late fees

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If you fall behind on several mortgage payments, your lender may begin the foreclosure process, which can lead to months of financial and emotional stress, and even result in the loss of your home.

Key Takeaways

  • Foreclosures occur when a lender takes control over a property from a borrower for failing to make payments
  • Foreclosures may occur by court order or not, depending on the state the home is located in
  • There are several indicators that come before the foreclosure, including notice of default
  • Foreclosures take 2.5 years to complete on average, but can take up to seven years
  • Foreclosures can damage your credit score and result in loss of property

What is a foreclosure?

Foreclosure definition

A foreclosure is when a lender takes control of a property after the borrower misses several mortgage payments.

When you purchased your home and took out a mortgage, you agreed to a deal with your bank or lender. They gave you the financing upfront to pay for the home, and in return, you signed a contract agreeing to pay a specific amount each month for a set number of years.

If you start falling behind on your payments, or stop making your mortgage payments completely, the bank or lender can foreclose on the property and sell it as a way to make back the funds that were lost.

When you purchased your home, you signed a mortgage contract that specified the amount of money you borrowed, as well as the interest rate and the details about your monthly payment.

However, simply living in your home does not mean that you legally own it. If you have a mortgage, the bank or lender technically owns the property until you make your final mortgage payment.

Types of foreclosure

After you have several missed mortgage payments, your lender can start the foreclosure process. There are two main ways your home can be foreclosed on:

  • A judicial foreclosure, meaning the lender needs to get a court order.
  • A nonjudicial foreclosure, depending on the state where the property is located.

There are several different types of foreclosures, depending on the state and the terms of your mortgage. Some foreclosures involve legal action and others do not. The types of foreclosures include:

  • Judicial foreclosure: With a judicial foreclosure, the lender files a lawsuit and the borrower is notified of the non-payment. The homeowner has 30 days to make up the missed payments, otherwise the foreclosure process will proceed.
  • Power of sale: A power of sale foreclosure is allowed in some states if your mortgage has a power of sale clause in the contract. Once the borrower falls behind on their payments, their mortgage provider is allowed to put the house up for auction. A power of sale foreclosure is considered a non-judicial foreclosure because there is no legal action taken.
  • Strict foreclosure: Strict foreclosures are less common because they are only allowed in a few states. In this case, the mortgage lender files a lawsuit against the homeowner, and if the borrower does not make up their payments within the court-ordered time period, the home can be seized by the mortgage holder.

The foreclosure process in 5 steps

From the time of your first missed mortgage payment to the foreclosure sale of your home, there are several steps in the foreclosure process. These phases can vary by state, but generally follow this timeline. Each state has its own laws pertaining to the process of foreclosure and foreclosure sales. These can govern the borrower’s relief options if already in foreclosure, how to go about posting a Notice of Sale, the sale timeline and other parts of the process.

Step 1: Missed mortgage payments

If your mortgage payment is a few days late, you are probably not at risk of foreclosure. Your lender may have a grace period of up to two weeks for you to make your payment without serious penalties. After the grace period, however, your payment is considered late and you’ll be charged late fees. You might also receive a warning from your lender about a potential foreclosure if you fail to make the payments.

Step 2: Notice of Default

After three to six months of missed mortgage payments, your lender will file a Notice of Default with the local recorder’s office. Your lender will also send one to you via certified mail, and depending on your state, might post the notice on your front door. This notice specifies how much you owe in order to bring your mortgage back into good standing.

A Notice of Default could show up on your credit report and affect your score. This can make it more challenging to obtain other types of credit or refinance your mortgage.

A Notice of Default doesn’t equate to the lender immediately or automatically foreclosing on your home, and it doesn’t mean you don’t have options to prevent the foreclosure from happening. You can put a stop to the proceedings by getting current on your payments.

Step 3: Preforeclosure

Preforeclosure is the time period between the Notice of Default and the auction or sale of your home. During this time, if you can get your hands on the amount specified in the Notice of Default, you’ll be able to stop the foreclosure process from going any further. The exact amount of time you have depends on your state. During preforeclosure, you might also have the option to sell your home and pay back the money owed, in what is called a short sale.

Step 4: Notice of Sale

If you don’t have the money to bring your mortgage into good standing within the allotted time frame, your lender will file a Notice of Sale, and your home will be placed up for auction at a specified time and location.

How the Notice of Sale is published depends on your state. For example, in North Carolina, the notice must be published in a local newspaper and posted on the door of the local courthouse, while in California, it must be posted on the property as well as a public place in the county.

