What Is a Living Wage? – Minimum Income for Basic Needs Above Poverty

Early in his term, President Joe Biden announced his support for an idea lawmakers on the left had been pushing for years: increasing the federal minimum wage to $15 per hour. Proponents assert the current hourly rate of $7.25 is simply too little to maintain a decent standard of living. To stress this point, several politicians and other public figures took part in the Live the Wage Challenge in 2014, living on minimum wage for one week to show how difficult it is.

Many state and local governments have already passed their own minimum wage increases. The Economic Policy Institute (EPI) reports that more than half of all states in the United States have minimum wages above the federal minimum, and 45 cities and towns have adopted wages higher than the minimum level for their state. But lawmakers in other states have pushed back, claiming higher minimum wage laws will hurt business owners and limit job growth. According to the EPI, 26 states have already passed “preemption laws” to bar municipalities from raising their local minimum wage levels above the state level.

At the heart of this debate is the question of what really amounts to a living wage. In the words of the Fight for $15 campaign, the question is how much America’s workers need to “feed our families, pay our bills, or even keep a roof over our heads.” And as it turns out, that’s not at all a simple question to answer.

Defining Poverty

In announcing his support for the minimum wage hike, Biden declared, “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.” However, according to FactCheck.org, this isn’t quite true. Even the current federal minimum wage is technically enough to keep a full-time worker with no dependents over the federal poverty line.

But it’s not clear how much that statistic matters. For one thing, many low-wage workers do have dependents, and the cost of supporting them pushes them below the poverty level. That explains why a 2021 Congressional Budget Office report found that the proposed wage hike would lift roughly 900,000 Americans out of poverty by 2025.

Yet even this number may be an understatement. There are many problems with how the government defines poverty — so many that even the government itself doesn’t always rely on it. In other words, someone who falls above the government’s official poverty line isn’t necessarily making a living wage.

Minimum Wage & the Poverty Guideline

Technically, the federal government has more than one way of defining poverty. When people talk about the “poverty line,” they’re usually referring to the poverty guidelines set by the Department of Health and Human Services (HHS). There are actually three separate guidelines: one for the contiguous U.S. and higher ones for both Alaska and Hawaii, where the cost of living is higher.

As of 2021, the poverty guideline for most of the country is $12,880 for a single person. A person earning $7.25 per hour working 40 hours per week would bring home $15,080 per year before taxes — assuming they took no vacation or sick days. Therefore, this single person would indeed be making enough to be slightly above the poverty guideline in most states.

However, the picture changes for people raising children on minimum wage. According to the National Employment Law Project, roughly 1 in 4 workers with minimum-wage jobs have kids to support. The poverty guideline for a family of three is $21,960, so a single parent trying to raise two kids on that same $15,080 per year would be well below it.

Problems With the Poverty Guideline

Even if you assume anyone whose income falls below the poverty guideline is “poor,” and anyone above it is getting along just fine, not all minimum-wage workers are over the line. However, it’s not clear whether that’s even a reasonable way to define poverty. The poverty guidelines are based on the official poverty threshold from the Census Bureau, and the formula used to calculate this threshold is pretty archaic.

The poverty threshold was first developed in the mid-1960s by Mollie Orshansky, a Social Security Administration worker. At the time, the government didn’t have the accurate figures it has today to show how much the average household spends on the things they need to live, such as food, housing, and health care. The only expense Orshansky could calculate with any accuracy was food costs, based on food plans developed by the U.S. Department of Agriculture.

Orshansky found a 1955 USDA survey that showed the average American family spent one-third of its after-tax income on food. Based on that, she estimated the smallest amount a family could live on would be three times the amount they needed to feed themselves on the most frugal diet possible. Today, the Census Bureau continues to calculate the poverty threshold by taking the cost Orshansky worked out for a “minimum food diet” in 1963, adjusting for inflation, and then multiplying it by three.

The problem is that a lot has changed since 1955. A 2019 survey from the Bureau of Labor Statistics (BLS) shows that the average American family now spends less than 10% of its pretax income on food. Its biggest expense is housing, which accounts for 25% of income. Transportation and health care also take up a sizable chunk of the budget.

The Census Bureau admits that the poverty threshold isn’t the best measure of whether someone’s income is enough to meet their needs. It stresses the threshold is only “a statistical yardstick,” not “a complete description of what people and families need to live.” So even according to the government, being over the “line of poverty” is no guarantee someone actually has enough money to cover their basic needs, let alone extras like a movie or haircut. That’s the point politicians were trying to highlight through the Live the Wage challenge when they tried — and for the most part failed — to survive on minimum wage for a week.

The Supplemental Poverty Measure

In 2011, the Census Bureau designed a new way of calculating how many Americans live in poverty, known as the supplemental poverty measure (SPM). It’s a lot harder to calculate than the official poverty threshold, but it offers a clearer picture of how much someone really needs to get by.

