Home Buying

Your credit history is the MOST important thing you need to be aware of and should always consider when making financial decisions. Your score is a snapshot of your historic and current ability to repay debt. Believe it or not, having debt can actually be a good thing as it pertains to generating credit scores. While there are several other factors, your credit history is the number one factor influencing your ability to borrow money. So why do your scores change so often? Why is your score lower today than when you received your free online report yesterday?

There are three credit bureaus that lenders pull information from; Trans Union, Equifax and Experian. They each generate a score, and we the lender use the median score as your qualifying score. If you are buying a home with a spouse, partner or co-borrower, we look at both median scores and then take the lower of the two for qualifying. People are often surprised that their score is lower than they expected. Often times people will tell me that they got a free report online and their score was much higher. Why is this? Each of the three credit bureaus use multiple scoring models and algorithms to determine your score. You may hear a credit score often referred to as a FICO score. This is the overlying scoring system. Fair Isaac Corporation (FICO) has multiple models that are updated and released from year to year. For example, Classic 04 and Beacon 5.0 are often used in the mortgage industry but can have a much more conservative scoring process than the models used when purchasing a car, or getting a free consumer report. So no, we cannot use your online credit report. We must pull our own report. And yes, it’s very important to have your lender pull your credit early in the pre-approval process to manage your expectations and help identify any potential issues or discrepancies you may be able to correct.

While the scoring algorithms aren’t public, we know what impacts your scores the most. And no, having your score pulled by multiple mortgage companies will NOT affect your score. I’ll dive into that later.

Pay your bills on time.
Your credit card won’t report you late until it’s 30 days past due, but get in the habit of paying early. I’ve seen a single 30 day late payment drop scores more than 50 points. If you continue to fall behind, multiple 60 and 90 day late payments will destroy your scores.

Revolving debt vs. Car Loans, Student Loans & Mortgages
Having good credit comes from a history of repayment. Car loans, student loans and mortgages can help develop a long term history of good credit standing. As long as these are paid on time, these are good items to have on your credit report. Revolving debt, i.e. credit cards, need to be tamed. Again, it’s okay to have credit card debt but read ahead on how to handle this debt.

Keep your credit card balances “low”
It’s perfectly fine to have credit cards. In fact, showing your ability to pay these cards on time is what generates a healthy credit record. The key however, is keeping your debt utilization low. What does that mean? Try to keep your credit card balances below 40% of the limit. Percentages are key! If you have a card with a $15,000 limit, then keep that balance below 40% or $6,000. Better yet pay that card off so your utilization is 0%. Somebody with a $25,000 credit limit with an $8,500 balance will likely have better credit scores than somebody with a $2,000 balance on a $4,000 card. Sure the debt is higher but the person with the higher credit limit has a lower utilization percentage. Be careful when opening cards to buy products. They often set the credit card limit to the cost of the product. I’ve seen this with somebody who bought a $2,000 television on a Best Buy card. Sure, it was no payment and no interest for 12 months. Great, right? Not for this person. The card limit was set to $2,000, so he was actually maxed out, 100% utilization, for several months.

Don’t close out old cards
As I mentioned, your credit history is important. When you close out a card, eventually that history attached to that account will go away. More importantly, your overall utilization percentage goes up. For example, if you have two credit cards with a $10,000 credit limit and the balance of one is $0 and the other is $4,000, your combined utilization is 20%. If you close out the zero balance card, your total utilization just went to 40%. Don’t trust yourself with that second card? Cut it up. Shred it. You don’t have to use it. I just don’t recommend you close it out.

Pay off collections
Sometimes the oldest collection can come back to haunt you. When you have a bad debt that the credit card company couldn’t collect on, they will sell that debt to a collection agency for cents on the dollar. The collection company will try to recoup dollar-for-dollar to be profitable, but often they’ll negotiate with you since they bought the debt for less than what you owe. If you don’t pay it, the debt could get sold to another collection agency years later. This could bring it back to life on your credit report where you’ll once again get “dinged” with late payments.

Write letters
If you find something erroneous on your credit report, contact the creditor and get documentation agreeing it was an error. Send that information to the three credit bureaus so they can correct the errors.