Because the Notice of Sale is public information and has been advertised, several buyers, including investors, might be interested in buying your home. Depending on laws in your state, you might have the ability to exercise right of redemption (meaning you can reclaim your home) up until the foreclosure sale, or even after.

Step 5: Eviction

Following the auction and sale of your home, you’ll generally have a few days to gather your belongings and move to a new residence. If you do not voluntarily move out, law enforcement personnel are legally allowed to remove you and your belongings from the premises.

How long does foreclosure take?

The foreclosure process can take some time, and up to a couple of years. The average foreclosure in the U.S. took 948 days, or about two-and-a-half years, as of the first half of 2022, according to ATTOM Data Solutions. In some states, the foreclosure process took four years, and some took nearly seven years.

However, you are allowed to remain in your home while the foreclosure process plays out. Once the house is sold, you will be asked to vacate the property. If you refuse, you will receive an eviction notice and law enforcement will remove you and your belongings from the home.

How to avoid foreclosure

Facing home foreclosure can be extremely scary. Fortunately, there are plenty of ways to avoid foreclosure, even if your current financial situation is making it difficult to pay your mortgage on time.

Ultimately, avoiding foreclosure starts by communicating with your mortgage lender or servicer. It is unlikely that your lender will let you off the hook completely, but it can help you take action so you do not lose your home.

Here are some of the best ways to avoid a home foreclosure:

  • Take advantage of forbearance programs: During the COVID-19 pandemic, the federal government established a mortgage forbearance program that has since expired. However, you can still apply for forbearance if you have a federally-backed loan from Fannie Mae or Freddie Mac.
  • Adjust your loan terms: If you are struggling to afford your monthly loan payment, ask your lender if they can adjust the terms of your loan. In exchange for a longer amortization schedule, you might be able to lower your monthly payment.
  • Get a deed-in-lieu of foreclosure: Some states allow homeowners to choose a deed-in-lieu of foreclosure, in which you agree to turn over your home to a lender in order to avoid a foreclosure. With this option, you are not required to pay your mortgage, but you might still be responsible for paying the difference between your home’s value and the mortgage balance.
  • Set up a repayment plan: If you know that you are unable to make your mortgage payment for a given month, let your lender know as soon as possible. Your lender can probably set up a payment plan that involves more frequent, but lower payments, or deferral for a month or two.

Consequences of foreclosure

There are several financial consequences to foreclosure, and they can be devastating. For one, getting a mortgage after foreclosure can be challenging because of the impact on your credit and the fact that you’ll likely be subject to a waiting period before having a chance at a new loan. The other implications of foreclosure include:

  • Losing your home, which puts you in the position of having to find a new place to live with a foreclosure on your record
  • Damage to your credit, since a foreclosure stays on your credit report for seven years
  • Losing your property and equity, which can have far-reaching impacts on your overall wealth
  • Owing money on the remaining balance if it’s a judicial foreclosure, and being subject to litigation, wage garnishment and more if you can’t pay

Bottom line

If you’re struggling to make your mortgage payments, your best bets to avoid foreclosure are time and communication. As soon as you realize you can’t pay your mortgage, reach out to your lender or servicer to learn about the options available to you. They might be able to set up a payment plan or allow you to defer the payment for one month if you have a temporary financial hardship.

Source: thesimpledollar.com

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If you don’t pay your credit card bill, you could face more severe consequences than you might think. Though it will depend on your credit card issuer, you can generally expect to be charged a late fee as well as a penalty interest rate which is higher than the regular purchase APR.

Life happens, and, from time to time, payments are missed, especially if you’re dealing with emergencies such as losing a job or a family crisis. In the event you have skipped a credit card payment, it’s crucial you understand what can happen. That way, you can take steps to reduce the odds of it having a major impact on your financial health.

Here, you’ll learn more about this topic, including:

•   What happens if you don’t pay your credit card bills?

•   What if you miss one credit card payment?

•   What happens if you only can make minimum payments?

•   How can you pay off credit cards?

What Happens If You Don’t Pay Your Credit Card?

Consequences for missed credit card payments could include being changed late fees and possibly losing your grace period. It may also negatively affect your credit score since issuers report your payment activity to the credit bureaus — in most cases after 30 days.

There may be other consequences depending on how late your payment is and whether it’s your first time missing a payment.

Accruing Interest

When you don’t pay your credit card, interest will accrue and will continue to do so as long as you have a balance on your card. In essence, you are paying more for your initial purchase thanks to that interest.

The longer you go without paying your credit card, the more you risk your rate going up. Your credit card issuer may start imposing a penalty annual percentage rate (APR), which tends to be higher than your regular purchase APR. If this happens, you’ll end up paying more in interest charges. The penalty APR may apply to all subsequent transactions until a certain period of time, such as for six billing cycles.