Both the official poverty threshold and the SPM define people as poor if “the resources they share with others in the household are not enough to meet basic needs.” However, the SPM differs in several ways from the official measure:

  • It Counts More People per Household. For purposes of resource sharing, the current poverty measure assumes a “household” is all the people who live under the same roof and are related by birth, marriage, or adoption. The SPM uses a broader definition: It counts foster children, unmarried partners and their children, and any other children who live with the family. This definition recognizes that two adults bringing up five children have just as many mouths to feed, even if they aren’t all related to each other.
  • It Calculates People’s Needs More Precisely. The current poverty threshold is based on food expenses alone. It takes the cost of a basic food budget, as calculated in 1963, and adjusts for inflation. Instead, the SPM looks at what people actually spend today on basic needs: food, clothing, shelter, and utilities. That gives a much more accurate picture of a household’s budget than the current model.
  • It Accounts for Location. The current poverty threshold assumes all people need the same amount to survive, no matter where in the country they live. However, surveys such as the annual Consumer Expenditure Survey from the BLS and the Census Bureau’s own American Housing Survey show that isn’t true. Housing costs, which are the biggest expense for many people, vary widely from one city to another. The SPM accounts for that by factoring in rent or mortgage costs for different parts of the country.
  • It Counts Benefits as Income. According to the current poverty measure, resources include only actual cash coming into the house: wages, pensions and other retirement funds, Social Security benefits, interest, and dividends. However, many low-income earners also receive various types of financial assistance. For instance, they may receive subsidized housing, food aid such as the Supplemental Nutrition Assistance Program (SNAP) or free school lunches, and home heating aid. The SPM counts all these benefits as resources because they help meet the household’s basic needs.
  • It Deducts Certain Expenses. The current poverty measure looks only at total cash income — the amount listed under “total income” on a tax return. However, most people’s actual take-home pay is lower than their total income. Their employer takes a certain amount out for taxes, and there may also be health premiums that come out of pretax pay. Additionally, many people have unavoidable costs — work expenses, child support, or child care costs — that don’t count as taxable income on tax returns. Since these expenses are unavoidable, the SPM doesn’t count the money spent on them as income.

Since 2011, the Census Bureau has released two separate reports every year measuring poverty in America. It bases one report on the official current poverty threshold, while the other uses the SPM. In 2019, the official poverty threshold for a two-adult, two-child family was $25,926. According to the bureau’s first report, 10.5% of the population (34 million people) were below that threshold, thus living in poverty. For context, if all those people constituted an independent state, it would be the second-most populous state in the U.S., between California and Texas, according to 2020 data from the Census Bureau.

The second report for the same year paints a more varied picture. It sets the SPM for the entire country at $29,234 for homeowners with a mortgage and $28,881 for renters. However, this figure differs widely from one part of the country to another. In 16 states and the District of Columbia, the SPM was higher than the official poverty threshold. In 25 states, it was lower, and in nine states, it was more or less the same.

Overall, the second report found slightly more people living in poverty than the first one — 11.7% of all Americans, or around 38 million people (almost equal to the population of California). The difference was especially great for people over 65. According to the official poverty measure, less than 9% of older Americans (4.9 million) live in poverty, but the SPM puts the figure at 12.8% (nearly 7 million).


Defining the Cost of Living

The SPM is more useful than the official poverty guideline as an indicator of how much income people need to barely make ends meet. However, many living wage advocates argue that it still doesn’t reflect a family’s true needs.

A real living wage, they say, should do more than allow people to scrape by. It should enable them to support themselves decently without having to rely on additional help from the government. A worker making a true living wage shouldn’t have to worry every day whether some unexpected expense is going to push them over the edge into poverty.

Various economists and policymakers have tried to analyze the average household budget and develop a guideline for this sort of living wage. Currently, there are two primary alternatives for calculating a living wage, each with its own method for defining basic needs and the income needed to meet them. Their estimates differ significantly, but they’re both considerably higher than either the poverty guideline or the SPM.

The EPI Budget Calculator

In 2015, the Economic Policy Institute (EPI) developed a tool for calculating a living wage. Its budget calculator shows how much money a household needs for a “secure yet modest living standard.” That’s a level of income at which people not only survive but can live in safe, decent conditions.

Like the SPM, the EPI family budget calculator considers food, clothing, and housing costs. However, it also factors in costs the SPM doesn’t, including transportation, health care, child care, and taxes. It also allows a modest amount for extras like phone service, cleaning supplies, personal care items, books, and school supplies. It does not include any money for emergency or retirement savings.

The EPI calculator is adjustable, so you can use it to estimate expenses for households with up to two adults and four children. It uses housing and other expenses for different parts of the country (last updated in 2017) to show how much the cost of living varies by region.

According to the EPI’s budget map, there are some counties in the U.S. where a two-parent, two-child family needs less than $5,000 per month to live modestly and others where it requires more than $9,000 per month. That’s a significant difference, but even the low end of this scale is close to $60,000 per year — more than double both the Census Bureau’s official poverty threshold and the SPM for a family of this size.

The MIT Living Wage Calculator

Another tool for calculating the living wage rate is the living wage calculator developed by Amy Glasmeier, an economic geography and regional planning professor at the Massachusetts Institute of Technology (MIT). It estimates the amount a household needs “to achieve financial independence while maintaining housing and food security.”

Like the EPI calculator, it uses tax and spending data from different parts of the country to estimate the expenses for working families and individuals. It factors in all the basic expenses in a typical household budget, including food, housing, transportation, child care, health insurance, clothing, and personal care. It also accounts for income and payroll taxes.

The MIT calculator is somewhat more flexible than the EPI’s. It can estimate expenses for households with one or two working adults and up to three children. You can also add a second, nonworking adult who provides full-time child care. That increases the number of people living on a single worker’s income but eliminates child care as an expense.