Credit Inquiries
Yes. Too many credit inquiries can affect your score. Just one credit check can have a negative but small impact, but just like your car, you need a checkup. Have it pulled annually to make sure nothing populates out of the ordinary. Think of it as a score card. You should visually see your credit history and see if there are ways to improve your scores. If you are having it pulled several times by several credit card companies, this for sure can impact your scores. The bureaus know that you’re attempting to acquire more revolving debt. They’ll penalize you for multiple attempts. A common misconception is that multiple pulls by a mortgage company will hurt your credit. As a consumer shopping lenders for your home mortgage, rest assured that multiple inquiries from multiple lenders will not affect your due diligence. The Consumer Finance Protection Bureau regulates this and states that multiple inquiries in a 45 day window will only register as 1 inquiry. Read More From The CFPB Here

There are many other factors that can affect your scores, but if you can pay your bills on time and keep your credit card balances low, you will find yourself on the path to 800. If you are in the early stages of purchasing a home or even just entertaining the idea, please give me a call so we can make sure you’re on the right path!

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

I’d like to preface things by saying that every market, state, county and city is different. More so than that, different price points come with different types of buyers. So while you might be living in a town with several million dollar home listings, I’d like to focus on the types of homes that the largest share of home buyers are in need of. According to the National Association of Realtors, 34% of buyers are 36 years old and younger and of these individuals, 66% of them are first-time buyers. The next biggest share of homebuyers are ages 37 to 51, making up 28% of buyers.

Historically, persistently weak participation of first-time buyers would suppress home purchase activity. So much so that the government even introduced a first-time homebuyer tax credit from 2008 to 2010 to spur growth and help battle the economic crisis, but the demand was restrained by high unemployment and declining income. However, as the labor market continues to heal and young-adult incomes have begun to recover, participation is no longer an issue. The inventory of “starter homes” is the issue. [A starter home is one that falls at the lower end of the home price distribution and typically less than 2,000 square feet. Prior to the housing bubble, 71% of homes owned by first-time home buyers were less than 2,000 square feet. – Fannie Mae]

So why is inventory an issue?

Many starter homes have shifted from owner occupancy to rentals. In part, this is a product of existing homebuyers losing some equity during the housing collapse and while they are ready to move up to their next home, they aren’t ready to sell until some of that lost equity returns. We’ve also seen the cost of renting go up. With the economic downturn and foreclosure crisis, many people who damaged their credit are not yet able to purchase a home. With heightened rental demand and higher rents collected, there is more of an incentive for move-up buyers to lease out their property in lieu of selling. Fannie Mae reports that between 2005 and 2013 (the most recent year for which data are available) the inventory for owner-occupied starter homes has declined by more than 1 million units, whereas the inventory of renter-occupied starter homes rose by 2 million. In addition, analysis finds that home builders have moved away from building new starter homes, dropping from 40% to 32% over that same time span.

In turn, the tight starter home supply and associated rapid price gains in the lower tiers of the home sales market are reducing first-time homebuyer affordability. This leaves a very specific home at a very specific price point for the largest share of people in the market for purchasing. So what can you do as a first-time homebuyer? Be prepared. Get your pre-approval lined up. Go over your options with your lender. Work with your lender and your realtor to put a home buying plan in place so you are ready to make an offer when the right home that’s the right fit for you comes to market.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Let’s face it. The term Millennial is thrown around so often that it’s hard to get thru a day without hearing it. Being a Millennial comes with its labels, sometimes even stereotypes- some good and some not so good- to those that were born in the early 80’s and after. However, this is such an important and talked about demographic nowadays because this class of individuals has entered and continues to enter the workforce. They have become the new entrepreneurs. They’re climbing the corporate ladders, impacting the economy and ultimately shaping the future of this country.

After years of many experts lamenting how Millennials weren’t interested in becoming homeowners, statistics are showing just the opposite. According to Ellie Mae, Millennials are the largest group of homebuyers today, representing about 45% of all home purchases.

Here lies the problem. Their path to homeownership isn’t easy as they are competing against move up buyers. This has created a shortage of inventory, driving up home prices, particularly among starter homes that tend to fall within first-time buyer’s budgets. According to Zillow, home values are up 7% from a year ago with around 3% fewer homes on the market. Move up buyers tend to have additional down payment from earned equity on their home sale, and since they’ve done this once before, they know what to expect, prepare accordingly and have a buttoned up home buying plan.

So how do you, the millennial buyer, get an edge on others you may be competing with for a home purchase? Of course it’s important to work with a knowledgeable realtor, but believe it or not, it starts with financing and how qualified you are for purchasing. The stronger the buyer you are, the more options you may have when purchasing. Have you had your credit checked? A better credit rating can lead to a lower rate, which leads to a lower mortgage payment which in turn allows you to afford more home (purchase power) and come in with a stronger offer. Did you get your pre-approval from a lender and did they structure the pre-approval to show your strengths as a buyer? Did you discuss the difference between giving a low ball offer on a home versus offering the listing price? What does that difference actually mean to your monthly payment? Does the seller want to close quickly? Writing up a 30 day close might give you the edge over somebody with a similar offer putting in a 60 day close. Has your lender reviewed all your income, assets and supporting documents? Getting your financing in place helps assure a smoother loan process with typically quicker turn times from contract to close. Are you flexible on when you can move in? Does the seller know why you want to buy their home? Sometimes writing a short heartfelt letter can be the difference in winning the bid.