Collections

Depending on your credit card issuer, your missed payments may go into collections if it goes unpaid for a period of time. You’ll still continue to receive notices about missed payments until this point.

More specifically, if you don’t pay your credit card after 120 to 180 days, the issuer may charge off your account. This means that your credit card issuer wrote off your account as a loss, and the debt is transferred over to a collection agency or a debt buyer who will try to collect the debt.

Once this happens, you now owe the third-party debt buyer or collections agency. Your credit card issuer will also report your account status to the major credit bureaus — Experian, TransUnion, and Equifax. This negative information could stay on your credit report for up to seven years.

It’s hard to tell what third-party debt collectors will do to try and collect your debt. Yes, they may send letters, call, and otherwise attempt to obtain the money due.

Some collections agencies may even try to file a lawsuit after the statute of limitations expires. In rare cases, a court may award a judgment against you. This means the collections agency may have the right to garnish your wages or even place a lien against your house.

If your credit card bill ends up going to collections, take the time to understand what your rights are and seek help resolving the situation. Low- or no-cost debt counseling is available through organizations like the National Foundation for Credit Counseling (NFCC).

Bankruptcy

You may find that you have to declare bankruptcy if you still aren’t able to pay your high credit card debt and other financial obligations. This kind of major decision shouldn’t be taken lightly. You will most likely need to see legal counsel to determine whether you’re eligible.

If you do file bankruptcy, an automatic stay can come into effect, which protects you from collection agencies trying to get what you owe them. If successfully declare bankruptcy, then your credit card debt will most likely be discharged, though there may be exceptions. Seek legal counsel to see what your rights and financial obligations are once you’ve filed for bankruptcy.

Making Minimum Payments

A minimum payment is typically found in your credit card statement and outlines the smallest payment you need to make by the due date. Making the minimum payment ensures you are making on-time payments even if you don’t pay off your credit card balance. Any balance you do carry over to the next billing cycle will be charged interest. You can also avoid late fees and any other related charges by making a minimum payment vs. not paying at all.

What Happens if You Miss a Payment

If you can’t pay your credit card for whatever reason, it’s best to contact your issuer right away to minimize the impact. Let them know why you can’t make your payment, such as if you experienced a job loss or simply forgot. For the latter, pay at least the minimum amount owed as soon as you can (ideally before the penalty or higher APR kicks in).

If this is your first time missing a payment but otherwise paid on time, you can try talking to the credit card company to see if they can waive the late fee.

Some credit card issuers may offer financial hardship programs to those who qualify, such as waiving interest rates, extending the due date, or putting a pause on payments (though interest may still accrue) until you’re back on your feet.

15/3 Rule for Paying Off Credit Cards

The 15/3 payment method can help you keep on top of payments and lower your credit utilization — the percentage of the credit limit you’re using on revolving credit accounts — which can impact your score.

Instead of making one payment when you receive our monthly statement, you pay twice — one 15 days before the payment due date, and the other three days beforehand. This plan is useful if you want to help build your credit history and pay on time.

The Takeaway

Missing your credit card payment may not be a massive deal if it just happens once or twice, but it can turn into one if you continue to ignore your bill. While it’s not exactly fun to have to pay a late fee, you may be able to negotiate with the credit card issuer to waive it if you are otherwise a responsible user. Even if not, it’s better than being bumped up to the penalty APR or, worse still, having your account go to collections.

Are you looking for your first or a new credit card? Consider the SoFi Credit Card. With perks like cash back rewards on all purchases, no foreign transaction fees, and Mastercard ID Theft Protection, it may be just the right choice for your personal and financial goals.

The SoFi Credit Card: The smarter way to spend.

FAQ

How long can a credit card go unpaid?

The statute of limitations, or how long a creditor can try to collect the debt owed, varies from state to state, which can be decades or more.

What happens if you never pay your credit card bill?

If you never pay your credit card bill, the unpaid portion will eventually go into collections. You could also be sued for the debt. If the judge sides with the creditor, they can collect the debt by garnishing your wages or putting a lien on your property.

Is it true that after 7 years your credit is clear?

After seven years, most negative remarks on your credit report, such as accounts going to collections, are generally removed.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

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How to take a good rental property listing photo

“Invest during a pandemic? Are you crazy?”

That’s a reasonable question. Why would anyone want to invest in a volatile market and in the midst of economic uncertainty?

