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I’m 27 and Put 17% of My Income Into My 401(k), but That’s Keeping Me From Buying a Home

December 27, 2019


Hello Catey,

I am a single, 27-year-old male. I am beginning to save for a down payment on a home. I currently contribute about 17% to my 401(k). While that is great, it doesn’t leave me very much room to save for a new home. I am looking for perspective about lowering my 401(k) contributions to help save up for a down payment on a home, versus maintaining 401(k) and lengthening my home-buying timeline.


Dear Zack,

First of all, congrats on contributing so much to your 401(k) – you’re in an elite minority. A survey from personal finance site GoBankingRates found that about one in three Americans have nothing saved for retirement, with millennials being the most likely group to have a $0 retirement balance.

And even those who do contribute aren’t typically contributing like you do: The average person in their 20s with a 401(k) plan is putting in an average of 7% of their income with their employer matching an average of 4%, Fidelity data shows.

So you’re far ahead of the pack on saving for retirement — and that’s great. Even so, before you touch those retirement contribution amounts, consider other options: “This individual is taking a binary approach to his financial situation, assuming that the 401(k) is the only place to look for cash flow to purchase a home,” says Rich Ramassini, the director of strategy and sales performance for PNC Investments. He notes that you should look at your annual cash flow (income – expenses) and look for other opportunities to save — if you haven’t already.

If you’ve done that, some experts MarketWatch consulted with said that it’s OK for you to lower your 401(k) contributions — to a point, and for a short time — if you want to buy a home. (That advice assumes you don’t have any other high-interest debt and you have an emergency fund socked away -— things you might want to deal with before buying a home, as MarketWatch wrote in this article).

“I generally recommend that employees set aside at least 10% to 15% of their income in order to fund the retirement that they want,” says certified financial planner Amy Ouellette, the director of retirement services at Betterment for Business. “However, your contribution rate doesn’t need to be set in stone, and it’s okay to consider lowering it a bit when saving up for other big milestones. While saving for retirement is incredibly important, so is having the financial freedom to make other worthwhile investments like home ownership.”

So how low can you lower your 401(k) contributions while trying to save for a home? “If buying a home is a few years out, I’d consider reducing your 401(k) savings rate to 8% to 10% of your income, while building up the down payment fund; this way you continue to build for your retirement while meeting a shorter term goal,” says Ouellette.

Certified financial planner Bobbi Rebell cautions that if you decide to lower your contributions to save for a home, you should still make sure you contribute at least enough to get the company match: “That is free money and often a return of 100% depending on the specifics of the plan,” Rebell, who is also the host of the Financial Grownup and co-host of the Money with Friends podcasts, adds. And Ouellette adds that you may want to talk to a financial advisor to calculate exactly how much to decrease contributions by and how much that will leave you for a down payment.

Another possible option: A 401(k) loan, though that also comes with risks. “The best option available, if you plan to stay at your job for a while, is to take a loan from your 401(k) to help cover you for the down payment on the home. Doing this will allow you to continue funding your 401(k) on a pre-tax basis (at the same rate as before), locking in that federal tax deduction up front, while getting you the funds needed to buy the home,” says Dave Cherill, a member of the American Institute of CPAs’ Personal Financial Planning Executive Committee — who adds that you must “keep in mind, if you leave your job with the loan outstanding, you will either need to pay it back, or include it in income that tax year and pay a 10% penalty on top (if under the age of 59-1/2).”

And of course, it’s important that you’re selective about the house you buy, ensuring that you can truly afford the home, that you’re getting a good mortgage rate if you do take out a loan, among other factors. And you should be aware of the fact that investing more in stocks may have upsides over real estate, as MarketWatch explored here.

“Owning a home is a huge financial investment but it is also a lifestyle choice. It provides stability, and a sense of ownership. It is often a commitment to a community,” Rebell points out. “Ownership has many non-financial benefits so it’s not [just] about comparing which will give you the better ‘return.’”

The post I’m 27 and Put 17% of My Income Into My 401(k), but That’s Keeping Me From Buying a Home appeared first on Real Estate News & Insights |®.

How Do Mortgage Brokers Get Paid?

December 19, 2019

mortgage brokers


So, you’re looking to buy a home. This is an exciting time filled with home tours, wish lists, and looking forward to making new memories in a new house. But finding a lender and getting a mortgage can be a difficult and confusing task.

Many people don’t have the time to contact numerous lenders and comb through details when looking for a mortgage, and choose instead to go to a mortgage broker for help. Before you do, you should know what mortgage brokers can really do for you and how these loan brokers get paid.

What mortgage brokers do

If you go to a bank for a mortgage or home loan, it will offer only loans carried by that bank. Since it’s just one institution, its home loan options may be limited and may not suit your needs.

If you go to a mortgage broker, he or she should have a variety of loan options from various lenders. It’s the mortgage broker’s job to find the best mortgage rate, tailored for you.

So, if you need to get a house but can’t afford more than a 5% down payment on a 30-year mortgage, your loan broker should approach lenders with those terms.

Hopefully, with the help of that mortgage broker, you’ll find a lender that will offer you the mortgage you need more quickly than you would shopping for mortgage rates on your own.

How loan brokers get paid

Unlike loan officers, mortgage brokers don’t work for banks. They operate independently and must be licensed. They charge a fee for their service, which is paid by either you, the borrower, or the lender.

The fee is a small percentage of the loan amount, generally between 1% and 2%. If you pay this fee, the dollar amount can be either added to the loan or paid upfront.