Let me help you by being a resource of information for you. Let’s talk about the pre-approval process and how to structure your loan so you can make an offer that not just gets you the house, but more importantly gets you a mortgage payment that you are comfortable with and aligns with your financial goals as a homeowner.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

When it comes to buying a home or refinancing your existing mortgage, there are many loan options and many factors that help determine what’s right for you. Not only should you consider goals as a home owner today, but also look to the future. Where do you see yourself in the next five, ten and fifteen years? How about your job? Are you in a salary position or on a commission structure? Do you have children? Do you see your family growing in the short and long term? Have you started saving for your children’s college education? These are just a few things to consider and talk to your mortgage consultant about.

The most typical loan product is the 30 Year Fixed mortgage. With this product your interest rate is fixed for the full 360 month term. While your mortgage payment doesn’t change, the amount of interest and principal does each month. Since you only pay interest on the loan balance, the interest portion of your payment goes down and the portion of your mortgage payment allocated towards principal goes up. This is called amortization; the cost of the loan spread over the loan term. Since the 30 Year Fixed allows you to repay the loan over 30 years, it will have a lower monthly payment than say a 15 or 20 Year Fixed. This keeps your payment down in comparison, but you will be paying much more interest over the life of loan compared to a shorter term mortgage. Even if you can afford a 15 Year Fixed payment, you need to ask yourself what’s more important, expedite paying down your mortgage while building equity or a higher cash flow with the lower mortgage payment.

Let’s look at the 15 Year Fixed compared to a 30 Year Fixed. Using a $300,000 loan amount and a 4.000% interest rate on a 30 Year Fixed mortgage, the principal and interest payment is $1,432 per month. A 15 Year Fixed rate of 3.5000% – Yes, rates are typically lower on the shorter term product – with the same loan amount of $300,000 equates to principal and interest payment of $2,144 per month. That’s a $712 swing in monthly payment. While that sounds like a substantial difference in payment, the interest paid over the life of the 30 Year Fixed is $215,607 and just $80,036 on the 15 Year Fixed. That is savings of more than $135,000. However, not everyone can afford the 15 Year Fixed, especially when you add in your property taxes and homeowners insurance premium. Even if you can afford it, you may have certain expenses coming up that need to be considered. Do you anticipate a new car payment, a job change, or are of your children going to have a school expense? Maybe you simply want the peace of mind that if something unexpected comes up, you’ll have a more comfortable mortgage payment. Whatever your reasons are, everybody’s life situation is different.

What about the Adjustable Rate Mortgages (ARMs) that received a lot of bad press in recent years? How does it work and is it a risky product? Typically an ARM product has a fixed term and then can adjust at a future date. For example, a 5 Year ARM is fixed for 5 Years and then can adjust at the start of year 6. Just like the 30 Year Fixed, it is amortized over 360 months but the interest rates are usually lower than the 30 Year Fixed. Therefore you pay less interest and have a long term loan to provide an overall lower monthly payment. The interest rate can adjust to a margin plus an index and has a cap of how much it can adjust annually and over the life of the loan. Typical ARM products are 5, 7 and 10 Year ARMs. This is where you ask yourself where you see yourself living in the next 5, 7 or 10 years. Hypothetically, let’s say you and your partner are buying condo in the city and plan to start a family in the next 5 years. You’ve discussed your life goals and decide that you want to save up for long term home in the suburbs. The 7 Year Arm might be a great option for you. Your rate will not adjust over the time frame you own and live in the condo, minimizing your risk of a rate adjustment, and with a lower interest rate than that of a 30 Year Fixed, you will maximize your savings. The ARM products received a bad reputation years ago as many loans began to adjust upward with the “collapse” of the housing market. Due to the deteriorating market, people didn’t have the equity in their homes to refinance out of their ARM. Layered with unconventional, subprime and low documentation loans, many people struggled making their mortgage payments. However, as the housing market continues to normalize, added regulation and a more conservative approach to qualifying individuals, this is still an attractive program for qualified home buyers.

