I love passive income because it is money that you make without working. Examples of passive income are cash flow from rental properties, stock dividends, interest from loans, royalties, money from businesses, or other investments that you are not spending time on. A lot of people will argue that there is no true passive income because it takes some amount of work to create any type of passive income. Even the kid who inherits a billion dollars must do some work to not completely piss off their parents and become disowned. I agree that almost all passive income takes some work, but I still think the idea of passive income exists. To me, passive income is an investment or business that might take some front end work to set up, but once it is running, there is little to no work needed to keep the money coming in.
The great thing about passive income is it reduces stress because you know you don’t have to work all the time, it can allow you to be more aggressive with investments or business because you have something to fall back on, and it can help you live the lifestyle you want because you don’t have to worry about running out of money.
Why is passive income important?
A lot of people think someone is rich based on how much money they make per year. That is one way to judge if someone is rich, but if they lose their job, are they still rich? Did they have investments, or were they totally dependent on that income?
I think of someone as rich when they don’t have to work and can still live the lifestyle they want to live. They may continue to work because they love it or need a challenge, but they have passive income coming in that will pay for all of their expenses and then some.
I made a lot of money as a real estate agent selling foreclosures from 2007 to 2013. While I was making a lot of money, I was also stressed out. I did not have as much money in my bank accounts as I thought I should have. I was spending a lot, and things always cost more than you think they should. I knew I had to invest my money better, and I did by purchasing rental properties. I started to have passive income come into my accounts without working! Just the thought that my hard-earned money was now making me more money instead of wasting away reduced my stress. It also gave me the confidence to pursue my goals and more aggressive strategies because I had a safety net of passive income.
I also knew that if I built enough passive income, I would not have to work anymore. I could essentially retire knowing I would have a certain amount of money coming in every month, and that money would increase with inflation. I also knew that if I got sick or lost my income, I had money coming in to keep me going. It was not the end of the world.
When I have passive income, I do not have to worry about getting sick, missing work, or going on vacation.
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Why did I choose real estate?
I looked at many businesses and investments before choosing real estate. Yes, I was a real estate agent, and it may seem like the obvious choice, but I purchased my first rental property in 2010 right during the housing crash. Most real estate agents told me I was digging my own grave investing in rental properties.
I researched every investment I could because it was my money, and I wanted to make it grow as fast as possible. I did not want to take the easy way out. Real estate kept coming back as the number one choice for a number of reasons:
Cash flow
With every good rental property you buy, it should bring in a decent amount of cash flow or profit each month. I was seeing properties that would make me around a 15% cash-on-cash returns. That was a great return and really caught my eye.
Leverage
The cash-on-cash return is high on rental properties because you can leverage real estate fairly easily. That means I can get a loan for most of the purchase price. When buying an owner-occupied house, I can put as little as nothing down! On investment properties, you usually need at least 20% down, and that is what I was basing my 15% cash-on-cash return on. By using leverage, it increases your returns on the right properties.
Tax advantages
Real estate has some amazing tax advantages, like the tax-free gain on a personal house or the ability to depreciate a rental property. You can also sell a rental tax-free using a 1031 exchange or using an opportunity zone.
Buying below market
Another huge advantage to real estate is that you can buy properties below market value. A house could be worth $100,000, and I can buy that house for $60,000. It may need some work or none at all. It is not easy to find deals like that, but it is possible and a massive advantage when it comes to building wealth.
Is real estate really passive?
I hear all the time how people do not want to be real estate investors because they don’t want calls from the tenants at 2 .m. or they do not want to change out toilets. Guess what: I don’t want those things either, and I do not have to do those things. I have a property manager who handles all of that, and it leaves me time to do other more profitable things. Once I get a property set up, it is very passive.
While it is passive owning rentals after they are set up, it takes some time on the front end. I have to find the deal, which takes time. I might have to have repairs made to get the property rent ready, and I need to get financing lined up. All of these tasks take time. Once the property is ready to rent, I can hand it over to a property manager. In some cases, you may be able to find a property manager that will handle many of those things for you.
I will admit that using real estate for passive income can be more time consuming than investing in stocks or other investments. The reason I love real estate is that I make more money than investing in those asset classes because of the advantages I listed above.
How did passive income change my life?
I made a lot of money in real estate, but I felt stressed because no matter how much I made, I did not have much to show for it. When I bought rentals, I created instant net worth and passive income that would always be coming in. In fact, passive income allowed me to buy many things that I am passionate about, the big ones being exotic cars.
In 2014 ,I bought a Lamborghini Diablo, which had been a dream of mine since I was a kid. I felt comfortable buying the car because I had more than $5,000 a month coming in from rentals. That $5,000 a month was not enough for me to live on, but it provided a safety net, and coupled with my income, it allowed me to buy a dream and not feel bad about it. The car was well worth it and has helped my business in many ways, as well as doubling in value since I have owned it! I have since bought a few more cars: 1981 Aston Martin V8, 1998 Lotus Esprit V8, 1994 Supra 6 speed twin-turbo, and I had a couple of other cools ones before I bought the Diablo.
Conclusion
The great thing about passive income is that you make money when you sleep. I don’t have to constantly struggle to bring money in. My money works for me by making more money. If I keep investing that money I make, then the passive income grows and turns into a snowball that gets bigger and bigger. It can be tough saving the money to invest, and finding the right investments, but the effort is worth it!
The mere thought of filing for bankruptcy is enough to make anyone nervous. But in some cases, it really can be the best option for your financial situation. Even though it stays as a negative item on your credit report for up to ten years, bankruptcy often relieves the burden of overwhelming amounts of debt.
There are actually three different types of bankruptcy, and each one is designed to help people with specific needs. Read on to find out which type of bankruptcy you might be eligible for. We’ll also help you determine whether it really is the best option available.
What are the different types of bankruptcy?
In general, bankruptcy is the process of eliminating some or all of your debt, or in some cases, repaying it under different terms from your original agreements with your creditors.
It’s a very serious endeavor but can help alleviate your debt if you calculate that it’s unlikely to you’ll be able to repay everything throughout the coming years.
The two most common for individuals are Chapter 7 and Chapter 13. Chapter 11 is primarily used for businesses but can apply to individuals in some instances. Take a look at the other details that set them apart from each other.
Chapter 7
Chapter 7 bankruptcy is designed for individuals meeting certain income guidelines who can’t afford to repay their creditors. You must pass a means test in order to qualify. Then, instead of making payments, your personal property may be sold off to help settle your debts, including both secured and unsecured loans.
There are certain exemptions you can apply for in order to keep some things from being taken away. It all depends on which debts are delinquent. If your mortgage is headed towards foreclosure, you might only be able to delay the process through a Chapter 7 delinquency.
If you’re only delinquent on unsecured debt, like credit card debt or personal loans, then you can file for an exemption on major items like your home and car. That way they won’t be repossessed and auctioned off.