But recessions create opportunities. Yes, it’s terrible that millions have lost jobs and suffered huge portfolio losses, but the unfortunate reality is recessions happen. Like it or not, this is our current situation. By looking at the market and asking “what opportunities can I find?,” we contribute to the recovery.

We contribute to the recovery in all types of investments: stocks, real estate, side hustles.

When we buy stocks, we infuse capital into companies that we believe in and/or into the market as a whole.

When we buy, renovate and rent properties, we create jobs for contractors, agents and property managers and we offer our tenants a safe, comfortable and well-maintained home.

When we start a side hustle, we build products or services that thrill our clients and create jobs for our team.

When we invest, we participate in the recovery. Recessions are an unfortunate fact of life, but they carry a silver lining. And for newbie investors in particular, recessions can open the door.

Unfortunately, during times of uncertainty, many people surrender to their fear of investing. They sit in cash until it’s too late.

To be clear, I’m not talking about people who don’t have the capital to invest. If someone is financially unstable — if they lack an adequate emergency fund, for example, or if they’re buried in high-interest credit card debt — then they should be applauded for focusing on the fundamentals first. Build the foundation; everything else rests on that.

But many financially stable people will sit on excess piles of cash.

I get it. Investing is scary during a recession.

It’s normal to feel scared of buying index funds, only to watch them drop the next day. It’s natural to feel scared to start a side hustle, when you know this is a tough time for small businesses. It’s normal to feel scared about buying a rental property; what if your tenants lose their jobs?

But by sitting on too much cash, you miss the opportunity to pick up undervalued deals.

You also miss the chance to start building momentum, so that when the economy starts rebounding, you’re already established. You’ve started the side hustle. You own the rental property. You’re not scrambling to get started after the recovery is underway; your projects are in place.

You might not have enough cash to buy cheap assets at this moment. That’s okay. Focus on the fundamentals (like building an emergency fund) and don’t worry.

If you’re fortunate enough to be able to invest, though, don’t sit out this opportunity due to fear.

We discussed stocks at length in this podcast episode, and we talked broadly about how to finish 2020 financially stronger than you started in this episode.

In this article, we’ll focus on real estate.

Should you invest in rentals during a pandemic? Might we see another housing crash, 2008-style? Is this a good time to buy? To sell? Let’s explore.

“Is the real estate market going to crash again?”

Have you heard of the availability heuristic?

It’s defined as “the tendency to overestimate the likelihood of events with greater ‘availability’ in memory.”

We overvalue examples that can easily come to mind, while we undervalue examples that are harder to imagine or recall.

If something happened recently or if something is emotionally charged, then it’ll easily come to mind. And if it easily comes to mind, we overestimate the likelihood that it’ll happen again.

Prior to the pandemic, the 2008 housing crash was the most recent recession. It comes to mind quickly: it was recent and suuuuper emotionally charged.

And so it’s natural — it’s logically flawed, but natural — to assume that this current recession will resemble the last one, to overestimate the likelihood of another housing crash.

But the factors that led to the 2008 recession (subprime lending, speculative building, shady credit-default swaps) are nothing like the factors that led to the 2020 economic collapse (a deadly virus).

The Great Recession was created by weakness in the housing market. The chain of events in 2008 wasn’t: “a recession struck, therefore home prices collapsed.” It was the opposite: “home prices collapsed, therefore recession struck.”

If you started investing before the 2002 dot-com burst, or if you were already an adult during the 1987 market crash, you’ve experienced bear markets that didn’t coincide with a housing crash. But if you’re under 40, the Great Recession was the first major recession in your adult life.

If that’s your situation, then it’s especially tempting to associate recessions with real estate crashes. After all, as a millennial, 100 percent of the recessions of your adult life — 1 out of 1!! — have been tied to a massive real estate crash.

But that was a dozen years ago. The underlying economic factors are different today.

There may or may not be a temporary slight dip in housing prices. (I doubt it, but it’s possible.) If that happens, clickbait headlines will refer to this minor dip as a “crash,” because that’s eminently more clickable. Don’t be fooled by the phrasing.

Study the housing market. Read the price-per-square-foot declines. Look at the average days-on-market of homes for sale. Scan for the number of new mortgage loan originations. This data will tell you far more than any screaming headline.

“What if my tenants can’t pay rent?”

Let’s look at statistics:

In a normal market, around 20 percent of tenants are late in paying their rent, according to data from the National Multifamily Housing Council, which tracks 11.5 million apartment units nationwide.

In April 2020, that number increased from 20 percent to 31 percent. That’s not as bad as many landlords feared.

  • In normal conditions, 80 percent of tenants pay rent on time, and 20 percent are late.
  • In pandemic conditions, 69 percent of tenants pay rent on time, and 31 percent are late.