Finally, let’s look at Federal Housing Administration (FHA) and Veteran Affairs (VA) loans. Both are government sponsored and have their quirks. FHA allows for a 3.5% down payment, lower than most conventional 5% down products. They are more forgiving as it pertains to credit scores, debt-to-income ratios and interested party contributions, i.e. seller credits. Many have referred to this as a first time homebuyer program, but because of its leniency on credit scores and debt ratios, it may be the right choice for any homebuyer. The interest rates are also typically lower than that of a conventional loan. The downside is that Private Mortgage Insurance (PMI) is required to be paid for a minimum 11 years for those putting 10% or more down payment and for the life of the loan for those putting less money down. FHA also collects a mortgage insurance premium up-front when acquiring the loan. VA helps current military service members, Veterans, and eligible surviving spouses become homeowners. Since VA guarantees a portion of the loan, it enables the lender to provide favorable terms. Depending on county loan limits, most VA loans will not require a down payment. For example, in Cook County, Illinois, you can purchase a home for $424,100 and finance the entire amount. There is no PMI and the interest rate is typically lower than that of a conventional loan. The only down side of a VA loan is that you may be required to pay a funding fee at closing. This fee is rolled into your loan balance and the amount of the fee is dependent upon your down payment and the number of times you’ve received VA financing.

There are an abundance of loan programs and several ways to structure your mortgage. Since everyone’s credit score, income, down payment and debt-to-income are different, it’s important to speak to a seasoned mortgage professional that will not only walk you through your options but help guide you to what best fits you based on your current and future life goals.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

One constant perception that both new and repeat homebuyers have is that 20% down is required when buying a home. There are other options, but many of the people that are aware you can put less down seem to have a stigma about it. Why is this? Any conventional loan with less than 20% down payment requires private mortgage insurance (PMI). PMI is an added insurance premium that the homeowner pays to help protect the banks and loan servicing companies if the homeowner were to default on their mortgage. Homeowners believe that this is “throwing money away” as it can lead to a higher monthly payment. However, there are options to avoid paying monthly PMI, even with as little as 5% down.
First off, let’s look at the minimum down payment requirements for different loan programs for a one unit (single family or condo), owner-occupied purchase.

Let’s focus on conventional loans since most homebuyers fall into this category. A conventional mortgage refers to a loan that is not insured by the government, is less than $424,100 and adheres to the guidelines set by Fannie Mae and Freddie Mac.
The cost of PMI is risk based when putting less than 20% down. If you have excellent credit, the PMI factor will be lower than someone with poor credit. If you put 15% down, the PMI factor will be lower than someone who put 5% or 10% down, and the cost is lower on a 15 Year Fixed than a 30 Year Fixed. Don’t want to pay PMI at all? There are Lender Paid PMI and Single Premium PMI programs that actually allow you or your lender to “buy out” the PMI. Assuming you have excellent credit, the cost of “buying out” the PMI can be very beneficial. This “buy out” is typically done by taking a slightly higher than market interest rate, but because you don’t pay monthly PMI, your overall effective rate/payment is lowered.
Sometimes putting less down and paying PMI is beneficial. Maybe you have 20% to put down but instead you put 10% down and use the other 10% for future home renovations, window treatments, furniture or to pay off some debt. That monthly PMI cost is likely lower than the APR on your credit card.
As you can see, there are so many moving parts that end up determining how much you should put down when buying a home. It’s important to see if it makes more sense to pay monthly PMI or do a “buy out” program eliminating your monthly PMI. The best thing to do is call a seasoned mortgage professional that will walk you through all your options and show you comparisons tailored to your current needs and financial goals.

Click here for a more in depth look at down payment requirements based on property type and loan amount.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Should You List in January Or Wait for Spring?

The snow has melted, the skies are blue and the temperature is warmer. It’s the perfect time to list.  Well, maybe not.  It’s a great time to go out and look at homes, but thousands of homeowners are speaking with real estate agents this time in the spring so much of their time will be dedicated to showings.  It can take months to prep your home to be listed, so don’t wait for the spring market to get your house listed.  Get ahead of the game and create inventory at a time of the year where home listings are at their lowest.

It’s important to realize that buyers don’t hibernate in the winter. Life goes on.   People are constantly changing jobs, moving to new cities, school districts or simply just out grow their home.   Winter brings the holidays and often vacation time from work.  This is a perfect opportunity for potential homebuyers to research and even visit homes.  Inventory is lower, so your home might just be the hot listing they were waiting for.   You’re better off being the home on the street listed for sale than competing with your next door neighbor.  Let’s not forget that the New Year brings several types of employee’s annual bonuses ready to use towards their down payment.

So why wait until the spring again?

Written By: Chris Ulrich – United Home Loans
NMLS# 215735