Eligible exemptions vary by state. Usually, there is a value assigned to your assets that are eligible for exemption. You may keep them as long as they are within that maximum value. For example, if your state has a $3,000 auto exemption and your car is only valued at $2,000 then you get to keep it.
Most places also allow you to subtract any outstanding loan amount to put towards the exemption. So in the situation above, if your car is valued at $6,000 but you have $3,000 left on your car loan then you’re still within the exemption limit.
Chapter 7 is the fastest option to go through, lasting just between three and six months. It’s also usually the cheapest option in terms of legal fees. However, keep in mind that you’ll likely have to pay your attorney’s fees upfront if you choose this option.
Chapter 13
A chapter 13 bankruptcy is the standard option when you make too much money to qualify for a Chapter 7 bankruptcy. The benefit is that you get to keep your property but instead repay your creditors over a three to five year period. Your repayment plan depends on a number of variables.
All administrative fees, priority debts (like back taxes, alimony, and child support), and secured debts must be paid back in full over the repayment period. These must be paid back if you want to keep the property, such as your house or car.
The amount you’ll have to repay on your unsecured debts can vary drastically. It depends on the amount of disposable income you have, the value of any nonexempt property, and the length of your repayment plan.
How long your plan lasts is actually determined by the amount of money you earn and is based on income standards for your state. For example, if you make more than the median monthly income, you must repay your debts for a full five years.
If you make less than that amount, you may be able to reduce your repayment period to as little as three years. You can enter your financial information into a Chapter 13 bankruptcy calculator for an estimate of what your monthly payments might look like in this situation.
To qualify for Chapter 13, your debts must be under predetermined maximums. For unsecured debt, your total may not surpass $1,149,525 and your secured debt may not surpass $383,175. However, unlike Chapter 7, you may include overdue mortgage payments to avoid foreclosure.
Chapter 11
Chapter 11 bankruptcy is usually associated with companies. However, it can also be an option for individuals, especially if their debt levels exceed the Chapter 13 limits. A lot of the characteristics of Chapter 11 and Chapter 13 are the same, such as saving secured property from being repossessed.
Having to pay back priority debts in full and having a higher income bracket than a Chapter 7 are also common characteristics. However, unlike a Chapter 13, you must make repayment for the entire five years with a Chapter 11. There is no option to pay for just three years, no matter where you live or how much you make.
Another reason to pick Chapter 11 is if you are a small business owner or own real estate properties. Rather than losing your business or your income properties, you get to restructure your debt and catch up on payments while still operating your business, whether it’s as a CEO or as a landlord.
One downside to be aware of with a Chapter 11 bankruptcy is that it’s usually the most expensive option. However, you can pay your legal fees over time so you don’t have to worry about spiraling back into debt.
What are the long term effects of bankruptcy?
It should come as no surprise that going through a bankruptcy causes your credit score to plummet. Depending on what else is on your report, your score could drop anywhere between 160 and 220 points.
Those effects linger. A Chapter 13 bankruptcy stays on your credit report for seven years. And a Chapter 7 remains there for as many as ten years. Their effects on your credit score do, however, begin to diminish as time goes by.
You’ll probably have trouble getting access to credit immediately following your bankruptcy. Eventually, you’ll start getting approved for loans and credit cards, but your interest rates are likely to be extremely high.
A new mortgage will probably be out of reach for at least five to seven years from the time you file for bankruptcy. Additionally, any employer performing a credit check can see all of these items on your credit report.
Government agencies can’t legally discriminate against you because of your bankruptcy, but there is no specific rule for privately-owned companies. It could be particularly damaging if the job you’re applying for deals with money or any type of financials. No matter where you work, though, you can’t be fired from a current employer because of a bankruptcy.
Should I file bankruptcy?
There’s no correct answer to this question and it’s ultimately something you’ll need to decide on your own. However, there are a few things you can do to make sure you’re making the best decision possible. Start off by finding a licensed credit counselor to help analyze your individual situation. They’ll help you review the guidelines for each type of bankruptcy and determine if you’re even eligible.
At first glance, filing for bankruptcy may seem like a great way to settle your debts and move on with your life. Unfortunately, the process isn’t as simple as filling out a form. The effects of bankruptcy will stick with you for years.
As you begin the evaluation process of whether or not bankruptcy is right for you, there are a number of considerations to take into account. This overview will get you thinking about your situation. It will also point you in the right direction for more in-depth resources when you need them.
Is your current status temporary or permanent?
You should also look at your expected future and compare your potential earnings to your amounts of debt. If you don’t realistically see how you’ll ever pay off that debt, then bankruptcy may be a wise option. Also, understand the types of debt you owe. Tax payments, student loans, and liens on your mortgage or car will not be discharged even when you file for bankruptcy.
Once you figure out which specific options are available to you, it’s time to contact a bankruptcy attorney. You’re certainly able to represent yourself, but the process is complicated. It’s usually best to have a professional work on the case on your behalf. Just be sure to interview a few different lawyers to get multiple opinions and prices to compare.
Evaluate Your Situation
Even when your bankruptcy is underway, it’s smart to spend some time evaluating how you got there. Was it due to a one-time financial hardship, like a long bout of unemployment? If that’s the case, then you know that you have a brighter future ahead of you with the promise of work and steady income to pay your bills.
However, if you’re on the path to bankruptcy because of reckless spending, you really need to look inward and address your overspending habits. Otherwise, it becomes too easy to put yourself in the same situation a few years down the road. Use your bankruptcy as a second chance to start fresh with a clean financial slate.
Why Consider Bankruptcy?
If you’re considering bankruptcy, then you’re most likely feeling overburdened with debt and other financial obligations. You probably have a tough time paying your bills each month and may even worry how you’ll ever pay off some of your outstanding balances.
If you’ve already exhausted your other options, like working overtime and cutting back on your non-necessities, it might be time to seriously think about potentially declaring bankruptcy. Some signs that you might be ready include:
Increased interest rates because of late payments or bad credit
Using credit cards for daily purchases without paying off the balance each month
Already downsized things like house, car, and other assets
Working multiple shifts or jobs
Paying off debt with retirement funds
Wages are being garnished
If one or more of these situations apply to you, then you should probably continue your research into bankruptcy. If not, try finding other ways to improve your financial situation. For example, you could rework your budget if there are easy places to cut back on.
You can also try negotiating with your lenders, particularly if you’re experiencing just a short-term setback. Most lenders are willing to work with you. They would much rather set up a new payment plan than have the debt discharged or settled through bankruptcy.
Understanding Bankruptcy and Alternatives
If you want to file for bankruptcy it takes careful planning. Due to the long-term legal and financial consequences of bankruptcy, there are many rules that must be followed before you’re eligible.
For example, it’s necessary to show the courts you have obtained credit counseling and considered alternatives like debt settlement or debt consolidation. Bankruptcy is controlled exclusively by the federal judicial system, which strongly recommends hiring an attorney before attempting to file.