However, MIT living wage calculator’s primary advantage is that in addition to estimating monthly or yearly expenditures, it also shows the hourly wage a worker would need to earn to meet them. For comparison, it also lists the “poverty wage” for a household of a given size — that is, the wage needed to maintain it at the HHS poverty line — and the actual minimum wage in the city or state.

According to MIT, the average living wage at the end of 2019 for a family of two working adults and two children was $21.54 per hour, or $89,606 per year, before taxes. However, it varies widely across different parts of the country — from as low as $76,222 in the McAllen, Texas, region to $131,266 near San Jose, California. Once again, even the lowest estimate from MIT’s calculator is much higher than the official poverty threshold for a family of four — nearly three times as high.


Location, Location, Location

The EPI and MIT calculators offer somewhat different estimates of what constitutes a living wage in America. However, there’s much more variation within each calculator across different parts of the country.

This table shows how each tool estimates the annual cost of living for a family with two working parents and two children in five different areas, including urban, rural, and suburban makeups. For comparison, it also includes the SPM’s estimates of a poverty wage for these same areas. The SPM and MIT costs are based on data from 2019. The EPI figure uses data from 2017. The official 2019 poverty line in the U.S. based on the same family size was $25,750.

SPM (Poverty Line) EPI (Living Wage) MIT (Living Wage)
Baird, Texas

(Callahan County)

$26,028 for homeowners with a mortgage

$22,713 for homeowners with no mortgage

$25,752 for renters

(Figures are for “Texas Nonmetro.”)

$67,370 $77,492 ($18.63 per hour)
Aurora, Illinois

(DuPage County)

$30,429 for homeowners with a mortgage

$25,825 for homeowners with no mortgage

$30,047 for renters

(Figures are for “Chicago-Naperville-Elgin.”)

$95,602 $99,551 ($23.93 per hour)
Los Angeles, California $37,468 for homeowners with a mortgage

$30,803 for homeowners with no mortgage

$36,918 for renters

$92,295 $112,361 ($27.01 per hour)
New York City, New York $35,530 for homeowners with a mortgage

$29,432 for homeowners with no mortgage

$35,026 for renters

(Figures are for “New York-Newark-Jersey City.”)

$124,129 $112,325 ($27 per hour)

(Figures are for “New York-Newark-Jersey City”)

Oklahoma City, Oklahoma $26,888 for homeowners with a mortgage

$23,321 for homeowners with no mortgage

$26,591 for renters

$81,552 $84,538 ($20.32 per hour)

These figures reveal a few patterns. For one, the cost of living is generally higher in urban areas than in rural or suburban ones. It’s also higher in big cities than in small ones and higher on the coasts than in more central parts of the country. All these factors put together mean that a living wage in large coastal cities, such as Los Angeles and New York, is much, much higher than in small inland towns.

The chart also shows the official poverty standard is lower than it should be. Even in rural Baird, Texas, the 2019 SPM finds that a family of four with a mortgage needs a little more than $26,000 after taxes to get by, yet the official poverty measure for 2019 is less than $26,000 before taxes. It’s clearly not enough to meet a family’s needs, even in the cheapest parts of the country, and it’s nowhere near enough in expensive coastal cities.


Why a Living Wage Is Higher Than Many People Think

If you live in New York City, you’re probably nodding your head in recognition right now. But if you live in an area with a lower cost of living, it may come as a shock to see that there are places where a family could need over $90,000 per year to pay all its bills. Perhaps you even suspect the data must be wrong somehow.

But there’s no lack of evidence these numbers are accurate. For example, a 2017 survey by CareerBuilder found that across the country, 78% of workers — including nearly 1 in 10 of those making over $100,000 per year — live paycheck to paycheck. And while it’s tempting to think these individuals must be struggling due to poor spending habits, such as dining out too often, the calculations from the EPI and MIT show that in many areas, a family could easily have trouble making ends meet, even on a $100,000 salary.

The detailed cost breakdowns from the EPI and MIT calculators shed some light on just why so many people struggle to get by on what looks like a middle-class income. They identify four expenses that hit budgets particularly hard: child care, housing, transportation, and health care.

Child Care

According to MIT, the average family of four spends 21.6% of its income on child care — more than it devotes to housing. Like so many other costs, this one varies widely by region.

For instance, according to Child Care Aware, the average cost of day care in Massachusetts is more than $36,000 for an infant and a 4-year-old. For a family with a $100,000 annual income, keeping these two children in day care would eat up more than one-third of its earnings. By contrast, in Arkansas, the average cost for two children of these ages is only $10,936 — around 11% of that same $100,000 income.

Housing

MIT reports the average family spends 17.2% of its income on housing. However, this expense varies even more dramatically than child care costs.

In some cities, rent and mortgage costs are ridiculously high. The most notorious of these is San Francisco, where according to a 2018 SmartAsset study, the average rent is nearly $4,400 per month for a two-bedroom apartment. That means a family of four (with the children sharing a room) would have to spend over $52,000 per year on rent — more than half the annual budget for a family making $100,000.

However, the same study found that in Memphis, Tennessee, the average rent for a two-bedroom is just $769 per month, or $9,228 per year. That’s less than 10% of a $100,000 salary.

