Blog :: 01-2014

What is a Pre-Approval Letter and Why do you need it?

One of the first questions a real estate agent will ask a home buyer is, "Are you pre-approved?" and it's important that you are before looking at homes. Find out what it means to be pre-approved and why it's so crucial here:

What does it mean to be pre-approved? If you have a written letter from a mortgage lender stating their willingness to loan you a certain amount, then you are pre-approved. A pre-approval letter is different than a pre-qualification letter which is merely an estimate of what you will be able to borrow without the research to back the number.

Why is being pre-approved important? Having a pre-approval letter first of all sets your budget of what you will be able to afford. It may also tell you the length of your loan and the interest rate associated with your payments. When you and your agent choose homes to look at you'll have more bargaining power and appear serious to the seller who will appreciate knowing you have the financial ability to back up your offer. A seller will almost always accept an offer from a pre-approved buyer over a non approved buyer in the case of a bidding war. In short, a pre-approval letter sets your spending cap, labels you as a serious buyer and will help expedite your purchase by giving you an upper hand over non approved buyers.

How do you get pre-approved? First, shop around for a lender that works best for you. Check on interest rates and any special offerings that may work to your advantage. It is always a good idea to work with a local lender as they are accessible, familiar with your area and expedient. Once you've settled on a lender you will be asked to provide your W2's, tax returns and will be subject to a credit check. You will also be asked about your ability to provide a down payment and supply closing costs as well. Once you are pre-approved, keep in mind that your letter may be time sensitive and will be subject to a home appraisal prior to closing.

While a pre-approval letter is a great symbol of financial commitment, it is not a concrete approval which you will receive at the end of your mortgage application.

Renters Insurance: Why You Need It and What To Look For

Many times renters mistakenly believe that the contents of their apartment will be covered by their landlord's insurance policy in case of theft or damage. In fact that is rarely the case. In order to protect your belongings it is very important to invest the $15-$30 per month on renters insurance -- a small price to pay considering the replacement costs of your valuables.

If you're in need of renters insurance, make sure you fully understand the policy options. The following are must have clauses in a good rental policy:

1. Coverage of Personal Property. The policy you choose needs to include coverage of all contents of the rental that you own. It is advised that you make a written and photographic inventory of your belongings to go over with your insurance agent so that together you can assign values to each item. Typically, insurers will assign an "Actual Cash Value" to your items which corresponds to a used replacement rather than a brand new market value price.

2. On Site versus Off Site Coverage. Check to find out whether the policy covers belongings only while they are in the rental unit or if it covers items indiscriminately. For example, if your bike is stolen while parked at another location, would it be covered?

3. Housing Expenses Reimbursement. Will your policy pay for your temporary living expenses if damage were to occur to your unit that required you to vacate? If so, find out how much the policy covers and for how long.

4. Liability. Will the policy protect you if a guest damages the rental? What if a guest is hurt and seeks medical reimbursement? Also check to see if guests belongings are covered in addition to your own.

5. Pets. Does the policy protect you if your pet is injured at the rental? If so, find out how much of the veterinary expenses would be covered. What if your pet injures a neighbor or guest -- are you held liable or not?

6. Flood Damage. Many policies will not cover water damage. However, extra insurance can be purchased specifically for this event. If your rental is in a high risk area you should definitely consider carrying the extra coverage.

8 Ways to Save for a Down Payment

8 Tips Down PaymentSaving for a down payment is difficult and time consuming. Depending on the type of mortgage you're planning to apply for, you may be required to put as much as 20% down (That's $40,000 if you're purchasing a $200,000 home!). Don't be discouraged if you are just starting out -- our 8 suggestions will get you on the right track toward saving.

1. Reduce Your Living Expenses. Cut costs in any way you can -- eat at home instead of dining out, buy generic brands instead of pricier name brand versions and brew your coffee at home instead of stopping on your way to work. Cutting just $5 per week in unnecessary costs adds up to $260 in a year and you'll be pressed to notice any difference.