If you need help finding a bankruptcy lawyer contact the American Bar Association. They offer free legal advice and you may qualify for free legal services if you are unable to afford an attorney.
Creating a Checklist to Avoid Dismissal
Before you file for bankruptcy, there are a number of important questions you should ask yourself. There are also several key steps that you need to take. First, it’s necessary to ask yourself if you really need to file for bankruptcy.
If you don’t, you probably won’t be approved anyway. You also need to calculate income, expenses and assets, find a trustworthy attorney, and select a credit counseling program.
It’s helpful to be methodical and to use a checklist. Failure to take the right steps and find the right credit counseling could result in more wasted money and a bankruptcy dismissal where they throw out the case.
Reasons to Delay Bankruptcy
Even if bankruptcy is the best choice for you, there may be some situations where it’s smart to delay the process so you can maximize your benefits. First, if you had a high income within the last six months that no longer applies to your situation, then you might want to wait.
That’s because the court weighs your last six months of income to determine your eligibility for Chapter 7. If you had a nice monthly salary a few months ago but have been laid off since then, that means test isn’t going to reflect your current situation accurately.
Another reason to delay bankruptcy is if you are anticipating an upcoming major debt. New debt isn’t allowed to be discharged once you file for bankruptcy.
So, for example, if you’re about to have a major medical surgery, you might consider waiting until it’s over to include the medical bills as part of your bankruptcy plan. Talk to a professional to see the eligibility requirements. Luxury items charged right before bankruptcy, for example, likely won’t be included as part of your debt discharge.
Changes in Bankruptcy Law
Before getting started, it’s important to note the changes that went into effect in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). While the changes don’t affect some people applying for bankruptcy, they may affect others.
The law requires mandatory credit counseling to make sure you fully understand the consequences of declaring bankruptcy. It also created stricter eligibility requirements for Chapter 7 bankruptcies. For Chapter 13 bankruptcies, the law requires tax returns and proof of income.
An informed decision begins with understanding the law, the bankruptcy process, and what has changed. It’s important to better understand these changes before you make any final decisions.
Filing Under Chapter 7 or Chapter 13
Understanding how bankruptcy works means understanding the process and laws related to Chapters 7 and 13 of the Bankruptcy Code. Depending on the details of your situation, you might be eligible to file under Chapter 7 or Chapter 13. Which route you choose has a lot to do with your income and what assets you want to keep.
Your debts can either be resolved quickly or over a several-year period. It’s helpful to read up on in-depth frequently asked questions related to each route.
Calculating Chapter 7 Means
To have all your unsecured debts completely eliminated under Chapter 7, you must qualify under the Chapter 7 means test. Using your personal information, or a basic estimate, an online calculator can help determine this for you. When filing, you must also fill out an appropriate form in which you enter your income, expense information, and data from the Census Bureau and IRS.
If you don’t meet the income level requirements to file for Chapter 7, you can still file for Chapter 13. A Chapter 13 will settle many of your debts after you successfully complete a three to five-year repayment program.
Qualifying and Qualifying Debts
Your debts qualify for bankruptcy relief when you can prove you are unable to pay them, but a great deal depends on your situation and which chapter you are filing under. Debts can be either unsecured or secured. Secured debts include mortgages, cars, and debts related to a property you’re still paying for.
Unsecured debts include credit card debt, bills, collections, judgments, and unsecured loans. It’s important to know which debts qualify for bankruptcy. But, it’s even more important to know whether or not your situation makes you eligible for this major step. To determine this, a full financial assessment is necessary. You can start by reading more about debts that qualify.
Defaulting on a Student Loan
If you have defaulted on a student loan, there are several options open you. Bankruptcy is one of them, but if your goal is to have a student loan discharged under Chapter 7, this can very difficult.
Nevertheless, taking certain steps as soon as possible can help prevent wage garnishment. Knowing your options can help you make the best choice before matters become more difficult. Under Chapter 13, your defaulted loan can be consolidated with your other bills. This will give you a better payment plan or a temporary reprieve from making payments.
If you have a federal student loan, check out your repayment options, especially if you are facing financial hardship. Otherwise, read more to figure out how to pull yourself out of student loan default.
What Assets You Can Keep During Bankruptcy
Depending on how you file for bankruptcy, there are certain assets you can keep. Different states have different exemptions, and in certain states, you can choose between state and federal bankruptcy exemptions.
If you need to have debts discharged, are out of work, and cannot afford a repayment plan, some assets might be lost. In most cases, however, people who file for bankruptcy can keep their homes and cars and much of what they own while they repay their debts under a modified plan. It all depends on your unique circumstances and how you file.
Get a FREE Credit Evaluation Before You File Bankruptcy
A bankruptcy can affect your credit for 7 to 10 years and should be considered a last resort option when all other options have failed. Many times people file bankruptcy when it is completely unnecessary. A credit professional can help you fix your credit and deal with your creditors so you can avoid filing for bankruptcy.
Before filing bankruptcy, talk to a credit specialist:
Call 1 (800) 220-0084 for a FREE Credit Consultation with a paralegal.
If you’re buying a home, one question you might wonder is this: Is home insurance required when you own a house?
In many cases, homeowners insurance is indeed mandatory—and even in cases where it isn’t absolutely necessary, it’s still a good idea. To help you understand why, we’ve put together this Home Buyer’s Guide to Home Insurance, which will help walk you through what you need to know from beginning to end.
In this first article, we’ll introduce you to what homeowners insurance is, why it’s often essential, and what can go wrong if you don’t have it.
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What is homeowners insurance?
With home insurance, as with other types of coverage (including health insurance), you pay a relatively small amount of money either monthly or annually in exchange for the promise that your provider will help you pay for unexpected costs you might incur as a homeowner.
What can go wrong? So much, including natural disasters, fires, crimes, accidents, and other emergencies, many of which can be expensive to fix. Without home insurance, you run the risk of getting stuck with a bill that could be in the tens of thousands of dollars. Home insurance offers protection and peace of mind that you won’t get hit with expenses that might be hard to pay on your own.
Why you need home insurance with a mortgage
If you need a mortgage on your home, most lenders will require you to get home insurance before they approve your loan and close the deal.
The reason: By loaning you money for the house, lenders are also investing in your property. If this investment suddenly plummets in value—since, say, a tornado turned it into a pile of rubble—it’s in your lender’s interests for you to have a home insurance plan that will rebuild and restore what you (and your lender) have lost.
“Homeowners insurance is typically required by a mortgage company,” says Brian Rubenstein, senior director for Ally Home. “A lender wants to protect the financial investment they made in your home.”
When to get homeowners insurance
At closing, most mortgage lenders will need you to show proof that you have an insurance policy already in place—even though you don’t officially own the home yet! This proof is known as an insurance binder, and serves as a temporary agreement between you and the insurance company that becomes permanent once you officially close on the home.
In fact, most lenders will want to see an insurance binder at least a few days before closing. As such, you’ll want to start shopping for insurance a few weeks before your closing date, so you have time to compare policies and find the right insurance company for you.
