortgages and refinancing can interfere with debt reduction. Obviously, if you can save a bundle by refinancing, go ahead and do it. But remember that with most loans, you pay mostly interest in the early years of your loan – so every time you start over, you delay (or at least slow down) your equity building. Borrowing against your home with a second mortgage (or home equity line of credit) clearly increases your debt and reduces your equity.
Forced Savings
Sometimes people refer to a mortgage payment as "forced savings." You might not think you're saving any money by making payments each month, but you are building up the value of an asset (like you would build up the value of a savings account by making regular deposits). With a home, the asset isn't cash in a savings account - it's equity in your home.
What can you do with Equity?
You might wonder what you get out of all that equity. The short answer is that it's an asset that you can trade for other assets.
Banks Photos/Getty Images
How Homeowners Build Equity
By Justin Pritchard
Building equity is one of the main benefits of home ownership. You don’t notice it while it’s happening, but at some point you’ve got a valuable asset that can be used for almost anything.
What is Equity?
Equity is the amount of your home that you actually own. If you borrowed money to buy your home, you can calculate your equity by subtracting your loan balance from the value of your home. If you end up with a negative number, you’ve got negative equity – the home is worth less than you owe on it.
Example: your home is worth $250,000 and you owe $100,000 on your mortgage. $250,000 minus $100,000 equals $150,000 of equity in your home. This is the value you can do something with if you sold the home.
How to Build Equity
The more equity you have, the better. There are two ways to build equity:
- The property value increases
- The amount of debt decreases
You can take an active or passive approach to building equity, depending on your goals, your resources, and your luck.
Increase the Property Value
Your home’s market value is an important element in your equity calculation. If that goes up, you instantly have more equity. So how does your home rise in value?
Rising prices in your market: if you’re lucky, home values in your market might simply rise over time, without any effort on your part. This is most likely to happen in attractive neighborhoods and growing towns.
Home improvement: you can also invest in your home to increase its value.
Updating kitchens and bathrooms, improving landscaping, and making the home more energy-efficient can all pay off (but there’s an up-front cost, and you need to make sure you can more than recoup those costs). If you’re doing improvements mainly to build equity, pick projects with the highest return on investment (ROI).
Upkeep: routine maintenance is boring, but a home that’s falling apart is not worth much to anybody. You can actually see your home equity decrease if you fail to address issues like leaks and deteriorating roofing.
Decreasing the Debt
Monthly payments: with most home loans, you pay down your loan balance a little bit each month. A basic amortization table can show you the process in action. The longer you have your loan, the more principal you pay (more of each payment goes towards equity, and less of each payment is lost to interest charges). It’s actually pretty easy if you just keep making payments – and you build momentum (with larger and larger principal payments) without even trying.
But you might want to accelerate the process and build equity more quickly. There are several ways to do that.
Shorter term: shorter term loans cause you to pay down debt and build up equity more quickly than long term loans. For example, a 15-year mortgage would be better than a 30-year mortgage. As a bonus, those shorter term loans often come with lower interest rates – that, combined with the fact that you’re paying interest for fewer years, means you’ll actually spend less on interest over the life of your loan.
Extra payments: even if you have a 30 year mortgage, you can speed things up by paying extra. Each extra dollar you pay (above and beyond your required payment) reduces your debt and goes towards your equity – just make sure your lender applies those payments to the principal. There’s nothing stopping you from setting up a 15 year repayment schedule (see the link to the amortization table above) and making those payments on your 30 year loan. If things change at some point and you can’t afford to do that any more, you’ve got the flexibility to go back to the smaller 30-year payment. If that’s too complicated, just send an extra payment from time to time.
Leave it alone: second mortgages and refinancing can interfere with debt reduction. Obviously, if you can save a bundle by refinancing, go ahead and do it. But remember that with most loans, you pay mostly interest in the early years of your loan – so every time you start over, you delay (or at least slow down) your equity building. Borrowing against your home with a second mortgage (or home equity line of credit) clearly increases your debt and reduces your equity.
Forced Savings
Sometimes people refer to a mortgage payment as "forced savings." You might not think you're saving any money by making payments each month, but you are building up the value of an asset (like you would build up the value of a savings account by making regular deposits). With a home, the asset isn't cash in a savings account - it's equity in your home.
What can you do with Equity?
You might wonder what you get out of all that equity. The short answer is that it's an asset that you can trade for other assets.
- If you sell your house, you'll get cash for your equity
- If you're buying another house, you can use that money (or the equity) to help fund the purchase of your new house (and therefore you'll borrow less)
- If you ever need cash, you can borrow against the equity in your home with a second mortgage (also known as a "home equity loan")
To view the original article, visit thebalance.com
Tuesday, March 14, 2017
How Much of a Mortgage is Right for You?