This 1% to 2% of a loan may sound like a lot of money for you, or for the lender, to pay on top of the mortgage you’re already committing to. Fees may vary, depending on the size or number of loans, but luckily, you shouldn’t be stuck with any hidden fees.

Loan brokers are required to disclose all fees upfront and can charge only that disclosed fee amount. Further, each fee should be itemized, and the broker should be ready to tell you, the borrower, exactly what each fee was for.

When applying for a mortgage, it’s important to know exactly how much you’ll be paying in fees. Knowing what your mortgage broker fees will be upfront will be helpful.

Pre-Dodd-Frank Act

New regulations put in place by the Dodd-Frank Act have restructured how mortgage brokers get paid.

Before this legislation came into effect, lenders could compensate mortgage brokers for getting their clients to agree to high-interest rate loans and signing off on costly fees.

If an unassuming client worked with an unscrupulous loan broker, there were few laws in place to protect the client. As a result of the Dodd-Frank Act, that has changed.

Here are some ways mortgage brokers cannot get paid:

  • They cannot charge you, the borrower, hidden fees.
  • Their pay cannot be tied to your loan’s interest rate.
  • They cannot get paid for steering you in the direction of an affiliated business, such as a title company.
  • In general, they cannot be paid by both you and the lender.

Unless you paid upfront costs, mortgage brokers generally do not receive payment unless the deal is closed.

When you’re thinking of buying a home, and starting the arduous process of shopping for a mortgage and talking to lenders, teaming up with a broker may seem like a good idea.

Although it might be a bit scary to trust someone with the future of your mortgage, it can be a good idea to get some help.

With lots of knowledge of mortgages, plus experience working with loan officers and mortgage lenders, a broker may be invaluable in your first stages of buying a home.

Brokers will take a fee off the top, but that fee could be well worth it!

The post How Do Mortgage Brokers Get Paid? appeared first on Real Estate News & Insights |®.

Why Paying Down Your Mortgage Faster Could Be a Good Investment Strategy

December 13, 2019


Paying down your home mortgage balance faster than required is not a new idea. But you may be surprised to discover how powerful it can be. I will explain. But first, note the following.

This is not for everybody

The accelerated mortgage paydown idea can only work for folks who have positive cash flow and/or available cash. It’s not for people who are struggling to pay their monthly bills.

The idea is only appropriate for folks who are looking for a very conservative, risk-free way to invest some surplus cash flow or funds. Obviously, if you believe you can earn 8% to 10% annually with other investment strategies, you are not going to be very excited about the idea of expending cash to earn 4% (or whatever your exact home mortgage interest rate may be) by paying off your mortgage early.

Finally, the idea is far more powerful when you intend to continue pumping the monthly accelerated mortgage paydown amount into a retirement account after your mortgage has been paid off.

With these thoughts in mind, here’s how the accelerated mortgage paydown strategy can work in the form of some sample scenarios.

Sample scenario

Pilar is in good financial shape. She has cash on hand and positive monthly cash flow. She expects to be in the same position for the foreseeable future. She has a $400,000 balance on a recently refinanced 30-year first mortgage that charges 4% interest.

Pilar’s monthly payment for principal and interest is only $1,910, but she has a whopping 30 years to go before the mortgage will be paid off, if she sticks to the prescribed monthly payment schedule. That means she will be a wizened 75 years old when the mortgage is finally extinguished.

Being 75 years old before your mortgage is paid off probably does not sound so great to most folks. Collecting a guaranteed, risk-free 4% (or whatever rate applies) return by paying down your mortgage quicker (thus avoiding the interest that would otherwise be charged on the principal you pay off early) probably sounds like a solid investment idea to many homeowners. After all, the stock market is looking rather frothy, and fixed income investments are still paying pitiful interest rates.

Say Pilar adopts the accelerated mortgage paydown strategy and immediately starts paying $3,500 per month instead of the scheduled monthly payment of $1,910. She will pay off her $400,000 mortgage balance in about 12 years, at age 57, instead of paying it off in 30 years, at age 75. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments. Not bad.

Loss of mortgage interest deductions

One objection against the accelerated mortgage paydown idea is that you will lose tax deductions because interest charges will go down more rapidly than if you stick to the scheduled monthly payments. This may be true, but so what? Consider the following points:

* The TCJA imposes stricter limitations on home mortgage interest deductions for 2018 – 2025. See here for more information.

* The TCJA’s greatly increased standard deduction amounts for 2018 – 2025 mean that many more folks won’t be claiming itemized deductions. Even if you itemize, the larger standard deduction reduces the incremental tax benefit from itemizing. See here.

Impact of future inflation or deflation

While the accelerated mortgage paydown strategy will yield guaranteed results, it is not foolproof. If we have a period of roaring inflation, paying down a mortgage with a relatively low interest rate earlier than required may no longer make sense. In this situation, it may be better to stop the accelerated paydown program, allow the mortgage term to stretch out, and pay the remaining balance back with cheaper inflated dollars.

On the other hand, the accelerated paydown strategy will work great during a period of deflation, because the mortgage is being paid down sooner when dollars are cheaper rather than later when dollars are more expensive.

Big advantage to continuing program after your mortgage is paid off

The accelerated mortgage paydown strategy can clearly be beneficial in and of itself because interest charges are avoided, and debt is eliminated from your personal balance sheet. Another advantage is you can stop and restart the program anytime you want (for example, when inflation or deflation strikes). However, the biggest payoff from following the strategy will probably be reaped by folks who have the cash flow and self-discipline to continue the program even after the mortgage is extinguished. This involves taking the monthly amount that was previously dedicated to the accelerated mortgage paydown strategy and stuffing it into a retirement savings account (whether taxable or tax-advantaged).