But wait! It gets better.

The NMHC surveyed apartment managers again one week later. They found a huge improvement: 84 percent of apartment households paid rent by April 12th.

Tenants might not be able to pay rent on the 1st of the month. But the overwhelming majority — 84 percent — were able to pay after a delay of less than two weeks.

As far as the data shows so far, worries that tenants won’t be able to pay rent have largely not come to pass. Most tenants are still able to pay rent; they just need extra time.

(The NMHC noted that a huge number of apartment managers volunteered to waive late fees or offer flexible payment plans.)

That said, millions of people have been helped by a combination of stimulus checks, enhanced unemployment benefits (which currently provides an extra $600 per week in addition to normal state unemployment benefits), or payroll protection if either they or their employer qualifies for Paycheck Protection Program funds. Will these programs get renewed or extended? What will happen if they don’t? There are many lingering questions, and the future remains to be seen.

The simple truth is that nobody can accurately predict the future. We can look at data about our current situation, and as of now, we know that 84 percent of tenants (out of 11.5 million household units) paid rent within two weeks of its due date. But we do not know if or how that number will change in the future. Variables that cannot be predicted — such as the speed of recovery, the level of government intervention — will play a major role in shaping these answers. We don’t know how those variables will take shape.

The greatest risk is assuming that we know the future. Beware of certainty. Those who pretend to know the future are clinging to security at the expense of honesty and accuracy. Don’t listen to any economic or market projections that are expressed with too much confidence. We don’t have a crystal ball. Nobody knows what the future holds. The wise ones recognize this and accept it.

We cannot state what will happen. We can only state what IS happening. And from that, we make preparations for what is and what might be.

“What risks should I be wary of?”

Of course, there are serious risks ahead. We do not know:

  1. … how long the pandemic and global shutdown will continue.
  2. … how long such a large portion of the population will remain unemployed.
  3. … how many employees have had their hours reduced or accepted a temporary paycut, and how this will reverberate throughout the economy.
  4. … how long the recovery will take.
  5. … whether or not there will be a tragic second wave, or third wave, which triggers an unavoidable second or third shutdown.

How can you approach smart real estate investing in this context?

Here are a few Do’s and Don’ts:

Don’t avoid investing. The people who made that mistake during the Great Recession — those who avoided making new investments from 2009-2012 — missed out on massive, opportunity-of-a-lifetime recovery gains.

Do thoroughly analyze any new rental investment that you’re eyeing. Run a variety of “what if” scenarios on a spreadsheet, crunching the numbers with different assumptions.

What if occupancy rates fell by an additional 10 percent? What if you reduced the rent by 20 percent for the next six months? How would this affect your returns?

In our course, Your First Rental Property, we provide robust, detailed spreadsheets for heavy number-crunching.

We teach our students that the cliché thrown around by other investors — who tell you to “calculate the return” — is too simplistic.

You’re not calculating “the” return; you’re calculating a range of possible returns.

You’re not stubbornly insisting that a given rental property will have an 8 percent cap rate. You’re calculating a range of cap rates in best-case, worst-case and middle-case scenarios.

Unfortunately, there are sellers who will advertise properties as having an “X” cap rate, and there are investors who take that information as a fixed number. That’s baloney.

Properties don’t have a single fixed cap rate; they have a range of cap rates, and we teach our students how to assess this range before they commit to a six-figure investment.

Don’t over-leverage. You don’t need to borrow every penny you qualify to receive.

Ignore the real estate investors who are fixated on cash-on-cash return, a popular formula that inherently rewards overleveraging.

Instead, focus on an investing strategy that prioritizes the property’s cap rate (essentially its dividend stream). This is the investment philosophy and strategy that we teach in our course.

Do maintain strong cash reserves. We teach our students to keep a minimum of three months’ gross rent, which translates to six months of operating expenses.

Don’t jump in without a specific, carefully-thought-out written plan. Before you start investing in rental properties, write your personal investor statement.

Your written investment statement should articulate how many properties you want to purchase, the speed or rate of acquisition, the type of financing you want to use, your ideal debt-to-equity ratio or leverage maximum, the type of neighborhood you want to target, the age and condition of properties you want to purchase, and more.

We provide a fill-in-the-blank template to guide you through this exercise in our course.

Do prepare a variety of ways that you can accommodate tenants who are financially struggling. Here are some examples:

Offer an incentive: 
Offer your tenants one month of free rent — which they can use immediately — if they extend their lease by an additional year.

This is a win-win scenario. You’re spared from the costs of a turnover and vacancy. You pass these savings directly to your tenant.