Transportation

The Federal Highway Administration (FHA) reports that the average American family spends about 19% of its budget on transportation. This cost also varies by location — but in just the opposite way from housing costs. While housing is usually most expensive in densely populated cities, transportation costs most in the “exurbs” — the distant outskirts of a city, where cars are the only way to get around.

According to the FHA, families in the exurbs spend an average of 25% of their income on transportation. By contrast, those in cities and other walkable neighborhoods can often live without a car, cutting their transportation costs down to 9% of their income. That creates a dilemma for many people: deciding whether to move into the city and pay exorbitant rates for rent or stay out in the suburbs and spend more money — and more time — driving.

Health Care

Health care costs also take a big bite out of many people’s budgets. According to the Kaiser Family Foundation, the average employer-sponsored family health care plan cost $21,342 in 2020, and workers paid $5,588 of that out of their own pockets. For individuals, the average total cost is $7,470, with workers paying $1,243.

For those who must buy their own health plans, such as self-employed people, the costs are higher still. According to a June 2020 eHealth study, families that purchased a health insurance policy through the federal exchange in 2020 paid an average of $1,152 per month — $13,824 per year — in premiums. On top of that, the average family policy had an annual deductible of $8,439, so a family’s out-of-pocket health care costs could easily come to more than $22,000.

Individuals paid an average of $456 per month ($5,472 per year) with deductibles of $4,364, for a total potential out-of-pocket cost of almost $10,000. That’s significantly better than the cost for families, but if you only make $30,000 per year, it’s still a third of your income.

Student Loans

Many Americans are struggling with one more expense the EPI and MIT calculators don’t even mention: student loan payments. According to the Pew Research Center, 37% of all adults under age 30 and 22% of those aged 30 to 44 have student loans they’re still working to pay off.

Like many other expenses, student loan debt varies by location. According to The Institute for College Access and Success, the average student loan balance for graduating college seniors in 2019 was nearly $29,000. However, in Utah, the average was under $18,000, while in New Hampshire, it was over $29,400. Overall, graduates in the Northeast tend to carry the most debt, while those in the Southwest have the least.

Pro tip: If you have student loan debt, consider refinancing to a lower interest rate. This can help reduce the amount of time it takes to become debt-free. Companies like Credible allow you to compare lenders so you can find the best possible rates. They’re even offering a cash bonus to Money Crashers readers of up to $750.


A Survival Wage vs. a Living Wage

The SPM and the EPI and MIT living wage calculators offer vastly different pictures of what it takes for a family to get by. All three agree it varies considerably by location, but across all areas, the SPM’s standard is much lower than either the EPI’s or MIT’s. There are differences between the EPI and MIT estimates too, with MIT’s typically being higher. But they’re much closer to each other than either of them is to the SPM.

That reflects the fact that the SPM isn’t really meant to be a living wage in the same sense as the EPI and MIT measures. The SPM is merely an alternative way of calculating the poverty level. It reflects the bare minimum people need to survive, assuming they take advantage of all available forms of government aid.

The EPI and MIT calculators, by contrast, are looking at how much people need to live decently. That means meeting all their basic needs without depending on government benefits. It means living in a home that’s structurally sound and sanitary, eating nutritious food, and having a car if necessary. It also allows for items beyond the bare necessities, such as clothing, cleaning supplies, personal care, and phone or Internet service.

There’s a lot of middle ground between the poverty budget set by the SPM and the living wage set by the EPI and MIT. That means there are many low-wage workers in the U.S. who aren’t technically living in poverty but are still financially insecure. It’s a constant struggle for them to pay for minor expenses like a car repair or new shoes for their kids. They make enough to get by but not to get ahead.

There’s one point on which all three guidelines agree: The current federal minimum wage of $7.25 per hour is not a true living wage. In many parts of the country, it’s not even a subsistence wage.

At $7.25 per hour, a two-earner family would bring in $30,160 per year. Even according to the bare-bones SPM standard, that’s not enough to support a family of four in suburban DeKalb County or urban Los Angeles and New York. And based on the EPI and MIT calculators, it’s not nearly enough in Oklahoma City or Baird.

In fact, according to the EPI and MIT, even Biden’s proposal for a $15-per-hour minimum wage isn’t ambitious enough. In Baird, the cheapest of the five municipalities on the list, MIT calculates it would take two incomes of at least $18.63 per hour to support a family of four. The EPI’s cost of living estimate for Baird is a bit lower, but it still works out to an hourly wage of $16.19, more than a dollar above the proposed level. And in every other city on the list, the minimum wage would need to be around $20 per hour or more.

Of course, passing a minimum wage this high at the federal level is overwhelmingly unlikely. Given how much resistance there is to the idea of a $15-per-hour federal minimum wage, there’s essentially no chance Congress could ever agree on anything like the $27-per-hour living wage needed in Los Angeles.

Fortunately, it doesn’t have to. If the federal government doesn’t intervene, individual states and cities can tackle the problem by passing their own minimum wage laws to ensure workers living there can make enough to maintain a decent, modest lifestyle. Given the wide variation in the living wage across different parts of the country, it’s a viable way to meet workers’ needs in high-priced cities without unduly burdening employers elsewhere in the country.


Final Word

There’s no way to pin down the meaning of a living wage with a single number. The cost of living varies too much from one part of the country to another. If lawmakers want to set the minimum wage at a livable level for everyone, they’ll have to do it at the city and state levels — which is exactly what’s happening now.