In our sample scenario, let’s say Pilar continues the program after her mortgage is paid off by putting $3,500 a month into a retirement savings account that earns 4% annually for another eight years. At age 65, she will have accumulated about $395,000 in the account. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

More sample scenarios

Here are some additional illustrations of how the accelerated mortgage paydown strategy can work.

Faster paydown

Now say 45-year-old Pilar pays $4,500 per month under the accelerated mortgage paydown program instead of making the scheduled monthly payment of $1,910. She will pay off her $400,000 mortgage balance in eight years and 10 months, at age 54, instead of paying it off in 30 years, at age 75. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments. If Pilar continues the program after the mortgage is paid off by putting $4,500 a month into a retirement savings account that earns 4% for another 11 years, she will accumulate about $745,000 by age 65. Sweet. Once again, this seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

Slower paydown

Let’s now be a bit less ambitious and assume that 45-year-old Pilar pays $2,500 per month under the accelerated mortgage paydown program instead of making the scheduled monthly payment of $1,910. This only requires an additional payment of $590 per month. Paying $2,500 per month will allow Pilar to pay off her $400,000 mortgage balance in about 19 years and two months, at age 64, instead of paying it off in 30 years, at age 75. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments.

Older individual

Finally, let’s now assume that Pilar is 55 instead of 45. She pays $4,000 per month under the accelerated mortgage paydown program instead of making the scheduled monthly payment of $1,910. She will pay off her $400,000 mortgage balance in about ten years and two months, at age 66, instead of paying it off in 30 years, at age 85. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 85.

The bottom line

You get the idea. With financial software, you or your financial adviser can put together your own accelerated mortgage paydown scenarios. Think about it.

The post Why Paying Down Your Mortgage Faster Could Be a Good Investment Strategy appeared first on Real Estate News & Insights |®.

7 Home Loans for Teachers (and How to Apply for Them)

November 26, 2019

Home Loans for Teachers

photo: Monashee Frantz/Getty Images
house outline: Greg Chow

People, we have a crisis on our hands: a teacher crisis. One reason for the squeeze: real estate. Rising housing costs and interest rates can prevent teachers from getting a mortgage and living in the districts they serve, creating a lack of teachers everywhere, from Seattle to San Francisco, to Virginia’s Fairfax County.

But did you know that several organizations and lenders offer home loans and mortgage help for eligible teachers? Below are seven programs and lenders that can help teachers get funding for a home.

1. Good Neighbor Next Door

Developed by the U.S. Department of Housing and Urban Development, this program was created for eligible teachers and other civil servants, including firefighters, law enforcement officers, and emergency medical technicians.

It offers a 50% discount on HUD-owned homes located in “revitalization areas”—regions with high foreclosure rates and low homeownership—nationwide.

Here’s the catch: Applicants are not permitted to own a home already. They must also commit to using their new house as a primary residence for three years—if they don’t, they will be required to pay the full cost. See homes available through the loan program at HUDHomes.

2. HUD Teacher Next Door

HUD’s Teacher Next Door connects educators to a wide variety of home loans and down payment help for teachers—including Good Neighbor Next Door—helping applicants find local programs and organizations that reduce mortgage rates and closing costs and provide down payment rebates.

Housing in this HUD program isn’t restricted to federally designated revitalization areas, and there are no residency requirements.

3. Educator Mortgage Program

Mortgage bank and lender Supreme Lending’s Educator Mortgage Program offers up to $800 in loan discounts on closing costs and real estate agent fees on home loans for teachers, as well as a speedy loan turnaround and a $400 donation to the school program of their choice.

Available for all teachers and school district employees, the program requires a minimum credit score of 620, but it doesn’t discriminate based upon previous bankruptcy or foreclosure.

4. Homes for Heroes

Intended for firefighters and military veterans as well as teachers, this program discounts 25% of your real estate agent’s fee when buying and selling, as long as you use an agent or broker who has signed up as a program affiliate.

Applicants also receive reduced closing and home inspection fees.

5. Community lending programs for educators

Through a partnership with the United Federation of Teachers, educators may receive a loan through the Union Assist Program at ICC Mortgage. The loan program offers zero or reduced interest, lower fees for processing or underwriting, as well as financing discounts.

6. Home loans for teachers at the local level

For Californians working in an underperforming school, the Extra Credit Home Purchase Program can provide mortgage tax credits to reduce the total they owe to the federal government. Participants must be first-time buyers and meet income and home price limits, which vary by county.

In Baltimore, the Housing Authority offers $5,000 toward a qualifying down payment on home loans for teachers, and the Texas State Affordable Housing Corp. offers fixed-rate Teacher Home Loans and down payment assistance grants.

Many states offer similar home loans, help with down payments, and mortgage assistance for teacher programs. In many cases, Teacher Next Door can connect qualified buyers with the appropriate grants, or you can search for home loans for teacher programs in your state.

7. Teacher-specific housing

In some areas, housing designed or earmarked for teachers is available. North Carolina teachers in Dare County can sign up for DARE, affordable housing complexes rented at below-market rates.

For New York City residents, Teacher Space New York connects teachers with affordable housing, based on income. And in Baltimore, Union Mill, an “urban oasis for teachers and nonprofits,” offers up to a $600 rent discount for teachers.