Waive late fees: 
If your tenant is waiting on unemployment benefits, they may not be able to pay rent on the 1st of the month. That’s fine; they’ll have the money once their benefits arrive.

Offer to waive late fees, under the condition that they stay communicative.

You want to avoid a tenant ‘ghosting’ you, screening and dodging calls from you or your property manager.

You can avert this situation by (1) letting them know you’re flexible and accommodating, and (2) telling them you’ll waive late fees as long as they send you frequent updates about their situation, like a quick text message or email, every two to three days.

Set specific and measurable communication criteria, such as: “Please text me with an update at least once every three days, even if your text is as simple as ‘hey I’m still waiting on my benefits to start’.”

Spread the payments:
Another option? If your tenant is waiting for their unemployment benefits to arrive, offer to spread next months’ payment across the rest of their lease.

Let’s say their rent is $800 per month, and they have 9 more months remaining on their lease. In this example, they would pay $0 next month, and their rent would rise by $100 per month for the remaining 8 months.

The Bottom Line: Recessions are tragic, but they also carry the hope and promise of a recovery. If you have money to invest, don’t let fear hold you back. Invest in the market, start a side hustle, or invest in rental properties. Don’t let another year or two slip by, and then scramble to get a foothold after the recovery is well underway.

Our flagship course, Your First Rental Property, opens for enrollment again on Monday, November 30th.

Learn about the course in this video below, or check out this page for FAQs, testimonials, and your chance to join our VIP waitlist. When you join, you get a free 7-day crash course on the fundamentals of residential real estate investing.

If you’re interested in investing in rental properties and want an A-to-Z guide of everything you need to know, learn all the details here.

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Source: affordanything.com

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how to build credit

how to build creditDo you want to learn how to build credit?

While you might be intimidated, it doesn’t have to be hard!

I learned how to build credit at 18 by opening a credit card offer that came in the mail. My first credit card had a small limit around $300.

I never maxed it out, and there were really no benefits. But, it didn’t have a monthly fee, and it helped me learn how to build credit fast.

My credit score is now over 800 and considered excellent.

I don’t rely on my credit score and credit history, but I know that it impacts my life in many different areas — from insurance, to loans, to my cell phone bill.

Whether you want to believe it or not, your credit score can play a major role in your family’s life.

While you shouldn’t go crazy and completely obsess over learning how to improve your credit score, it is important to learn what you can about your credit score and the impact it may have on your life.

Your credit score can influence the interest rate you receive on a loan or your home mortgage, finding a rental home, attaining certain jobs, your insurance rates, and more.

Because of this, I think that a credit score can be used to a person’s advantage.

Even though your credit score can impact your life in a big way, that doesn’t mean it’s hard to build your credit history and credit score. Yes, it can be easy to wreck your score, but it’s easy to learn how to build your credit score back up.

Check your credit score with Credit Sesame for free!

How to build credit.

 

What is a credit score?

Before we begin, I want to talk more about what a credit score is. If you want to learn how to build a credit score from scratch, then starting here is the key to understanding what you’re working with.

A credit score is a three digit number that shows others your creditworthiness, and is often used as an indicator to show how risky you are.

There are three main credit bureaus, which is why you may occasionally see different numbers. The main three (Equifax, TransUnion, and Experian) calculate scores depending on the information they have about you, so your history and score may be slightly different at each of them.

Related: How Do Credit Cards Work?

 

What is a good credit score?

Lenders and people who are checking your credit score usually have varying opinions about what a good credit score is.

In general, though, a good credit score is usually 720+. The higher your number, the better your credit score.

Is 600 a good credit score?

A 600 credit score is below average. But, do not fret. There are ways to increase your credit score.

 

Is it easy to hurt your credit history?

Learning how to build credit and improving your credit score usually take more work and time than it does to damage your credit score.

You may be hurting your credit score if:

  • You have a high utilization rate. Keeping your balances below 20% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $200. Lenders like to see a low utilization rate, as it shows that you are not maxing out your debt.
  • You cancel credit cards that may be helping your credit history.
  • You pay your bills late or not at all.
  • You never check your credit report and have errors listed.

 

Can my credit score influence my home buying process?

Yes, for sure!

This is a big reason why learning how to build credit is so important. Your credit score can impact:

  • Whether or not you are approved for a home loan.
  • Your interest rate.
  • How large of a home loan you are given.
  • The size of the down payment you are required to put down.

Read more at How Your Credit Score Impacts Your Home Buying Process.

 

How can I build my credit fast?

How can I build my credit fast?