That’s where the EPI and MIT data can be a real help. State and local governments wrangling over the minimum wage can use these tools to figure out just how much a household needs to get by in their area. Based on this information, they can make sensible policy choices — not just about wages, but also about who should qualify for benefits, such as food aid or reduced mortgage rates.

The EPI and MIT calculators are useful for individuals too. Looking at these budget calculators can help you evaluate your household budget and see how the amount you’re spending in different categories compares to the reasonable minimum. You can also use these tools to estimate how much it would cost to have a child or how much you could save by moving to another city.

Source: moneycrashers.com

How To Pay Off Your Mortgage Early

September 28, 2018 Posted By: growth-rapidly Tag: Buying a house

Are you looking to pay off mortgage early? Or as early as in 5 years? If so, then follow these tips. Your monthly mortgage payment might your biggest monthly expense in your budget right now. So the sooner and quicker you can pay off your mortgage, the sooner you can start experiencing true financial independence.  Follow the following six steps to learn how to pay off your mortgage faster.

Wondering how paying off your mortgage early can affect your overall financial plan? Talk to a local financial advisor.

1. Refinance your mortgage.

One of the steps you can take to pay off your mortgage faster is to refinance your mortgage loan. In the simplest term, refinancing your mortgage means that you get a new loan to replace your current mortgage loan. Refinancing can help you pay off mortgage early in two ways.

The first way is that you can get a mortgage loan for a shorter term and make higher payments and thus reduce the number of years it would take you originally to pay off your mortgage. Second, when you refinance your mortgage, you can get a loan with a way better and lower interest rate, provided that you have a good credit score.

So if you’re looking to refinance your mortgage loan to get a lower interest rate, it might be worth looking into learning how to improve your credit score.

A mortgage, like any debt, is something that you have to pay. So, in addition to making your monthly mortgage payments on time, make extra payments whenever possible. Making extra mortgage payments is one of the easiest ways to pay off mortgage early.

When you make extra payments on your mortgage loan, not only will you get rid of your debt faster, you will also save tons in interest payments. The logic behind it is this: the more money you owe, the more interest you’ll pay.

If you don’t make extra payments, the interest in your mortgage loan will build up and you will end up paying interest on interest. By making extra mortgage payments, you will be able to pay off your mortgage early. 

One word of caution though, before you start making extra payments, check with your loan to see if you’re allowed to do so without incurring any extra fees. You may not be allowed to make extra payments on a mortgage loan with fixed rates.

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3. Set a pay off mortgage early date.

Use an online mortgage calculator to have an idea when you can pay off your mortgage loan. The mortgage calculator will tell you when you can expect to pay off your mortgage and how much you need to pay every month to reach that goal.

Your paycheck from your current job may not be enough to consider making extra repayments on your mortgage.  With your monthly expenses, you may not have any money left at the end of the month.

So making extra money by doing side hustles or completing surveys can help pay off mortgage early. Here are some ways to make some extra cash.

5. Watch your spending habits.

Start watching your spending habits, including avoiding impulse buying. See if you can cut back on unnecessary expenses like monthly cable bills, subscription magazines, stop eating out and buying new things. That extra money can go towards your mortgage payments.

6. Make a lump sum payment.

If you receive a bonus at work, or a tax refund, use some or all that cash towards your mortgage. 

In conclusion, paying off your mortgage early can save you thousands. So it’s a good idea to work on it.

Click here to compare mortgage rates through LendingTree. It’s completely FREE

Working With The Right Financial Advisor.

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

Source: growthrapidly.com

Preparing To Buy a House in 8 Simple Steps

In life there are some situations a person simply can’t prepare for, like locking the keys in a car full of groceries or having a head full of shampoo when the smoke alarm goes off. Luckily, purchasing a home doesn’t have to be one of those moments.

Buying a house is probably one of the biggest financial decisions many people will make in their lifetime, and the process can be lengthy and complex. From getting a bird’s-eye view of their overall financial picture to calculating housing costs and securing loan pre-approval, there are many actions for home buyers to take as they get ready to purchase a home.

With the right resources and a solid strategy, however, purchasing a house can be a smooth process.

8 Steps to Prepare for a Home Purchase

1. Determining Credit Score

A home buyer’s credit score can impact their ability to secure a mortgage loan with a desirable rate. It can also affect how much they’ll be required to pay as a down payment when it’s time to close.

In a recent report from the National Association of Realtors , home buyers who had debt said it hindered their ability to set aside funds for a down payment by a median of four years.

Credit score can be influenced by a variety of factors, from payment history to amount of debt (a.k.a. credit utilization ratio) to age of credit accounts, mix of credit accounts, and new credit inquiries.

Payment history is the main factor that affects a person’s credit score, accounting for 35% of an overall FICO® score. Missing a payment on any credit account—from unpaid student loans to credit cards, auto loans, and mortgages—can negatively impact a person’s credit score.

By making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances, home buyers could potentially boost their credit score and qualify for a lower mortgage rate.

Is There a Credit Score “Sweet Spot?”

Many buyers wonder whether there’s a desired credit score range or “sweet spot” to obtain a mortgage. The 2020 Q1 Federal Reserve Report on Household Debt and Credit found that the median credit score of newly originating borrowers increased to 773 in the first quarter for mortgages—up 14 points from 2019.