Your local school district or teachers union should have more information about available educator-only housing.

The post 7 Home Loans for Teachers (and How to Apply for Them) appeared first on Real Estate News & Insights |®.

What Is a Strategic Default on a House? When Walking Away Is the Right Move

November 8, 2019

What is a strategic default on a house?


We’ve been told to never walk away from our problems, but what if walking away is the most logical solution? When it comes to an underwater mortgage—where the money you owe on the house is higher than the current market value—some homeowners choose to cut their losses.

Referred to as strategic default or strategic foreclosure, the decision to abandon your home loan is a workaround that some homeowners use to get out of a bad investment. Although controversial, there are times when voluntarily bolting on your mortgage based on declining values might make economic sense.

“During the foreclosure crisis, when property values plummeted, strategic default was the term used to describe borrowers who remained able to pay their mortgage, but made a calculated, strategic choice to stop paying,” says Charles Castellon, attorney at Widerman Malek, in Celebration, FL. “The strategic decision to default is fundamentally a business decision to cut losses.”

During the most recent financial crisis, negative equity in the U.S. peaked at 26% in the fourth quarter of 2009, according to CoreLogic. Today, 4.2% of mortgages are still underwater.

But how does a strategic default work, and how will it affect a homeowner’s creditworthiness?

How strategic default works

The process of a strategic default is fairly straightforward. After making the calculations and realizing your home value pales in comparison to the principle left on your mortgage, homeowners simply stop paying. And if lenders are not getting their money, sooner or later they’ll foreclose on the home.

“To strategically default, you stop paying the mortgage until the lender forecloses and repossesses the property,” says Tendayi Kapfidze, chief economist at LendingTree in New York.

Relevancy to today’s homeowners

Castellon says the concept of strategic default remains relevant since people will always suffer economic hardship, regardless of the strength of the overall economy.

Strategic default was a hot topic during the low point of the foreclosure crisis and may make a comeback after the next market correction,” says Castellon. “During hard times, they may not be able to pay all of their obligations and are forced to engage in triage. This involves determining the likely consequences that will come from defaulting on certain debts and deciding who to pay and who to stop paying.”

How defaulting affects your financial future

Of course, defaulting on a mortgage means you’ll take some sort of hit to your credit score. That’s why anyone considering strategic default should understand the consequences it can have on their financial future. When buying another home or even renting, lenders and landlords may be more discriminating based on your record.

“Any default will affect your credit score, and a foreclosure will remain on your report for up to seven years,” says Kapfidze.

However, he says, many borrowers who default, strategically or otherwise, can purchase a home again in as little as two years.

“Given that strategic defaulters did not do so because of cash flow challenges, they are likely to service other debts well and thus see recovery in their credit score faster than borrowers with additional financial challenges,” says Kapfidze.

Pros and cons of strategic default

Before you choose to walk away and let your property go into foreclosure, it’s important to understand the pros and cons of this decision.

“The benefits of the strategic default include getting out of bad debt and containing the financial damage. It’s all about mitigating losses and damage control,” says Castellon.

It’s important to note that strategic default is not without risk though—having one in your financial history can harm your credit scores and make it harder to get another loan down the road.

And, in some cases, lenders pursue borrowers for deficiency judgments. A deficiency judgment is the difference between the amount a borrower owes on the loan and the foreclosure sale price.

“In my experience, a very small percentage of my distressed mortgage clients have had to face a deficiency claim, but it has been known to happen,” says Castellon.

The post What Is a Strategic Default on a House? When Walking Away Is the Right Move appeared first on Real Estate News & Insights |®.

5 Crucial Questions to Ask Before You Co-Sign a Mortgage

November 5, 2019


If you’re considering co-signing a mortgage—say, to help your grown kids buy their first house—it’s wise to take a step back and consider whether this move makes sense. Sure, you’re helping a loved one purchase property, but this type of arrangement could also pose a risk to your own finances (not to mention your relationship with the co-signee).

So before you put your John Hancock on the line which is dotted, ask yourself these four key questions first.

1. What is co-signing, exactly?

When a home buyer uses a co-signer, the buyer becomes what’s known as the “occupying borrower”—the person who is going to be living in the home.

Meanwhile, the co-signer—usually a relative or friend of the occupying borrower—is someone who typically doesn’t live at the property.

Co-signers physically sign the mortgage or deed of trust in order to add the security of their income and credit history against the loan. In turn, both parties take on the financial risk of the mortgage together—meaning that if the occupying borrower defaults on the loan, the co-signer is expected to cough up the cash.

To qualify as a co-signer, you must have a strong credit history and good income, says Ray Rodriguez, regional sales manager at TD Bank. Co-signers get vetted just as ordinary borrowers do—they have their income, credit history, credit score, assets, and debts scrutinized by a lender.

2. What are my responsibilities when co-signing a loan?

If anything affects the occupying borrower’s financial health—for example, loss of a job or severe medical problems—”the co-signer is responsible for the [mortgage] payments,” says Rodriguez.

Moreover, if the occupying borrower misses a mortgage payment, that blemish can go on your credit report, as the co-signer, as well—potentially damaging your credit score significantly.

According to data from the credit analysis firm FICO, someone with an excellent credit score—780 or above—could see it drop 90 to 110 points if mortgage payments are missed.

Another thing to consider: When you co-sign a mortgage, you’re adding that person’s debt to your own, reducing your own borrowing power. As a result, “Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, a real estate broker at Brooklyn-based House-n-Key Realty.