Why is improving your credit score important? What else can it affect?

There are many instances in which your credit score and/or credit report may be looked at, and sometimes it has nothing to do with a loan. This is why it is important to work on building your credit score, because you never know when you may need it.

Plus, it’s something you can personally control, so why not learn how to build credit and start working on improving it?

Home and car insurance – If you have homeowners or car insurance, your rate may be calculated on a factor you didn’t know about – your credit score. If your credit score isn’t good, then you may actually be paying more because companies consider you to be riskier.

Employer – This may be shocking to hear, but there are some employers out there that will check your credit report (with your permission). Industries that often check your credit report include those dealing with financial services, chemicals, and defense. I recently read a statistic that around 30% of companies will check a potential new hire’s credit report before making a hiring decision.

Renting a home – If you have decided you don’t want to own a home, you may still need your credit history checked. In fact, your landlord will most likely check your credit history. They will want to know if you pay your bills on time or if you have ever skipped a payment entirely. This will say a lot about you as a renter, whether you want to believe it or not. If your credit history is not up to their standards, you may be denied the rental altogether, you may be asked to pay multiple months rent upfront, or you may be asked to find a co-signer just in case you fail to pay your rent.

Credit cards – If you don’t care about credit, then you probably will not care about this one. However, if you want a credit card, especially one with a good rewards system in place, then you will want to work on improving your credit score. The credit cards with the best reward offers are usually only available to those with good or excellent credit scores.

Loans (home, car, etc.) – If you apply for a loan, your credit score and credit history will definitely be checked. Before you are approved for a loan of any sort, the lending institution is going to thoroughly check your financial history so they don’t end up losing money on your loan.

The interest rate you receive – A good credit score usually means you will qualify for lower interest rates, while a bad credit score means higher interest rates. I have talked to someone with a 24% interest rate on a car loan, all because they had a very low credit score. A higher interest rate means paying hundreds or thousands of dollars extra in interest, and this is why it’s so important to learn how to build credit

 

What makes up your credit score?

There are five categories that make up your credit score. Your payment history and amounts owed equate to 65% of your credit history, but don’t forget the others factors!

If you want to work on building your credit score, here are the following factors that go into your score:

  • 35% Payment History. Your payment history has the biggest impact on your credit score. This includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on.
  • 30% Amounts Owed. This is the next largest category when it comes to your credit score. This includes your balances, your utilization rate, and more.
  • 15% Length of Credit History. The age of your accounts come into play here. This is why it’s usually a good idea to keep a credit card that you’ve had for a long time. I still have the credit card I opened when I was 18. It has no other rewards than improving my average account age. However, only keep cards open if you know you won’t go into debt.
  • 10% New Credit. This category includes things such as how many hard credit inquiries you have and how long it’s been since you last opened a new credit account. It is important to remember that checking your own credit score does NOT impact this category as long as you receive your credit report from a company that is authorized to give you your credit report. 
  • 10% Credit Mix. This includes the type of accounts you have, such as whether or not you have credit cards, a mortgage, car loan, and so on.

Check your credit score with Credit Sesame for free!

 

Here’s how to build credit from scratch:

After reading all of the above, I’m sure you’re wondering how you can build your credit score fast, especially if you have a low credit score or no credit at all.

Increasing your score and learning how to establish credit is not extremely difficult. Once you realize what impacts your credit score, you can make relatively easy changes that will begin to improve it.

Below are my general tips for building your credit score.

 

Get a credit card.

Okay, okay, some of you may be cringing at this tip. Credit cards are not for everyone, BUT if you know that you can be smart about it, opening a credit card is a way to build your credit history. It can one day lead to you being able to use your credit score and credit history to your advantage.

While your first credit card will probably have a low limit and a high interest rate, it can help you learn how to build credit.

If you are looking for options, I recommend reading Best Rewards Credit Cards | What You Need To Know.

And, I recommend reading Top 5 Credit Card Mistakes And How To Avoid Them before you get a credit card.

Now, there are other ways to learn how to build credit without a credit card. Continue reading below.

 

Pay your bills on time.

According to FICO, 35% of your credit score is determined by your payment history. One or two late payments most likely won’t prevent you from having a good credit score. However, continuing to miss payments most likely will.

No matter what the bill is, you should always pay it on time. Paying a bill late may lead to interest charges, late fees, and a drop in your credit score.

Yes, companies can report late payments to credit agencies. If you do happen to accidentally pay a bill late, do not panic, though. If you are quick enough, you can call the company and ask for some leniency so they won’t report it. 