That’s not necessarily to say a credit score of 773 is a must for securing a mortgage, but the difference between a credit score in the 600 range and one in the 700 range could amount to about half a percent less interest on a mortgage loan and add up to a lot of money over time.

Credit scores can also affect the amount of the down payment itself. Many mortgage lenders require at least 20% of the house’s sale price be put down, but might offer more flexibility if the buyer’s credit score is in the higher range. A lower credit score, on the other hand, could call for a larger down payment.

Whether home buyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports is invaluable in knowing whether time is needed to repair credit, which could potentially lead to a higher credit score and possibly lower mortgage loan rate.

2. Deciding how Much To Spend

Deciding how much to pay for a new home can be based on a variety of factors including expected and unexpected housing costs, up-front payments and closing costs, and how it all fits into the buyer’s overall budget.

Calculating Housing Costs

There are several housing costs for home purchasers to consider that might affect how much they can afford to offer for the house itself. The costs of ongoing fees like property taxes, homeowner’s insurance, and interest—if the loan does not have a fixed rate—can all lead to an increase in the monthly mortgage payment.

Closing costs are fees associated with the final real estate transaction that go above and beyond the price of the property itself. These costs might include an origination fee paid to the bank or lender for their services in creating the loan (typically amounting to 0.5% to 1% of the mortgage), real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.

Last year, the average closing costs for a single-family property were $5,749 including taxes, and $3,339 excluding taxes, according to a recent report from ClosingCorp .

In addition to closing costs, expenses that potential home buyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs.

Finally, unforeseen costs of a major life event like a layoff or the birth of a new child might not be the first expenses that come to mind, but some buyers could find themselves making a potential home buying mistake by not getting their finances in order to prepare for the unexpected.

Making a list of these estimated expenses can help home buyers calculate how much they can feasibly afford and create a budget that could help them avoid being overextended on housing costs, especially if they might be paying other debt or saving for other financial goals.

3. Saving for a Down Payment

Saving money for a house is one of the biggest financial goals many people will have in their lifetime. And how much they’re able to offer as a down payment can significantly impact the amount of their monthly mortgage payment.

A larger down payment can also be convincing to sellers who see it as evidence of solid finances, sometimes beating out other offers in a competitive housing market.

The average down payment on a house varies depending on the type of buyer, loan, location, and housing prices, but, according to Zillow’s 2019 Consumer Housing Trends Report , 56% of buyers put down less than the typical 20% down payment, 19% put down 20%, and 20% of home buyers put down more than 20%.

For first-time home buyers, 20% of the price of the home can seem like a daunting figure. Many buyers find that cutting spending on luxury or non-essential items and entertainment can help them save up the funds.

Other tactics could include getting gifts and loans from family members, applying for low-down-payment mortgages, withdrawing funds from retirement, or receiving assistance from state and local agencies.

For buyers who were also sellers, proceeds from another property could also fund the down payment.

4. Shopping for a Mortgage Lender

There are many mortgage lenders competing for the business of the 86% of home buyers who finance their home purchases. These lenders offer a variety of mortgages to apply for, with a few of the most common being conventional/fixed rate, adjustable rate, FHA loans, and VA loans.

Buyers might not realize they can—and should—shop around for a lender before selecting one to work with. Different lenders offer different variations in interest rates, terms, and closing costs, so it can be helpful to conduct adequate research before landing on a particular lender.

Mortgage lenders must provide a loan estimate within three business days of receiving a mortgage application. The form is standard—all lenders are required to use the same form, which makes it easier for the applicant to compare information from different lenders and make sure they are getting the best loan for their financial situation.

5. Getting Pre-Approved for a Loan

While it might seem like a bit of a nuance, getting prequalified for a loan versus pre-approved for a loan are two different things.

When a buyer is prequalified for a loan, their mortgage lender estimates—but does not guarantee—the loan rate, based on finances provided by the buyer.

When a buyer is pre-approved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. This pre-approval gives a guarantee to the buyer that they will be able to obtain the loan and breaks down exactly what the bank is willing to lend.

Having a pre-approval letter in hand can help some buyers get ahead by appealing to the seller as a serious intention of purchase and a lender’s guarantee to back that purchase up.

6. Finding the Right Real Estate Agent

According to the National Association of Realtors 2020 Generational Trends Report :

•  89% of all buyers purchased their homes through a real estate agent.
•  The primary method most used to find that agent was referral.
•  All generations of buyers continued to utilize a real estate agent as their top resource for helping them buy a home.

While the internet and popular real estate search websites have made it easier for home buyers to hunt for a house online, most buyers still solicit the help of a real estate agent to find the right home and negotiate the price and purchase.

Also, many realtors are experts in their particular housing market, so for buyers who are searching in a specific location, a real estate agent may be able to offer valuable insights that might not be revealed online.

7. Exploring Different Neighborhoods

By researching neighborhoods where they might want to purchase a property (both in-person and online), home buyers can get a better sense of what living in their future community could look like.

Many real estate websites provide comparable listings to help determine a reasonable offer amount in a given neighborhood.

Check out housing market
trends, hot neighborhoods,
and demographics by city.

They may also highlight nearby school ratings, price and tax history, commute times, and neighborhood stats like home value fluctuations or predictions, and walkability ratings.