3. What are the risks of co-signing?

Real talk: When you co-sign a financial product—whether it be a mortgage, a car loan, or a credit card—you could get burned.

In fact, in a 2016 survey of 2,003 U.S. adults, 38% of co-signers said they had to pay a part of or the entire loan or credit card bill because the primary borrower failed to do so. Furthermore, 28% reported they suffered a drop in their credit score because the person they co-signed for paid late or not at all.

Most often, people co-sign mortgages for their friends or family—but co-signing inherently puts the relationship in jeopardy. Proof: Of respondents in the survey, 26% said the co-signing experience damaged the relationship with the person they had co-signed for.

4. How do I mitigate my risks?

The good news? There are several safeguards you can put in place to protect yourself as a co-signer.

First, make sure your name is put on the title of the home. That way, if your borrower can’t pay the mortgage, you have the power to sell the property.

Second, take steps to monitor your co-borrower’s mortgage payments. You can do this by setting up email and text alerts to let you know when mortgage payments are posted, or asking the mortgage lender to notify you if the borrower misses a mortgage payment.

This offers a nice protection, since every home loan agreement offers borrowers a grace period for late payments.

Typically, there’s a 15-day grace period, in which case you would have 14 days after the payment is due to help your co-signee pay the bill without incurring a late fee or taking a hit on your credit report, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.

You’ll also want to establish clear lines of communication between you and your co-signee—and make sure the person knows how to contact you if he or she has a problem with the mortgage.

5. Do I trust the borrower?

Before offering to become someone’s co-signer, ask yourself whether you truly trust the other person to be financially responsible for making the mortgage payments.

Pro tip: Past behavior is a good predictor of future behavior. If the person has had trouble making credit card payments or has a pattern of not meeting other financial obligations, he or she may not be responsible enough to be taking on a mortgage, especially one that has your name attached to it.

The bottom line

Co-signing a mortgage is serious business. You’re not just putting your name on a piece of paper—you’re putting your own finances, including your debt obligation and your credit score, at risk.

The post 5 Crucial Questions to Ask Before You Co-Sign a Mortgage appeared first on Real Estate News & Insights |®.

How to Calculate Property Tax Without Losing Your Marbles

October 15, 2019

how to calculate property tax

Aslan Alphan/iStock

Need to know how to estimate your property tax? You’ve come to the right place! Most people know that homeownership requires coughing up copious amounts of money. There’s your mortgage, of course, but the costs hardly end there. You will also have to pay property tax.

If you already own a home, you can look at how your tax is calculated on the most current property tax statement. If you’re considering buying a home, look on the real estate listing for assessment and tax information, or go to the county website to find out the annual property tax.

Be aware that property taxes can change. The assessed value of your house can go up or down, depending on the local real estate market. Your assessment can go up or down depending on changes you make to your house; for example, if you make additions to your property, or even build a new house on land. And the tax rate can change, depending on your local government.

Even though the government sends you a tax bill every year and tells you how much you owe in property taxes, it’s important to know how that tax is calculated.

How to calculate property tax

There are a number of factors that come into play when calculating property taxes, from your property’s assessed value to the mill levy (tax rate) in your area. Here’s how to calculate property tax so you don’t end up blindsided by this hefty homeowner expense.

What is a home’s fair market value?

The market value of a home is basically the amount a knowledgeable buyer would pay a knowledgeable seller for a property, assuming an arm’s-length transaction and no pressure on either party to buy or sell. When a property sells to an unrelated party, the sales price is generally assumed to be the fair value of the property.

What is a home’s assessed value?

One factor that affects your property taxes is how much your property is worth. You probably have a good understanding of your home’s market value—the amount of money a buyer would (hopefully) pay for your place. (You could also enter your address in a home value estimator to get a ballpark figure.)

Still, tax municipalities use a slightly different number; it’s called your home’s assessed value.

Tax assessors can calculate a home’s new assessed value as often as once per year. They also may adjust information when a property is sold, bought, built, or renovated, by examining the permits and paperwork filed with the local municipality.

They’ll look at basic features of your home (like the acreage, square footage, and number of bedrooms and bathrooms), the purchase price when it changes hands, and comparisons with similar properties nearby.

Sometimes a home’s assessed value will be strikingly similar to its fair market value—but that’s not always the case, particularly in heated markets. In general, you can expect your home’s assessed value to amount to about 80% to 90% of its market value. You can check your local assessor or municipality’s website, or call the tax office for a more exact figure for your home. You can also search by state, county, and ZIP code on

If you believe the assessor has placed too high a value on your home, you can challenge the calculation of your home’s value for tax purposes. You don’t need to hire someone to help you reduce your property tax bill. As a homeowner, you may be able to show how you determine that your assessed value is out of line.

What is taxable value?

The taxable value of your house is the value of the property according to your assessment, minus any adjustments such as exemption amounts.

What’s a mill levy?

In addition to knowing your home’s assessed value, you will need to know another number, known as a mill levy. That’s the tax assessment rate for real estate in your area. The tax rate varies greatly based on the public amenities offered and revenue required by local government. If you have a public school, police force, full-time fire department, desirable school districts, and plenty of playgrounds and parks, your property tax rates will be higher than a town without them. (Hey, you get what you’re taxed for!)

Your area’s property tax levy can be found on your local tax assessor or municipality website, and it’s typically represented as a percentage—like 4%. To estimate your real estate taxes, you merely multiply your home’s assessed value by the levy. So if your home is worth $200,000 and your property tax rate is 4%, you’ll pay about $8,000 in taxes per year.