Do you need homeowners insurance without a mortgage?
Now, what if you don’t have a mortgage? Technically speaking, no, you’re not required to have homeowners insurance. But then the question becomes “Should you pay for home insurance?” The answer is still a resounding yes.
“Even if you don’t have a mortgage, home insurance protects the investment you’ve made in your house,” says Amy Danise, chief insurance analyst at Forbes Advisor.
“Think of the worst-case scenario, because that’s really what insurance is for: If your house burned down or was destroyed by a tornado, would you suffer financially?”
Reasons to get home insurance: What home insurance covers
If you don’t have homeowners insurance, you could be in for a rude awakening if disaster strikes and you need to pay engineers, contractors, electricians, masons, painters, roofers, and other highly specialized (read: expensive) professionals to repair the damage to your house.
According to the Insurance Information Institute, about 1 in 20 insured homes will file a claim each year. Meanwhile, data from the Insurance Research Council finds that, on average, insurance companies pay out about $8,787 per claim to help defray homeowners’ costs. Below are some of the most common and expensive insurance claims homeowners experience.
Wind and hail: Wind and hail damage is the most frequent reason why homeowners file insurance claims. Every year, 1 in 40 insured homeowners files claims related to wind and hail, with claims paying out an average of $11,200.
House fire or lightning strikes: Every year, about 1 in 350 insured homeowners files claims due to fire or lightning. These accidents are also among the most costly to repair, with claim payments averaging $11,971. Furthermore, lightning strikes are becoming more expensive. Why? Because our homes are rigged with an increasing number of electronic systems like smart home technologies, which can go haywire when struck by lightning.
Water damage or freezing water: About 1 in 50 insured homeowners files a property damage claim caused by water damage (like a leaky roof) or freezing water (burst pipes) each year. The claim payments average $10,849.
Theft: About 1 in 400 insured homeowners files claims due to theft every year, with claims paying an average of $4,391.
Personal injuries damage: In addition to covering your home and belongings, home insurance often includes liability coverage. This means that if a visitor gets hurt on your property, her medical bills should be covered by your home insurance company. About 1 in 900 insured homeowners files claims related to bodily injury every year. This injury could happen inside your home or, in some cases, elsewhere. For instance, if your dog bites someone on your property or even on the street or down the block, that is typically covered by your home insurance. The reason: Although we all know that dogs are members of our family, pets are considered property in legal terms. As such, any damage they inflict on others is often covered by insurance, wherever the incident happens. And good thing, too, since the average claim to cover the injured party’s medical bills hovers around $45,000.
All that said, what exactly is covered under a home insurance policy—and what you’ll pay for it—varies by provider. As such, it’s important to shop around and understand your options.
So how much does home insurance cost, and how much do you need? We’ll cover that in future installments of this guide. Stay tuned!
It all starts with a plan. Get tips to budget, save and achieve your goals.
If you feel a little out of control of your finances, join the club.
In a 2015 NerdWallet survey, roughly one in four consumers said they were at least sometimes surprised by their bills, and households reported spending an average of $6,658 on interest payments every year—or 9 percent of average U.S. household income.
The good news is there are a few time-tested ways to get your finances in order. Here are five steps anyone can take to get on track:
1. Create a budget
Tracking your money isn’t always easy, but it’s the simplest way to lift the veil on where your cash is going. Knowing your spending habits will help you determine if they align with your financial or personal goals and make it easier to create a budget to bridge the gap. For example, if you find your social habits are consuming too much of your disposable income, impose a cap on expensive nights out (maybe go with dinner or a movie) and make every effort to stick to it. Start by taking inventory of your income and expenses, and then take a closer look at spending by category.
2. Save more money
Resolutions to save more money are one thing; following through on them is another. But your savings goals might be easier to tackle than you think. Start by narrowing your focus and setting a goal for the amount of money you want to save each month, or the amount you wish to have in a savings account by the end of the year. Then find a few small changes to your daily routine that could boost your savings. Pack lunch a few times a week. Cancel a subscription service you rarely use. Try to be more conscious of your water and electricity use at home. Whatever it is, direct the savings into an account where it can sit untouched.
3. Automate your finances
Automating your savings by scheduling monthly transfers to a savings or investment account is a reliable way to make sure you stick to your plan. Automation can start with your paycheck. More likely than not, your employer offers direct deposit, which electronically transfers your paycheck to the account or accounts of your choosing. Try depositing a portion of your paycheck straight into a savings account (you won’t have time to miss it if you avoid a pit stop in checking). You can also sign up for automatic bill pay, which can help you avoid late fees.
4. Pay off debt
Once you’ve gained some money momentum, commit to paying down your debt. Start with the three steps above—budgeting, saving and automating. Know where your money goes, find a way to save a little more of it and then put the extra toward your highest-interest loan. Keep in mind that you may want to keep some cash in a savings account as an emergency fund so you can cover unexpected expenses without borrowing.
5. Save for long-term goals
Saving early for long-term goals—retirement, a child’s education or buying a house—is a savvy financial decision. Even if you can only put aside a little money now, the sooner you start, the longer your money can grow with compound interest. Depending on your goal, look into opening a retirement account, savings account or Certificate of Deposit (CD) to hold your savings.
Owning real estate is expensive. Even for those with a solid savings account and a comfortable salary, it’s unlikely that you’ll be able to simply buy a home outright. That’s why most people, when they decide to invest in property and purchase a home, decide to take out a mortgage loan.
You’ve probably heard of mortgages at various points throughout your life, but you may not have ever arrived at answers to the questions, “what is a conventional loan?” or “how do mortgages work?” Don’t worry: we’re here to make it clear. Let’s start with a simple definition.
What is a conventional loan?
A conventional home loan is a large sum of money lent to a borrower by a bank, credit union, or lending agency—often referred to as a conventional mortgage when the loan is used to purchase property. The term conventional distinguishes this kind of financial product from other types of loan, like a jumbo loan, a VA loan, or an FHA loan.
In this article, we’ll walk you through the conventional loan basics you need to know to start your search with confidence. We’ve also included information on how to qualify for a mortgage and where to start looking for one when the time is right.
How do conventional loans work?
Conventional loans work like this: the bank (or credit union or lending agency) purchases property on your behalf and turns the title over to you—however, you promise to pay back the lender with interest.
Interest is the percentage rate you pay the bank for the trouble of lending you money, and it’s how the bank makes money from having lent you such a large sum. Interest rates are either fixed or adjustable; in the latter case, they typically change once per year depending on the state of the economy. The interest rate you receive on a conventional loan will also vary based on your own personal financial profile (more on that in a bit).
Interest rates and qualifications for a mortgage can vary significantly across the wide range of home loan products available to consumers, but conventional home loan terms tend to fall into a narrower set of categories. One distinction you’ll find between two types of mortgage products is conforming vs nonconforming loans.