All of this information can help paint a picture of life in the area a home buyer chooses to settle in. Doing a deep dive into a desired neighborhood can help inform a more realistic decision on where to buy a house.

8. Kicking off the House Hunt

Once the neighborhoods are whittled down, the loan is secured, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.

For 55% of buyers, the most difficult step in the home buying process was finding the right property. Some had to undergo a considerable process before making the final purchase, with most searching for 10 weeks and seeing a median of nine homes first.

With the help of a trusted real estate agent and a housing market with adequate inventory, most home buyers can begin to book showings, attend open houses, and formally put down an offer on a house they like.

In particularly “hot” markets, houses could receive several offers, so home buyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.

Home buyers might wish they could snap their fingers and move into their dream house as quickly and painlessly as possible. While that is not realistic, SoFi can help simplify the mortgage loan process.

Without any hidden fees or prepayment penalties, a SoFi home loan could be the right option for many homebuyers. For questions about buying a home, SoFi offers home loan resources, guides, and tips to steer future homeowners through the process. There are a lot of steps, but managing them can be easier with a helping hand.

Learn more about how SoFi home loans make the mortgage process as quick and painless as possible.



External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.

SOHL20008

Source: sofi.com

This Advisor Has 6 Pieces of Financial Advice For Women

Molly Ward is a Texas mother, wife and certified financial planner. With nearly three decades of financial planning experience, she focuses her practice on helping women achieve financial independence and live up to their financial potential.

An advisor with Equitable Advisors in Houston, Texas, Ward’s been helping her clients navigate their way through the COVID-19 crisis. She’s got some solid advice for how to lower your financial stress level.

Here are six questions that we’ve gotten from women who read The Penny Hoarder — and Molly Ward’s answers.

1. How Can I Prepare for Life’s Difficulties?

Q: Life has its inevitable derailments and obstacles: We take care of our aging parents; we have health concerns; deaths in the family; experience disabilities and often, women live longer than men. How can we prepare, financially?

A: “I have seen so many brilliant businesswomen and hardworking moms unnecessarily suffer when they experience life’s inevitable difficult seasons,” Ward says. “If a woman is proactive and thoughtfully and thoroughly prepared, she can change the course of her life and her family’s.”

Ward notes that women typically take more time out of careers to take care of loved ones — kids, husbands, aging parents. Also, women tend to live longer than men. Due to longevity and fewer earning years, a woman must:

  • Save more.
  • Acquire insurance on herself and possibly her spouse, and perhaps long-term care insurance on her parents.

Here at The Penny Hoarder, we recommend a life insurance company called Bestow. You could leave your family up to $1 million, and we hear people are paying as little as $16 a month for insurance policies. (But every year you wait, this gets more expensive.)

It takes just minutes to get a free quote and see how much life insurance you can leave your loved ones.

2. How Do I Invest?

Q: My husband recently passed away, and he took care of all the investing. What do I do? 

A: “Start with a realization that investing comes after planning,” Ward says. “Investing without a plan is like driving on a trip without a map.”

She recommends talking to a financial planner. When it comes to investing, Ward stresses long-term planning and logic versus focusing on the hot stock of the day or the political climate. Those will pass.

If you’re new to investing, you can start small. Investing doesn’t require you throwing thousands of dollars at full shares of stocks. In fact, you can get started with as little as $1.*

The Penny Hoarder likes Stash, because it lets you choose from hundreds of stocks and funds to build your own investment portfolio. But it makes it simple by breaking them down into categories based on your personal goals. Want to invest conservatively right now? Totally get it! Want to dip in with moderate or aggressive risk? Do what’s best for you.

If you sign up now (it takes two minutes), Stash will give you $5 after you add $5 to your investment account. Subscription plans start at $1 a month.**

3. Why Do I Feel Out of Control?

Q: Why do I feel out of control with my money? 

A: “Taking control of your finances should be a priority,” Ward says. “You wouldn’t knowingly leave your child’s college decision, or even your next summer vacation to chance. So why would you leave your financial future up in the air?

“Managing your own personal finances and investments requires a completely different emotional muscle, one that is often paralyzed by any number of experiences that can cause you to make easily avoidable mistakes — including the biggest mistake: Doing nothing at all.”

To assess your finances, Ward recommends making a list of all your assets and investments, along with any recurring payments or debts.

Take it from The Penny Hoarder: Credit card debt is the worst! Your credit card company is just getting rich by ripping you off with high interest rates. Take control with a website called AmOne, which will match you with a low-interest loan you can use to pay off your balances.

The benefit? You’ll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.99% APR), you’ll get out of debt that much faster.

It takes two minutes to see if you qualify for up to $50,000 online.

4. How Else Can I Take Control?

Q: What else can I do to take control of my finances? 

A: “Goal-setting may sound trite, but it’s an excellent starting point toward gaining control of your finances and your future,” Ward says. “Discussing and stating your short- or long-term plans for your life help you understand what financial goals you should set.”

“Financial assessment, goal setting and budgeting should become something you do out of habit — like brushing your teeth, giving your dog his flea medicine, scrolling through Instagram. Making these steps part of your monthly routine will bring a sense of control and order to your life.”

Here at The Penny Hoarder, we recommend taking control of your credit score. It’s important because the higher your score, the better deal you’ll get on a mortgage, a car loan, a credit card, or even a deposit on a car rental or an apartment.