Where to find property taxes

Thankfully, in many cases, you may not have to calculate your own property taxes. You can often find the exact amount (or a ballpark figure) you’ll pay on listings at®, or else you can enter a home’s location and price into an online home affordability calculator, which will not only estimate your yearly taxes but also how much you can anticipate paying for your mortgage, home insurance, and other expenses.

The post How to Calculate Property Tax Without Losing Your Marbles appeared first on Real Estate News & Insights |®.

Buying a House After Bankruptcy? How Long to Wait and What to Do

October 12, 2019

buying house after bankruptcy

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Securing a home loan and buying a house after bankruptcy may sound like an impossible feat. Blame it on all those Monopoly games, but bankruptcy has a very bad rap, painting the filer as someone who should never be loaned money.

The reality is that of the 800,000 Americans who file for bankruptcy every year, most are well-intentioned, responsible people. Life has thrown them a curveball, however, that has left them struggling to pay off their past debts.

Sometimes, filing for bankruptcy is the only way out of a crushing financial situation, and taking this step can really help cash-strapped individuals get back on their feet.

And yes, many go on to buy a home eventually, despite the challenging credit score that results from bankruptcy. But how? Being aware of what a lender expects after a bankruptcy will help you navigate the mortgage application process efficiently and effectively.

Here are the steps on buying a house after bankruptcy, and the top things you need to know.

Types of bankruptcy: The best and the worst

There are two ways to file: Chapter 7 bankruptcy and Chapter 13 bankruptcy. With Chapter 7 bankruptcy, filers are typically released from their obligation to pay back unsecured debt—think credit cards, medical bills, or loans extended without collateral.

With Chapter 13 bankruptcy, filers have to pay back their debt. However, the debt is reorganized and a new repayment schedule established that makes monthly payments more affordable.

Since Chapter 13 filers are still paying back their debts, mortgage lenders generally look more favorably on these consumers than those who file for Chapter 7, says David Carey, vice president and residential lending manager at New York’s Tompkins Mahopac Bank.

A bankruptcy attorney can help determine if Chapter 7 or Chapter 13 makes the most sense for your specific situation. Unfortunately, both Chapter 7 and Chapter 13 bankruptcies will adversely affect credit scores. But don’t give up, hopeful home buyer.

How long after bankruptcy should you wait before buying a house?

Most people applying for a loan will need to wait two years after bankruptcy before lenders will consider their loan application. That said, it could be up to a four-year ban, depending on the individual and type of loan. This is because lenders have different “seasoning” requirements, which is a specified amount of time that needs to pass.

Fannie Mae, for example, has a minimum two-year ban on borrowers who have filed for bankruptcy, says David Reiss, professor of law and academic programs director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

The FHA loan, on the other hand, has a minimum one-year ban in place after a bankruptcy. These bans, or seasoning periods, are typically shorter with government-backed loans (such as FHA or VA loans) than with conventional loans.

The time is measured starting from the date of discharge or dismissal of the bankruptcy action. Generally, the more time between debt discharge and the loan application, the less risky a once-bankrupt borrower looks in the eyes of a mortgage lender.

How to reestablish credit after bankruptcy

Once the bankruptcy process is over, reestablishing and maintaining creditworthiness is key to your financial health. Lenders will be looking for zero delinquencies postbankruptcy.

While you work to build new credit, don’t go overboard opening an extensive number of accounts, as this will work against you, advises Carey. Usually, opening just a couple of revolving credit lines and paying them in a timely manner over the course of 12 months helps to increase credit scores back to an acceptable level.

What to do before you apply for a mortgage

Before you apply for a mortgage loan, check your credit score by getting copies of your three main credit reports, which detail the financial transactions (and transgressions) from your past. You will want to check these credit reports for errors, such as a credit issue that you resolved but that is not reflected in your report.

“In some postbankruptcy cases, errors continue to report negatively on credit reports,” says Carey.

These mistakes will drag down your overall credit score and reduce your chances of getting approved for the mortgage. So if you spot mistakes on your credit reports, work with the credit bureaus to correct the information they include. This can boost your credit score significantly, and may even tip the scales on your home loan approval. Mortgage lenders want to see any movement from bad credit to good credit, so don’t leave any of your hard-earned progress on the table.

Buying a house after bankruptcy: Ways to woo a lender

To start the mortgage process, lenders require a detailed letter explaining why you needed to file for Chapter 7 or Chapter 13 in the first place. Ideally, the bankruptcy would have been caused by an extenuating circumstance beyond your control—such as the death of an income-contributing spouse, the loss of employment, or a serious illness.

In other words: A lender likes to see that you were hit with hard times that had a significant negative impact on your expenses or income, and made it impossible to meet your financial obligations.

What a lender won’t want to see is someone with a die-hard shopping habit or a lackadaisical attitude toward paying credit cards on time. If that’s you, you’ll have to prove you’ve changed.

Whatever the reason you filed for bankruptcy, lenders will need to properly document your extenuating circumstances, so be prepared to provide proof detailing your life event.

Medical bills, a doctor’s note, a death certificate, or severance paperwork are all acceptable evidence that prove to lenders that you are a safe bet worthy of a home loan.

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8 Mortifying Questions You’ll Be Asked When Applying for a Mortgage

October 8, 2019


If you need a mortgage to buy a home, rest assured: Prospective lenders will ask you a lot of questions. After all, loaning someone money is a risky proposition, so they’ll want some assurance you’ll pay them back!