Conventional mortgages are typically lent out with 15 or 30 year repayment periods; the one that’s right for you depends on your personal finances, your income, and the interest rate you can secure.
Conforming vs nonconforming
In the US, there are two federally run institutions that oversee a large portion of mortgage lending: Fannie Mae and Freddie Mac. The important takeaway is that conforming loans abide by lending standards put in place by Fannie Mae and Freddie Mac. Most importantly, these limits determine the possible size of the loan; In 2020, the conforming loan limit for a single-family home is $510,400. (Limites are higher in Hawaii, Alaska, Guam, and the US Virgin Islands.)
Nonconforming loans, sometimes called jumbo loansexceed these borrowing amounts. Nonconforming loans can vary more in their limits, rules, and conditions. Because they present a larger risk to lenders, they tend to come with higher interest rates. Non-conforming loans are not necessarily risky by default—though the Consumer Financial Protection Bureau warns they sometimes can be—but it’s still wise to read the fine print when shopping, and be sure to shop around before committing to any lender.
If you’re curious whether the homes you are interested in can be financed with a conforming loan, you can read more about the 2020 Federal Housing Finance Agency guidelines on FHFA.gov.
Who qualifies for a conventional loan?
Conventional home loans are more accessible to those with middle- to high-income, as they often necessitate a down payment and favorable financial profiles in order to secure a reasonable rate. This distinguishes them from government-backed loans, such as FHA loans, VA loans, and other products that are aimed at people with lower incomes, and make purchasing homes accessible to them.
In general, there are three areas that lenders care most about when assessing an applicant for a conventional loan: credit score, debt-to-income ratio, and down payment. Let’s take a look at each one of those qualifying criteria and what a lender might look for in a loan applicant.
Credit score
You may have often heard about people who want to improve their credit, or who want to gain access to certain financial benefits due to having good credit. Your credit score is essentially a measure of your trustworthiness as a borrower. It’s based on your past abilities to consistently pay off debts in a timely manner, as well as other factors like the number of accounts you have open. This includes debts like:
In fact, one reason many people work to improve their credit scores is to gain more favorable terms on a home loan they hope to apply for in the future. Credit scores are measured using a few different metrics. Two of the most common credit reports pulled by lenders are FICO and VantageScore. Both of these are measured from 300 to 850, with a score of 300 representing a very dubious borrowing history (likely with many late payments and defaults), and a score of 850 representing a strong and trustworthy history of borrowing.
Having high credit can mean the difference between a massive interest rate and one that’s much easier to manage. If you can, it’s smart to work on improving your credit before you seriously consider applying for a mortgage.
Debt-to-income ratio
The next mortgage lender consideration is your debt-to-income (DTI) ratio. This ratio is pretty much exactly what it sounds like: the total amount of money you spend on debt in a month divided by the amount of money that you bring in. Lenders consider this metric important because it indicates how well you may be able to keep up with payments. If your ratio is too high, it may suggest that there will be strain on your finances when adding a mortgage payment to the mix.
Check out the graphic below for instructions on how to calculate your own debt-to-income ratio.
If your DTI is too high, it may be worth taking steps to lower it before you apply for a conventional loan. This can be done by asking for a raise at work, following a debt repayment strategy, or consolidating outstanding debts to lower monthly payments. Waiting might feel frustrating, but facing a high interest rate for years or decades down the road will be more of a hassle in the long term.
Down payment
Your down payment is another significant factor that lenders closely consider when determining your eligibility for a conventional loan and the interest rate attached to it. A down payment is just a large lump-sum of money that you pay up front; it’s a percentage of the total cost of the home. For example, a 20% down payment on a home worth $500,000 would be $100,000; the remainder of the price could be financed through a conventional mortgage loan.
Many lenders may be more willing to approve you for a loan with a favorable interest rate if you’re able to put down a larger down payment.
You may have heard that you need a 20% down payment in order to afford a home. The average house costs around $250,000 according to Zillow, so it’s understandable if you don’t have $50,000 on hand. While that 20% number is definitely still a great option if you can comfortably afford it, you don’t need to panic if you don’t have that kind of cash laying around. Some lenders may allow you to make a down payment as low as 3%.
However, it’s important to note that if you do make such a low down payment, you may have to purchase private mortgage insurance,or PMI. The cost of PMI is added to your monthly mortgage payments, usually until you’ve paid 20% or more of the balance on the loan. For this reason, it’s generally a good idea to put 20% down if you can; this way, you wave PMI fees, lowering your monthly payments.
How to apply for a conventional loan
Applying for a conventional loan can be a nerve-racking process, but by making the right preparations and taking the right steps, it’s totally doable. If you’re considering applying for a conventional loan in the near future, here are some steps that you may want to take.
Consider your financial profile
Before you start seriously inquiring about a mortgage, it’s smart to get your personal finances in the best shape you can. That means repairing bad credit if your score is less than ideal, paying down existing debts and working on increasing your monthly income, and saving for a down payment as large as you can comfortably make.
Research lenders
From local credit unions, to large multinational banks, and consumer-friendly lending agencies to less-than-reputable ones, there are tons of places where you might apply for a mortgage. Some offer more preferable terms than others, and some make it easier to apply—but might come with greater risk.
These are all factors you should consider as you seek out the right lender for your mortgage. It’s smart to compare several lenders before you settle on the right fit for your needs.
Apply for your mortgage
Once you’ve decided on which lender best suits your needs, you can apply for your mortgage. At this point, your house hunt can begin! The application process can take some time—sometimes more than a month—and involves heavy documentation so it’s smart to start this early, preferably before you’ve started house hunting in earnest.
Conventional home loans can feel confusing and stressful, especially because there is so much money at stake. However, by learning the ins and outs of mortgages prior to applying, you can give yourself a leg up in the game, and the resources you need to find the financial product that’s right for you.
The Burnout generation—this is the nickname that has been given to millennials as they seek financial freedom from all of their debts. Millennials earned this nickname on account of being so generally anxious and overworked that just the thought of making a phone call to deal with student loan debt can seem crippling. Looking over a credit card statement is oftentimes a daunting and frightening task.
But what are the real reasons behind the debt that millennials are experiencing and how can they navigate through it? In the below sections, we will discuss the main causes of millennials and debt and ways of getting rid of it.
Average debt for millennials
A study done by Northwestern Mutual’s 2019 Planning & Progress Study found that the average debt for millennials is $27,900. While most people think that the bulk of these personal debts comes from student loans, it actually comes from credit card debt.
A lot of financial experts attribute this circumstance to the trend of millennials not wanting to sacrifice their lifestyle habits even though they have student loans and other bills to pay off. This is a particularly troubling phenomenon for a generation so young (the survey polled people ages 23 to 38) because it means that they are likely unable to be saving money for retirement.
A study done by the Pew Research Center found that while Americans are technically earning heftier paychecks, the purchasing power of those checks is about the same as it was 40 years ago. In other words, day-to-day costs are getting more expensive while wages are generally failing to keep up.