It's really easy to get excited when looking for a new home, we know! The thrill of imagining your life in a new, fresh space and all of its possibilities can be energizing and motivating. But when it comes to your dream home, with a little extra square footage you don't really need that's on the brink of your budget - should you go for it? While is easy to romanticize the extra hard work you'll do to keep up with your monthly mortgage, when it gets down to the everyday reality, the struggle can get real. Make sure you jump into your new home - and mortgage - with a full knowledge of what you can really afford, then you can truly live happily ever after!
How Big Should Your Mortgage Payment Be?
Just because a lender is willing to approve you for a mortgage doesn't mean you'll be able to comfortably make the payments. You're better off settling for a little less house and a monthly payment you can manage.
By Wendy Connick
Mar 12, 2017 at 6:43AM
It's normal for rent or mortgage payments to be the biggest single monthly expenditure for a household. But if housing starts to take up too big a percentage of your available income, you'll find yourself strapped for cash.
Zillow's most recent housing affordability survey shows that housing expenditures are clearly on the rise, with typical monthly mortgage costs hitting 15.8% of median household income -- up from 14.7% a year before. While that's still low in historical terms, the upward trend, in combination with rising interest rates and home values, means that payments may soon be heading into the danger zone. Renters are paying even more percentage-wise, hitting 29.2% of median household income. And in certain metropolitan areas the housing expenditure numbers verge on gruesome: Los Angeles and San Francisco both sport mortgage expense percentages of more than 40% of median household income.
Most experts agree it's best to keep housing costs to less than 30% of income. Lenders will typically limit mortgage loans so that the monthly payment (including taxes and insurance) is no more than 28% of monthly household income. Of course, the highest monthly payment you can really afford may be a little higher or lower than that, depending on factors like your lifestyle and your other expenses.
So how can you figure out how big of a mortgage payment you can afford?
Start by taking a good look at your income and expenses
Rather than depending on an arbitrary number like 28% or 30%, it's best to evaluate your household budget and see what percentage works for you. What you're looking for is a housing payment that you can pay every month without feeling stressed every time the due date rolls around. If you have a mortgage, you ideally want to be able to pay a little extra toward the principal every month, allowing you to get rid of the mortgage early and save on interest. If your gut reaction to that sentence was, "My mortgage payment is a pain already -- no way I can pay extra," then that's a sign you're paying more than you can afford.
Now take your monthly housing payment and divide it by your monthly household income. For example, if you pay $1,000 a month in rent, and your paychecks add up to $4,000 per month, then you divide $1,000 by $4,000 to get 0.25, or 25%. That number is your current housing payment percentage; remember it, because you'll use it to determine what the right percentage is for you.
Next, make a list of all your regular expenses. Don't forget the biggies that come around only once or twice a year, like insurance renewals. You can factor those large but sporadic expenses into your monthly budget by dividing the normal payment out over the number of months in the term. For example, if your car insurance renewal comes around once every six months, take the renewal amount and divide it by six to see how much it's costing you "per month." Once you have your expenses in front of you, ask yourself how comfortable you feel with your current situation. Do you have enough money every month to cover your expenses, plus a little to tuck away in savings? Do you live paycheck to paycheck, with creditors breathing down your neck until you can get a hold of the next chunk of income? Or worse, are you stuck with ever-growing credit card bills because you fall a little further behind every month? The answer will tell you whether your current housing costs are low, marginal, or too high compared to your current income and other expenses.
If you've already pared your non-housing expenses down as low as you can, yet you still have trouble paying all your expenses every month, then your housing payment is too high for your current situation. You might consider downsizing your home or possibly refinancing to get a smaller payment if you own your home.
If you're paying all the bills every month and can still stash a bit of money into savings and/or your retirement account every month, then your current housing payment is OK for your situation. Now is when you can go back to the percentage you calculated earlier and use that as a baseline.
If your current housing payment takes up 25% of your income and you're struggling to pay it, then you might aim for 20% or even 15% instead. On the other hand, if you're doing fine and have extra income every month, you could likely push the percentage up a little to 30% and still be all right.
Don't let the other costs of homeownership surprise you
If you're currently renting and are planning to buy a house using your rent payment as an affordability guideline, remember that as a homeowner you'll need to budget extra for maintenance and emergencies. If you buy a house and the furnace breaks down, or a pipe springs a leak and floods your kitchen, you can't just call the landlord and have him deal with it. You'll have to cover all these expenses yourself. Homeowners insurance will cover the cost of some crises, but you probably don't want to leave a foot of water on the kitchen floor until the insurance check arrives, so you'll need to have enough extra money kicking around to pay for repairs until you get reimbursed by the insurance company.
Whipping out a credit card for emergency housing expenditures is an option, but it's not a good one. Assuming you can't pay off the full amount of the card charge immediately, which is likely, you'll end up paying through the nose on interest and possibly fees. For that reason, you should prioritize setting up and funding an emergency savings account before you consider buying a house. Having enough money to cover at least a few months' worth of expenses is even more important for homeowners than it is for renters. And remember, making a down payment will inevitably take a huge chunk out of your savings, so take that into account when deciding if you have enough saved up to start house-hunting.
How Big Should Your Mortgage Payment Be?