So what questions might they ask you? Allow us to outline the most common queries during a consultation, and to tell you what constitutes a decent answer—and what doesn’t. That way, your mortgage pre-approval process won’t be derailed by any big surprises.

Ready? Make sure you have answers to these questions before you start the loan application process.

1. What is your credit score?

For starters, let’s look at your credit score—the numerical representation of how well you’ve paid off past debts. If you’re in the dark on what your credit score is, get your score for free at, or your full report at You may also be able to get a free score through your bank or credit union, or another financial institution.

Lenders typically offer the best interest rates to customers with the highest credit scores, generally 750 and above. Yes, you may get a loan without a good credit score. But you’ll pay higher interest rates if you do. Try to improve your score before you apply for a loan.

2. Do you have sufficient credit history?

A common misconception is that if you have a great credit score, you have the credit issue covered. Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage,” sees people who are proud of the fact they only have one credit card, which they hardly use, and a credit score of almost 800.

“It’s not just the score,” he says. “The whole purpose of the credit report is to have some sort of record that you have been able to establish credit and pay it back as agreed, reliably.” If you haven’t done that, lenders won’t be in a hurry to lend you money. You have what is known as “thin credit.”

If you only have one credit card, for example, you may not qualify for a prime loan with the lowest interest rates, regardless of your credit score. Your loan officer may recommend that you go out and get another credit card, or take out a small car loan, and come back when you have built a better track record of paying back debt.

3. How much is your countable income?

“Not everything you make necessarily counts,” warns Fleming. “It’s not unusual for someone to have this idea they make $200,000 per year, and an underwriter says they actually make $100,000 per year.”

The reason? A lender may not include any income that is sporadic, new, or for something that the lender determines isn’t a sure thing. Plus, ending a verifiable source of income you’ve had for years can also send up red flags, even if you have a new source of income to take its place.

Heather McRae, senior loan officer at Chicago Financial Services, Inc. in Chicago, IL, had one mortgage refinance borrower who retired during the loan approval process. Even though he had plenty of money from his pension and Social Security benefits, they had to wait a couple of months to document his new retirement income before he could get the loan.

Take-home lesson? Make sure your lender is aware of any recent changes to your income—not just the amount, but where it’s from.

4. Have you changed jobs recently?

People often move and buy a home at about the same time they change jobs. That can be a problem, especially if the new job compensates you in a way that’s different from the old one.

For example, say you were making an $80,000 base salary at your last job. You moved for a great job, where you get a $60,000 base salary, plus expected bonuses of $40,000, plus stock benefits. If you’re expecting the underwriter to count your salary as $100,000 or more, you’ll be disappointed. “If you don’t have a history to document that you have received that over two years, you can only use the lower base salary,” says McRae.

If you changed job fields, and your base pay stayed the same or improved, your loan approval may depend on the lender you are working with. Some lenders don’t care if you’ve even changed job fields completely, as long as you are a W-2 employee. Other lenders want you to stay in a new job field for one or two years first to establish yourself, before they’ll loan you money.

5. Do you have enough cash on hand?

Lenders expect you to have enough assets, such as cash and securities, to be able to pay for your down payment, inspections, and closing costs. An amount in reserve is important, too. The catch is that you probably won’t be able to count 100% of your assets for these purposes.

For example, say you have $20,000 in the bank, your parents have promised to give you $10,000 to help with the down payment, and you have $80,000 in your stock brokerage account. Sounds like you have $110,000 available to buy a house, right?

The lender won’t see it that way. They’ll count the $20,000, assuming you can show with bank statements showing that it’s been in your account for a while. The promise from your parents is less sure. The lender may want to see the money in your account, and get a signed letter from your parents stating that the money is a gift.

As for the $80,000 in your stock brokerage account, it may not be worth as much in the lender’s eyes as you think. Lenders often knock 25% to 35% off the value of a stock portfolio, according to Fleming. They assume selling off a stock portfolio and other securities will incur expenses. You may owe taxes on capital gains—they don’t know how much, so they’ll assume the worst.

Also, the stock market fluctuates, so if you have to cash in to buy a house, you could have to sell stock on a down day. If you need to sell stock to buy a house, and you are borderline on qualifying to have enough assets, consider cashing in before you apply for a loan.

What if you’re saving money in a shoebox under the bed? It doesn’t count. Put your money in the bank, and keep it there for at least a couple of months, so that it shows on your bank statements.

6. How much other debt do you have?

You could have a great income, plenty of cash, a high credit score, and still not qualify for a loan. The deal killer may be all the other monthly payments you have to make, from credit card companies to auto loans. You can even be derailed by back taxes, due to the Internal Revenue Service. Lenders compare your monthly debt payments to your income to determine whether they think you can handle your mortgage.

Tempted to go out and buy new furniture for your new house before the loan closes? Watch out—that added monthly expense can throw off your debt-to-income ratio, and ruin your chances of getting a loan. It’s a classic mistake.

7. What home are you hoping to buy?

You can’t control everything. For example, you could be trying to buy a condominium, and it turns out that the condo association isn’t viable, by underwriter’s standards. McRae says that sometimes the condo association doesn’t have enough insurance coverage, or other problems come up.

8. Are you single, married—or getting a divorce?

Lenders aren’t going to ask you how you’re getting along with your spouse. But they are interested if you are in the midst of a divorce, or if you have other major changes going on in your life that can affect your finances.