Student loans are another factor of millennial debt, of course, with $497.6 billion in student loan debt looming over the heads of about 15.1 million borrowers. This turns out to be about $33,000 per borrower.
The overall costs of college has risen over the years and with it, the amount of money being borrowed to pay for it all. It’s important to keep in mind that these numbers only reflect the students who have completed college and owe money for their student loans. This does not include those who did not finish school, but may still be responsible for some student loan debt.
Effects of debt on millennials
Recent psychological research shone some light on how income and debt impact our mental state. The studies have shown that the amount of money we are making per paycheck can’t fully make us happy as long as we are in debt.
Further research and surveying has even implied that acquiring debt can actually take away from the happy, accomplished feelings that people get from finishing college.
Student debt is also one of the main reasons why millennials can’t buy homes.
How millennials can get out of debt
Looking at your overall debt balance and trying to come up with a way to pay it all back can seem like a daunting task, but there are a few ways that you can help yourself get back on track such as:
Getting rid of student loans: Depending on your financial situation and lifestyle, it might seem impossible to pay off your student loans. But a lot of millennials are eligible for a payback plan that is based off of your current income. This could benefit those who want to make strides toward paying off their loans but need a more realistic plan until they’re able to afford more.
Depending on your profession, you may also be able to apply for government student loan forgiveness. Both of these are excellent options to explore if you are struggling with student loan debt.
Finding a workable budget: If it’s credit card debt that you are dealing with, sticking to a simple budget is your best bet. Try to avoid using credit cards when possible and do your best to live within your means. Take the time out to create a traditional budget using pen and paper or try using an online budgeting platform or mobile app.
Check out our page on paying off credit card debt fast for more detailed information on some tried and true methods.
Other considerations: There are other creative ways that you can find solutions to all of your millennial money struggles. For example, if the company you are working for doesn’t offer a traditional 401(k) plan, consider setting up an IRA or Traditional IRA. You can arrange to make automatic monthly contributions and invest larger amounts whenever possible.
Look for other areas in your life where you can afford to cut costs. Perhaps you can take public transportation to work instead of driving a car. Consider getting rid of your cable plan and sticking with cheaper forms of entertainment like Netflix or Hulu.
In today’s ever-consuming world, being a millennial is rough, but with the right planning and patience, reaching financial health is manageable.
Thoughtful spending (and saving) is the best way to get the most benefit from your bonus.
A bonus at work is not a sure thing. But landing one can be a great, great thing. Sometimes the only trouble is knowing what to do with your year-end bonus. Fancy new bag? Weekend getaway? Finally getting that emergency fund started? All smart uses for a year-end bonus, depending on your situation.
Employers are projected to dish out modestly larger discretionary bonuses in 2019, according to a survey by Willis Towers Watson, a global advisory, broking and solutions company. A discretionary bonus is typically awarded for special projects or one-time achievements. According to the survey, discretionary bonuses will average 5.9 percent of salary for exempt employees in 2019, which is slightly larger than companies budgeted for in 2018.
That means figuring out what to do with your year-end bonus is a question you may well have to answer as you succeed at work. Your best move is to plan in advance for any extra cash that could come your way.
Whether it’s a year-end perk or a recurring reward, here are some important ways to think about and use your bonus:
1. Understand your employer’s bonus structure
A work bonus is extra pay that an employee receives in addition to a salary and is typically awarded for successful individual or team performance. The timing of awarding bonuses and their structure can vary by industry, company and even department.
Before you can decide what to do with your year-end bonus, you’ll need to understand how and when people earn bonuses at your company and whether you are eligible to receive one, says Lance Cothern, founder of the financial blog Money Manifesto. While some employers pay bonuses to all employees when the company reaches its goals, other companies base the rewards on individual performance, or a combination of both. Your employee policy handbook should include this information, Cothern says. If not, consider asking your boss or someone from your human resources department for more information—including when bonuses are determined and paid out.
However bonuses work at your job, don’t count on one as part of your annual income. Bonus amounts can change from year to year, and sometimes they don’t happen at all.
“You don’t want to get yourself into a position where if you don’t get a bonus, you are in a financial tough spot,” says David Weliver, publisher of the independent financial site Money Under 30.
2. Remember that it’s not a lottery ticket
When deciding what to do with your year-end bonus, be careful not to treat it as if you won the lottery or got a prize that you weren’t expecting, Weliver says.
Turns out that people are more likely to spend money framed as a windfall (a large amount of money won or received unexpectedly) and to save money framed as a reimbursement, according to a study published in the Journal of Behavioral Decision Making. The bottom line? When money feels like an addition to your bank account, you’re more likely to feel like you can spend it. On the other hand, you’re more apt to hang onto money that feels like compensation.
To figure out what to do with your year-end bonus, “treat it as earned income,” Weliver says, “because it is. You worked for that bonus.”
3. Avoid frugal fatigue
After the Great Recession, the National Foundation for Credit Counseling popularized the phrase “frugal fatigue”—a tiredness over pinching pennies that’s still commonly felt by anyone on a budget. Smart uses for a year-end bonus can help alleviate some of this financial weariness.
People who feel “frugal fatigue” most strongly are the least likely to stick to good spending habits when their financial circumstances improve, Weliver says. Similarly, young people who are dealing with student loans and credit card balances and focused on getting out of debt as fast as possible can actually get burned out if they don’t treat themselves once in a while.
Enter: Your bonus. Smart uses for a year-end bonus may include spending some of it on yourself, some of it on bills and other financial obligations and some of it to save or pay off debt, Weliver says.
To start, “It’s a good idea to take between 10 to 25 percent of it and use that for yourself,” he says. “Positive reinforcement that you can enjoy a little bit of your money makes it possible to keep working hard.”
“You don’t want to get yourself into a position where if you don’t get a bonus, you are in a financial tough spot.”
4. Make a financial plan
After setting aside funds for a small treat, you can use the remainder of a work bonus as an opportunity to meet your larger financial goals.
Financial plans are extremely important when it comes to the best ways to spend your bonus, Cothern says.
“If you don’t have a plan for how you’d use your bonus money,” he says, “it usually ends up getting spent in small amounts here and there with nothing left to show for it.”
Although each person may spend his or her bonus differently, smart uses for a year-end bonus include paying off high-interest debt first, Weliver says. After paying down debt, consider creating an emergency fund with a few months of expenses in the bank, Cothern adds. Next, consider saving money for retirement or other big goals.
5. Spend and save thoughtfully
Even if you’re in good financial shape, one of the best ways to spend your bonus is in a thoughtful way, rather than spending it all at once on an impulse purchase, Weliver says.
“Whether it’s things or experiences, what brings you the greatest amount of happiness for the dollars you spend?” he says. “Make a conscious choice before you go out and spend.”
Smart uses for a year-end bonus may also include contributing to a long-term goal, like buying your own home, starting a business or jump-starting a child’s college education fund. When considering the best ways to spend your bonus, consider a donation to a favorite cause or charity, which can often be tax-deductible.