2. Open A Special Savings Account. Put your down payment money into a new bank account or CD where it will be earning interest without tempting you to dip into it. Consider depositing a set portion of each paycheck into the account to accelerate savings.

3. Look for Assistance Programs. There are state and federal assistance programs available to help people buy homes. Visit the U.S. Department of Housing and Urban Development (HUD) website for more information and to find a housing counselor to advise you.

4. Stow Away The Credit Card. Or, better yet, get rid of it all together. Not only will you avoid making unnecessary purchases by committing to a cash only lifestyle, you'll also prevent increasing your debt-to-income ratio which lenders will scrutinize.

5. Take On A Roommate. The money you will save by splitting the rent will add up very quickly.

6. Look For Deals. Use coupons at the grocery store and use sites like Retail Me Not or Deal Catcher to find online coupon/promotional codes for web purchases. Your savings may seem small, but every little bit helps pad that down payment account.

7. Supplement Your Income. If you are able to take on an extra job to help you save, consider doing so. Keep in mind that the busy schedule will only be temporary, and while not ideal, your goals will be met much sooner.

8. Accept Help When Offered. If your family is willing to help you with your down payment accept the assistance. You are able to accept up to $13,000 in tax free gifts annually. See the IRS website for more information.

10 Things to Avoid When Buying a Home

 

If you're financing your home purchase it's crucial that your personal finances are in the best order possible until after the closing. Here are 10 things to avoid during this time:

1. Job Changes. Changing jobs or becoming self-employed while applying for a mortgage is not a good idea. Lenders are looking for stability, and job security, as signs that you will be able to repay your loan. Making sudden changes will appear risky and may interfere with the process. If it is possible, hold off on taking a new job until after the closing.

2. Bank Changes. Do not open new or transfer accounts. Lenders will be thoroughly looking into your finances and changes will raise red flags and questions which will slow the process.

3. Taking Out New Loans. Now is not the time to buy a new vehicle or make any other large purchases. Adding to your debt-to-income ratio will look risky and will also cause problems when lenders are working out the details of your loan.

4. Wracking Up Credit Card Charges. Hold off on purchasing furniture or other big ticket items during the loan process. Increasing your debt makes your financial situation appear unstable. Wait until after the closing to pick up new accessories for your home.

5. Making Late Payments. Show that you are conscientious and responsible with your money and debts--lenders are looking for stability! If you are late with other payments, lenders will think you are struggling financially and may decide you are a bad investment. Remember, if you've had a history of late payments your credit score could be affected. If you tend to be forgetful, set up an alert on your phone to stay ahead of due dates.

6. Making Large, Sudden Deposits. Lenders like to see that the funds you are using as your down payment have been in an account accruing interest for at least a few months prior to your purchase. Making a down payment sized deposit suddenly will leave lenders wondering where the money came from. Make your transfers as early as possible.

7. 'White' Lies on your Loan Application. This seems obvious, but be completely straightforward and honest on your banking paperwork. Make sure to include all sources of income and all debts and liabilities. False reporting may seem harmless, but it is fraud.

8. Co-Sign on Another Loan. Now is not a good time to do friends or family members favors by adding your name to their loans. Even though you wouldn't be making payments, co-signing increases your debt-to-income ratio which will negatively impact your ability to obtain a mortgage.

9. Apply For New Credit Cards. Do not increase your debt potential by applying for, or accepting, new credit card offers. Also, avoid checking your credit during this process; lenders will see a spike in recent inquiries as potentially negative and it's best to avoid it altogether.

10. Spend Your Closing Costs. The fees due to cover legal and lender fees are called closing costs. Sometimes these can be negotiated and either paid by the seller or, depending on your mortgage, factored in to your loan. Normally, however, you can expect to bring 1-3% of your home's purchase price with you to closing to cover these costs. Be sure to plan ahead if affording that sum will be a strain.

The takeaway: be conservative financially leading up to, and during, the mortgage loan process.