McRae had some clients who were getting a divorce in the middle of the transaction. The couple didn’t think they needed to mention this. They thought it wouldn’t make any difference, because they were still both on the loan and the divorce was amicable. However, the husband was obligated to pay alimony and child support. The underwriters had to charge the alimony and child support as expenses to the husband. Meanwhile, they couldn’t give the wife credit for those payments under underwriting guidelines, because she had not been receiving them for six months. In the end, it killed the deal. They couldn’t get the loan.

Bottom line? Make sure to keep your loan officer informed about what’s going on. You can do whatever you want after the loan closes, as long as you keep up your payments. But when in doubt, avoid making big changes to your life and financial situation before or during the loan approval process.

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5 Surprising Financial Lessons I Learned About Paying for My First Home

October 3, 2019


I pride myself on being pretty financially savvy—after all, I’m a personal finance writer. I’m well versed in best practices for saving and spending, the ins and outs of HSAs and IRAs, and the basics of investing.

But when it came time to buy my first house, I had to put my ego aside: I was way out of my depth as I navigated the world of mortgages, closing costs, and escrow.

While all of the Budgeting 101 basics still apply to purchasing a home—top tip: Don’t buy anything you can’t afford!—some aspects of the process can come as a surprise to first-time buyers.

Gearing up to buy a house of your own? Get acquainted with these five lessons that I learned the hard way before you start shopping. Then, you’ll be ahead of the curve when it comes time to make an offer on your ideal home.

1. Don’t be fooled by your mortgage pre-approval amount

One of the first steps on the road to homeownership was requesting a mortgage pre-approval letter from a mortgage lender. I was shocked when my husband and I received a letter with a much higher number than we had ever considered spending.

The lender thought we could afford a house that cost how much?!

I quickly learned that a pre-approval letter is just assurance from a lender that the buyer is in good financial standing to take on a mortgage of a certain size. Lenders evaluate your financial history to come up with a pre-approval amount. Don’t confuse that number, though, with your actual budget for buying a house. In other words, just because you’re pre-approved for up to, say, $300,000, doesn’t mean a $300,000 mortgage will fit in your budget.

For us, we knew we didn’t want to stretch ourselves thin with a heftier mortgage, even if we were technically approved to take one out.

2. Closing costs can add up—and be complicated

Closing costs include out-of-pocket expenses like title insurance, notary fees, and the cost of the deed—and they can add up quickly. So when we made an offer on our house, we decided to ask for a credit from the sellers toward our closing costs—a common practice in which, typically, the seller advances an amount in cash that’s then tacked on to the purchase price. But I was surprised when our Realtor® urged us not to ask for too much from the sellers at closing.

“Some loan programs only allow a certain percentage of the sale price to given to the buyer as a credit,” says Joe DiRosa, a real estate agent with RealtyTopia in Pennsylvania.

That means that if you’re offering $200,000 for a house and your lender only allows you to accept 2% in closing costs, you shouldn’t ask for $5,000—that would be $1,000 down the drain, since you can only accept up to $4,000 in credit. Before you make an offer, ask your lender if your loan institutes a limit on closing cost credits.

3. PMI isn’t actually the devil

Private mortgage insurance—PMI for short—is at once a blessing and a curse. Lenders typically require it of buyers who are putting down less than 20% on their mortgage. This puts homeownership within reach for more people, but it also means an additional monthly payment that doesn’t add to the new owner’s equity.

For that reason, PMI sometimes gets a bad rap—better to shell out the necessary down payment cash (if you can) than waste your money on insurance, right? But in some cases, it’s in your best interest to put less money down and pay the PMI.

That was the case for my husband and me. We decided to hold on to some of the cash we would have put toward a 20% down payment and use that money to renovate our home and pay off other debts with higher interest rates. Our PMI payment has been manageable—we pay about $75 a month—and it’s worth it to keep our money in our bank account, where we can use it for projects like replacing the roof, renovating bathrooms, and creating a master suite.

4. You might have to make escrow payments

“Escrow” was a foreign word to me before buying a house. (Confession: I still picture a crow every time I hear it.)

Because we took out a loan with PMI, we were required to pay into an escrow account for our property taxes and home insurance. Escrow simply refers to the separate account where that money is held; basically, our lender sets aside the money for taxes and insurance, which acts as a safety net to ensure that we sock away enough money for those expenses.

While it’s nice to know we’re saving enough for taxes and insurance by paying into escrow, it’s also frustrating for control freaks like my husband and me, who would rather manage our money ourselves—preferably by putting that cash into a high-yield savings account where it can accrue interest. We’re looking forward to canceling our escrow payments as soon as we’ve built up enough equity in our home to remove PMI.

5. You need to budget for surprises (and your own mistakes)

During our home inspection, the inspector ran the dishwasher to make sure it worked—all good. Then, the day after we moved in, we loaded the dishwasher, hit “Start”—and it was dead. After flicking the electrical circuits on and off to no avail, we finally accepted that we would need to replace the dishwasher sooner than we had bargained for.

Several hundred dollars later, we learned that dishwashers are required to have their own wall switch, per local code. It turned out the old dishwasher wasn’t broken after all—the switch was just turned off.

All we could do was laugh, too slap-happy and exhausted from renovating to beat ourselves up much about the mistake. At least we planned to replace the dishwasher sooner or later, and we had enough savings to endure the blow. But the incident was a reminder that costly surprises (and stupid mistakes) are inevitable when you’re new to homeownership—and even when you’re not.

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