“If you don’t have a plan for how you’d use your bonus money, it usually ends up getting spent in small amounts here and there with nothing left to show for it.”
6. Share the wealth
If you’re debating the best ways to spend your bonus, there may be some ideas from published research. At least one study suggests that money can indeed buy happiness—if you spend it on others. Sarah Gervais, an associate professor of psychology at the University of Nebraska-Lincoln, wrote that when researchers evaluate people’s happiness before and after spending a bonus, they find greater joy among those who use the money on others or donate it to charity.
The happiness occurs no matter how big the bonus is. “One reason for this phenomenon is that giving to others makes us feel good about ourselves,” she writes.
The research also shows that when people purchase experiences—such as taking a class or traveling—the resulting happiness increases over time. That’s likely because we tend to share experiences and memories with others, Gervais says. One way to maximize the happiness of spending a work bonus may be to purchase an experience and bring a friend along. You can even use your bonus to plan an experiential gift for your significant other.
7. Stick to your plan
When deciding what to do with your year-end bonus, the best plan is to have a plan. Whether you treat yourself, contribute to long-term financial goals, help others—or all of the above—thoughtful spending (and saving) is the best way to spend your bonus.
May 12, 2019Posted By: growth-rapidly Tag: Buying a house
Unless you expect to rent all of your life, you’re going to need to buy a house of your own. You will need to figure out in what neighborhood to live in.
You’ll need to figure out how long you expect to live in the house. However, this is only one piece to the puzzle.
The main thing you will need to determine is how much house you can afford.
After all, and as any financial advisor will tell you, taking a 30-year home loan for a house is a major financial. And it should not be taken lightly. The worst thing you can do is to get a loan that is too expensive for your budget.
So knowing how much house you can afford can help you determine whether or not you’re ready to buy a house.
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Here are some strategies that can help you determine how much house you can afford.
Related topics:
5 Signs You’re Not Ready to Buy a House
10 First Tome Home Buyer Mistakes to Avoid
1. Do a Budget.
First up, do you have a budget? As any financial planner would say, buying a home is perhaps the biggest expense you will ever make in your life. When you are a homeowner, not only will you have to account for basic expenses like food, transportation, entertainment, etc, you will also have to account for monthly mortgage payments, home repairs, etc…
So, having a budget is an important step in determining how much home you can afford.
2. Increase your Credit Score.
How much house you can afford also depends on your credit score. In fact, mortgage lenders aren’t likely to offer you a mortgage loan if you have a bad credit score.
Although you can get an FHA loan with a 580 minimum score, but there are things to consider when taking an FHA loan, like paying for a private mortgage insurance (PMI).
So, a good credit score will not only help you get qualified for a loan, but it will also help you get the best terms and rates possible. So the higher your credit score, the better.
Get a copy of your credit report for FREE and address any mistakes immediately. You can call the 3 credit bureaus (equifax, equinox, and transunion) to report any inaccuracies. Once you do that, the next step is to try to raise your credit score.
One of the ways to improve your credit score is to pay all of your bills on time. Payment history accounts 35% of your total credit score. So, it’s crucial not to have late payments.
Another way to raise your credit score is to keep your credit balance under 30%. For more information, read: How To Raise Your Credit Score to 850.
Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisor. SmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.
3. Down Payment.
Your down payment is crucial in figuring out how much house you can afford. It is so because the larger the down payment, the less financing you will need, which also means the lower your monthly mortgage payment will be.
So although you can put a down payment as low as 3.5%, the rule of thumb is to put 20%.
Click here to compare mortgage rates through LendingTree. It’s completely FREE.
4. Beware of Closing Costs.
In addition to coming up with a sizable down payment to purchase your home, you will also need to think about the closing costs. Closing costs typically cover the home inspection fees, attorney’s fees, appraisal fees, etc.
Closing costs can range from 2 to 4% of the home purchase price. Depending on the home, closing costs can cost you a lot of money.
5. Get Pre-approved for a Morgage.
One way to know if you can afford a house is to get pre-approved for a mortgage. Mortgage lenders will gather your financial information like your salary, debt, employment history, and credit score, before they decide to give you a loan. Getting pre-approved is important, because at least you know you’re shopping for a house within your budget.
One word of caution though, a mortgage lender can give you a bigger loan. So make sure you can afford it. In other words, just because you’re qualified for a specific amount of money, does not necessarily mean you can afford it. So, review your budget before making a decision.
Related: Apply for a Mortgage Loan Today
Not All Mortgage Lenders Are Created Equally
When it comes to getting a mortgage, rates and fees vary. LendingTree allows you to view and compare multiple mortgage rates from multiple mortgage lenders all in one place and at the same time, so you can choose the best rates for your needs. LendingTree makes getting a loan faster, simpler, and better. Get started today >>>
As a single parent, you have a lot of responsibility resting on your shoulders. You’re in charge and no one else can decide the best way to budget your money or how to create a solid financial plan. This financial weight can be pretty overwhelming. After all, you have to determine how to build up your savings account or pay off debt as the sole head of your household.
If you could use a little help in the budgeting department, we have some financial advice for single moms and dads to help you make the most out of your income and plan for the future.
Monthly Budget for Single Moms and Dads
A single-mom budget (or single-dad budget) might include additional side income in the form of child support, but those extra payments don’t always cover all of your expenses. It’s crucial to track your spending habits so you can get a better holistic idea of your financial circumstances.
We get it — if money is tight, it can be a little scary checking on the number in your bank account. But if you’re newly single and accustomed to two incomes, your budget will look much different from ones in the past and it’s important to actively manage your bank accounts.
Some, if not all, expenses are likely different and so is the total household income. Even if you’ve been single for a while and you’re just getting your finances in order, there still may be some surprises you haven’t anticipated.
Everything is your responsibility now, so all services, products, and monthly financial obligations should be accounted for as real and tangible expenses. Maybe you’ve already considered your monthly mortgage payments within your budget, but have you thought about adding in the cost of the periodic holiday and birthday presents you buy every year? With those additional expenditures in mind, try to account for anything, so you can adequately prepare for everything.
Financial Planning for Single Parents: Keep Track of Accounts
One of our most effective budgeting tips for single Moms and Dads is to stay on top of your accounts. You should monitor your checking and savings accounts for fraud and incorrect charges. In addition, it’s a good idea to keep an eye on your credit accounts such as your mortgage, credit cards, and vehicle loans. Taking these steps help keep you informed and may eliminate overspending. When you know what you have, it’s easier to make smart choices — an essential aspect of a single parents’ finances.
With a budget app like Mint, you can manage all of your accounts from all angles. Monitor upcoming bills, track spending and receive alerts to suspicious activity all through the same platform. Mobile options for your budgeting allows you to take and access that information anywhere you go. Buy ice cream for the kids after soccer practice and check how it affects your budget in real time.