Just because a lender is willing to approve you for a mortgage doesn't mean you'll be able to comfortably make the payments. You're better off settling for a little less house and a monthly payment you can manage.
By Wendy Connick
Mar 12, 2017 at 6:43AM
Image Source: Getty Images
It's normal for rent or mortgage payments to be the biggest single monthly expenditure for a household. But if housing starts to take up too big a percentage of your available income, you'll find yourself strapped for cash.
Zillow's most recent housing affordability survey shows that housing expenditures are clearly on the rise, with typical monthly mortgage costs hitting 15.8% of median household income -- up from 14.7% a year before. While that's still low in historical terms, the upward trend, in combination with rising interest rates and home values, means that payments may soon be heading into the danger zone. Renters are paying even more percentage-wise, hitting 29.2% of median household income. And in certain metropolitan areas the housing expenditure numbers verge on gruesome: Los Angeles and San Francisco both sport mortgage expense percentages of more than 40% of median household income.
Most experts agree it's best to keep housing costs to less than 30% of income. Lenders will typically limit mortgage loans so that the monthly payment (including taxes and insurance) is no more than 28% of monthly household income. Of course, the highest monthly payment you can really afford may be a little higher or lower than that, depending on factors like your lifestyle and your other expenses.
So how can you figure out how big of a mortgage payment you can afford?
Start by taking a good look at your income and expenses
Rather than depending on an arbitrary number like 28% or 30%, it's best to evaluate your household budget and see what percentage works for you. What you're looking for is a housing payment that you can pay every month without feeling stressed every time the due date rolls around. If you have a mortgage, you ideally want to be able to pay a little extra toward the principal every month, allowing you to get rid of the mortgage early and save on interest. If your gut reaction to that sentence was, "My mortgage payment is a pain already -- no way I can pay extra," then that's a sign you're paying more than you can afford.
Now take your monthly housing payment and divide it by your monthly household income. For example, if you pay $1,000 a month in rent, and your paychecks add up to $4,000 per month, then you divide $1,000 by $4,000 to get 0.25, or 25%. That number is your current housing payment percentage; remember it, because you'll use it to determine what the right percentage is for you.
Next, make a list of all your regular expenses. Don't forget the biggies that come around only once or twice a year, like insurance renewals. You can factor those large but sporadic expenses into your monthly budget by dividing the normal payment out over the number of months in the term. For example, if your car insurance renewal comes around once every six months, take the renewal amount and divide it by six to see how much it's costing you "per month." Once you have your expenses in front of you, ask yourself how comfortable you feel with your current situation. Do you have enough money every month to cover your expenses, plus a little to tuck away in savings? Do you live paycheck to paycheck, with creditors breathing down your neck until you can get a hold of the next chunk of income? Or worse, are you stuck with ever-growing credit card bills because you fall a little further behind every month? The answer will tell you whether your current housing costs are low, marginal, or too high compared to your current income and other expenses.
If you've already pared your non-housing expenses down as low as you can, yet you still have trouble paying all your expenses every month, then your housing payment is too high for your current situation. You might consider downsizing your home or possibly refinancing to get a smaller payment if you own your home.
If you're paying all the bills every month and can still stash a bit of money into savings and/or your retirement account every month, then your current housing payment is OK for your situation. Now is when you can go back to the percentage you calculated earlier and use that as a baseline.
If your current housing payment takes up 25% of your income and you're struggling to pay it, then you might aim for 20% or even 15% instead. On the other hand, if you're doing fine and have extra income every month, you could likely push the percentage up a little to 30% and still be all right.
Don't let the other costs of homeownership surprise you
If you're currently renting and are planning to buy a house using your rent payment as an affordability guideline, remember that as a homeowner you'll need to budget extra for maintenance and emergencies. If you buy a house and the furnace breaks down, or a pipe springs a leak and floods your kitchen, you can't just call the landlord and have him deal with it. You'll have to cover all these expenses yourself. Homeowners insurance will cover the cost of some crises, but you probably don't want to leave a foot of water on the kitchen floor until the insurance check arrives, so you'll need to have enough extra money kicking around to pay for repairs until you get reimbursed by the insurance company.
Whipping out a credit card for emergency housing expenditures is an option, but it's not a good one. Assuming you can't pay off the full amount of the card charge immediately, which is likely, you'll end up paying through the nose on interest and possibly fees. For that reason, you should prioritize setting up and funding an emergency savings account before you consider buying a house. Having enough money to cover at least a few months' worth of expenses is even more important for homeowners than it is for renters. And remember, making a down payment will inevitably take a huge chunk out of your savings, so take that into account when deciding if you have enough saved up to start house-hunting.
Wednesday, March 1, 2017
First-Time Homebuyer Class
Do you want to buy a home but aren't really sure where to start the process? Reading about it online can only answer so many questions. Get real answers from professionals in the industry who help individuals like you every day get into homes they love! We are happy to be participating in this free class that only requires a pre-registration! Join us this Saturday, March 4 at Virginia Capital Realty on North Thompson Street!
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