Try using a free website called Credit Sesame. Within two minutes, you’ll get access to your credit score, any debt-carrying accounts and a handful of personalized tips to improve your score. You’ll even be able to spot any errors holding you back (one in five reports have one).

5. How Should I Leave an Inheritance?

Q: I’m going to be leaving an inheritance to my children. How do I make sure there is peace amongst them after I die?

A: “When it comes to passing down wealth and last wishes, I’ve witnessed success and sadly, on the other hand, I’ve seen feuds and litigation,” Ward says. “The negative outcomes tend to happen when there is either too much complication or at the other extreme, complete lack of planning. An internet legal document is not sufficient!

“Sometimes there is a ‘problem asset’ — for example, a piece of property that has emotional attachment. Along with poor planning, such as an unclear title or problems with a deed, emotions are high following the death of the guiding force of a parent. Feelings can get hurt, which can create a hotbed of controversy and fighting among the children.

“Thoughtful communication, in which the parent’s important values are discussed is key. Estate planning should be completed and regularly reviewed. Sometimes, hiring a trust company to be named executor or trustee of the estate can help keep the peace. When given to a family member, the executor or trustee role can often be a thankless job that comes with liability and creates unnecessary turmoil in the family.”

6. Why Do My Spouse and I Disagree About Money?

Q: My spouse and I disagree about money. Why? 

A: “It might have something to do with your embedded money scripts,” Ward says. “Your money memories — those embedded in you by parents and or grandparents — highly influence your financial success or struggles.”

“In fact, many experts believe our habits and views surrounding money were formed as children watching our parents and other adults with it. After you learn what yours are, have a peaceful discussion with him/her about money scripts to see where each other are coming from.”

“Also, planning when you are in love and things are going well is a great time to talk about your incomes, assets and debts. Truthful conversations about money at the beginning will serve you well later!”

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. 

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Source: thepennyhoarder.com

How Identity Theft Destroys Your Credit Score

Source: goodfinancialcents.com

My Secret Tricks To Help You Spend Less and Save More

Trying to spend less and save more money?  These are the tricks I have used and the best part of all is that they really work!

Learn how to spend less and save more money as we teach you how to budget and get out of debt

Learn how to spend less and save more money as we teach you how to budget and get out of debt

It is simple to make a resolution, but the trick is finding ways to actually keep it and make it happen. This week, we will share our tips on how to make the top five resolutions work for you.  We will even share tips to make any change in your lifestyle actually work well (in case your idea is not listed here).

The number 5 resolution was: Spend Less, Save More.  This sounds like a simple concept. You just want to watch your spending, right?  In theory, yes.  But, how do you actually make this happen?  When it comes to finances, there is much more than just finding a deal at the store.  Here are things you need to do in order to ensure you spend less and save more in 2016.

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Set a goal.  Why do you want to save more?  Do you want to get out of debt?  Do you want to increase your retirement savings?  Perhaps you want to go on a trip at the end of the year.  Whatever the reason, you need to write it down.  Say that with me  – Write. It. Down. Then, place that goal where you will see it every single day.

When you put your financial goals in writing, it makes them real. You can see where you are going as it is right in front of you. It might be on your bathroom mirror in the morning to remind you why you are going to work today.  It might be a photo clipped in your wallet to remind you of the trip before you decide to go and get that latte.

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Create and follow a budget.  If you plan a road trip to a new destination, you’d use a map, right?  The same idea is true when it comes to a financial plan.  You have to know how you are going to reach your financial goals.

The first thing you must do is create a budget.  We’ve got an easy post you can follow  – Budget Beginnings.  This will help anyone who is new to setting up a budget know where to start.

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Set small milestones. Now that you know how you are going to reach the goals you have set, you need to celebrate the small victories.  Break your goal up into smaller sections so you can see that you are making progress.

For instance, if your goal is to save $5,000 for a trip, break that savings into time frames.  Make your goal to save $1,000 in 3 months.  Then, when you reach that goal, celebrate it. I don’t mean go out and blow money. Just revel in the fact that YOU DID IT! You are proving to yourself that you can do it. That will motivate you to move on and maybe increase your goal to $1,500 over the next three months.

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Automate as much as possible. It is simple to decide that you don’t want to save as much out of this week’s paycheck because you want to go out to dinner at that new expensive restaurant.  It might also be tempting to not put that $75 into savings so you can get that adorable new handbag you saw that the store.  This is why you should automate as much as possible.

If you set up to make automatic payments or even transfers to your savings or investment accounts, you can’t spend the money on anything else.  It just simply is not available (well, you could try, but you may risk overdrawing your account).

Take a look at your financial institutions and find a way that you can set up direct deposits, transfers or automatic bill payments.  That way, you won’t be tempted to stray from your goal.

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Tips to reaching your Financial Resolutions in the New Year! These are SO smart!!

Check in often.  Builders don’t grab plans to a home, look at them once and then never again.  Walls would not line up, the rooms might end up too small and it, quite frankly, just would not work.  The same is true with your finances.

Sit down at least once a month and check in. If you have a spouse or partner, it is even more important to do this.  You need to always check to make sure you are on track.  Expenses might change.  Income may also fluctuate.  Have regular meetings to go over your budget and check the path of your goals and make any changes as necessary.

These are the first things you should do to get yourself onto the path of financial independence.

Source: pennypinchinmom.com