Money-Saving Tips for Single Moms and Dads: Learn About Tax Credits
Many single parents qualify for income-based tax credits for each child. These credits may actually prove more valuable than deductions, which only reduce the amount of your taxable income. Credits reduce the dollar amount of taxes you owe.
Tax tip: If you receive alimony, that’s income according to the IRS; you’ll pay taxes on it. Child support, however, is not taxable, and only one parent can claim a child as a dependent on his or her taxes.
Plan for the Future: Effective Budgeting Tips for Single Moms and Dads
Because everything rests on your shoulders, there’s a lot of planning necessary to secure your future and that of your child. Savings aren’t just important, they’re critical.
Every family, single-parent or otherwise, needs several months’ income in savings in case of an emergency, such as a lost job or long-term illness. You may also want to investigate precautionary financial products like life insurance so your children will have a more secure financial future should anything happen to you.
A solid budget plan can help you discover inefficient spending habits so you can take control and put that money to better use in savings. Even small changes add up monthly, and even more so as years pass.
FAQ: Single Parent Personal Finance
How can a single mom save?
In order to have a strong financial future, it’s important to reserve a portion of your income for your savings in order to prepare for significant expenses such as your children’s college education. The monthly budget for a single mom may be less than a two-parent household but there are still ways to make the most of it.
How much does the average single parent make?
For single-mother families, the median income is $25,493. For single-father families, the median income is $36,471. While these numbers may be difficult to work around considering the growing costs of child care and education, using a budget tracker is one of the best ways to conserve and spend your money.
How can I budget with little income?
You might feel at a disadvantage on a single income, but budgeting can empower you with the knowledge you need to meet both long-term and short-term financial goals. Paying off your credit card, watching for patterns in your spending habits, and preparing for your financial future is all within the realm of possibilities. Even if you don’t have much wiggle room in your budget, the ability to see the amount of money going in and out can help determine your next financial steps.
How can I be a good single mom or dad?
Hey, if you’re asking this question — you’re already a good mom or dad. There’s a lot more to being a single mother or father than just taking care of your children’s basic needs. You have to get them to soccer practice, financially prepare for their future, and get dinner on the table. But for your kids, you’re their hero already. Figuring out a monthly budget as a single parent isn’t always easy, but it’s one step in the right direction.
July 23, 2019Posted By: growth-rapidly Tag: Buying a house
Life is full of surprises. Just when you think you have everything figured out, a roadblock, like losing your job, presents itself. And a few months later you realize that you have missed on a few credit card payments.
When applying for a mortgage loan, mortgage lenders not only assess your ability to repay the loan, but they also review your credit report.
Click here to find the best mortgage lenders for low or bad credit score.
And if your credit report does not reveal a good credit score, then getting a mortgage loan to finance your property can be quite difficult. If you’ve found yourself in this situation, do not despair yet. There are a few things you can do to overcome a low credit score. Here are a few tips to get started:
1. Meet face-to-face with a lender and be transparent
When you have a low credit score and you have run out of time to fix it, one of your best options is to meet face-to-face with a lender and explain your situation.
Indeed, there are some lenders out there who are inclined to offer you a home loan despite bad credit after taking into consideration your unique circumstances.
LendingTree: A Better Way to Find A Mortgage
LendingTree.com is making getting a mortgage loan simpler, faster, and more accessible. Compare the best mortgage rates from multiple mortgage lenders all in one place and at the same time. LEARN MORE ON LENDINGTREE.COM >>>
Related Resources
When a lender runs your credit through a computer, you risk to be automatically rejected if you don’t meet the computer’s prerequisites.
But when you sit down with a lender and explain your poor credit, the lenders will be able to reach a deeper understanding on whether you are able to repay the loan.
So if you have a bad credit score, it’s best to be transparent and upfront about it.
2. Show that you have a full time, stable job.
Although your credit score is an essential lending requirement, it’s not the only thing a lender looks at.
Being able to show that you have a full time, stable job is another way to increase your chance of getting a loan even if you have a low credit score.
A good income will show that you’re able to make the payments on the loan despite a bad credit score.
Related: Apply for a Mortgage Loan Today
3. Have a bigger down payment.
A bigger down payment, say 20% + of the home purchase price, makes it more likely to get approved for a loan despite having a low credit score.
Furthermore, and more importantly, putting at least 20% down will allow you to avoid paying private mortgage insurance (“PMI”), which is an additional monthly payment you make on top of your monthly mortgage payments.
A PMI is a way to assure the lenders, that if you, as a borrower, default on the loan, the bank will be covered by mortgage insurance.
Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisor. SmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.
4.Consider applying for an FHA loan.
Since you have a low credit score, you may assume that you have little to zero chance with a lender. But did you know that you still can get approved for an FHA loan?
Depending on the amount of money you’re seeking as there are limits, an FHA loan may be the right loan for you.
An FHA loan is loan that’s insured by the Federal Housing Administration. FHA Loans are very popular among first time home buyers because they require a much lower down payment (3.5%) and a very low credit score (580).
So if you have a low credit score of 580 and can meet the other FHA loan requirements, you should be able to a home loan.
Click here to compare FHA loan rates
For more information see: FHA Loan Requirements – Guidelines & Limits.
5.Avoid applying for more credit prior to loan approval.
A low credit score is itself not a good sign. But the more debt you’re applying to prior to seeking loan approval can significantly damage your file.
You see, every time you’re applying for a new credit, it can be a credit card, a car loan or a personal loan, it goes to your credit report. And the more inquiries you have on your credit report raises a red flag that you’re experiencing financial difficulty.
These are just a few tips to consider when shopping for a home loan with a low credit score.
Tips to raise your credit score:
Although you still can get a loan despite having a low credit score, it’s not always the best decision. For one, it comes with higher interest rates.
So if you’re not in a rush, your best bet is to put buying a house on hold and work on improving your credit score. Here are a few tips to improve your credit score. For more information, read: How To Raise Your Credit Score To 850.
–Always pay your bills on time and in full. Payment history accounts for 35% of your total credit score. So whether it’s a credit card or a phone bill, stay on top of these payments
–Keep your credit card utilization rate below 30 percent if your total balance.
–Be stable. One thing that may make you a low risk borrower before a lender’s eyes is having a stable job. Lenders love stability. So if you have been with your current job for a while, that will work in your favor.
–Get a credit card if you don’t have one. You may think having a new credit card may hurt you, but it can actually help you if you’re able to manage it properly.
Click here to compare mortgage rates through LendingTree. It’s completely FREE
Related Articles:
5 Signs You’re Not Ready To Buy A House
Top 6 Home Buying Risks To Avoid
The Biggest Mistakes Millennials Make When Buying A House
How Much House Can I afford
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Not All Mortgage Lenders Are Created Equally
When it comes to getting a mortgage, rates and fees vary. LendingTree allows you to view and compare multiple mortgage rates from multiple mortgage lenders all in one place and at the same time, so you can choose the best rates for your needs. LendingTree makes getting a loan faster, simpler, and better. Get started today >>>