I once underpaid my monthly mortgage payment by $10. I must have clicked the wrong number because I’m still not even sure how that happened. Luckily, I caught it quickly enough and my mortgage company realized that it must have been a mistake. They waived any late fees and also did not report it to anyone.

Other related tip on how to build your credit score from scratch: Pay your credit card bill before your balance is reported. Even if you pay your credit cards in full each month, your balances are still probably being reported. Some people avoid this by paying their credit card bills twice a month to keep their utilization rate low.

 

Regularly check your credit report.

It’s important to check your credit report regularly because it may include errors that negatively affect your credit score. The sooner you fix those errors, the sooner you can improve your score.

My favorite site for checking my credit score is Credit Sesame. Credit Sesame makes it extremely easy to check your score and both me and my husband have active accounts.

You can also receive one annual free credit report from the three main credit bureaus mentioned above. Yes, this means that you get one from EACH, so three each year. I recommend spacing them out so you can get one every four months. You can read more about this here.

 

Keep your balances and utilization rate low.

If you have a credit card, then you have a credit limit. However, just because you are given this limit doesn’t mean you should try to reach it.

I recommend spending less than 20% of your available credit.

In fact, you should always try to be below 30% of your credit limit if you want to have a good credit score. So, if your credit limit is $1,000, you do not want to spend more than $300. Any more than that will impact your credit score.

It’s also important to note that even if you are paying your balance in full each month that going over 30% of your credit limit can still negatively impact you. This is because your balance is reported on a monthly basis to the credit bureaus. In this case, it is best to pay off your balance or at least some of it before your next credit card statement goes live. Paying off all or a portion of your balance before the rest of it is due will keep your utilization rate low.

If your credit limit is low, then you may even want to request an increase. Of course, only do this if you trust yourself not to spend more. The key here is to not it all!

 

Be mindful of your credit history.

Keeping credit cards open can lengthen your credit history, and this can improve your credit score. However, only do this if it makes sense for you. If you think you will go into debt or if the annual feels aren’t worth it, then you may want to think about closing your cards instead. 

According to FICO, 15% of your credit score is from the length of your credit history. The longer your credit history then the higher your score may be.

If you want to learn how to build credit when you have none and you have old credit cards that carry no annual fees, you may want to think twice before you cancel them. Yes, closing them can help you simplify your life, but an old credit card may be lengthening your credit history and, therefore, improving your credit score.

Like I said, I still have the credit card I opened when I turned 18. The credit card stinks and pretty much offers no benefits. However, it’s the card I’ve had the longest. To keep it active, I just buy one thing a year (such as gum)!

Side note: There are many reasons why you may want to cancel your credit cards, though. If having credit cards leads to credit card debt (not being able to pay your balance in full every month), then it may be the best idea to cancel them.

Get your rent reported.

Did you know that paying your rent can help you improve your credit score?

If you have little to no credit or are struggling with poor or bad credit, by using ExtraCredit, you can report your rent and utilities to TransUnion® & Equifax®, so you can get payment history for bills you are already paying! Rent reporting can help you add more credit history and help you work your way to a strong credit profile.

You can learn more at What Is ExtraCredit? Here Are 4 Reasons You Need to Read This ExtraCredit Review.

How do I start building credit?

As a recap of the above, you can learn how to build your credit score by:

  • Getting a credit card (but be smart!)
  • Paying your bills on time
  • Regularly checking your credit report
  • Keeping your balances and utilization rate low
  • Being mindful of your credit history
  • Getting your rent reported

 

How can I build my credit if I have no credit?

As a personal finance blogger, I sometimes hear people say that you shouldn’t worry about your credit score because credit cards are horrible. However, I don’t completely agree with that.

Credit cards are dangerous for some people, but that’s not the case for everyone.

Learning how to start building credit and improving your score can end up saving you lots of money. It can lead to lower interest rates, lower down payments, and lead to more opportunities.

Having a good credit score doesn’t mean you use credit cards all of the time either, it means you’ve followed the tips in this article and have shown lenders, employers, and others that they can trust you. 

Check your credit score with Credit Sesame for free!

Do you know what your credit score is? Do you think learning how to build credit is important?

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Are you wanting to learn how to be productive?

how to be productive

how to be productiveAre you feeling like you aren’t as productive as you usually are? Or, perhaps life is really busy right now and you want to be able to manage it all better.

Many people struggle with how to be productive. We all have lots of things to do and sometimes we can accomplish them all, and other times it is very difficult.

I go through productivity spurts.

At times, I feel like I can accomplish anything and everything, and other days I don’t even know what (if anything) I did all day. 

This is an area that I am constantly working on, and perhaps you are too.

Sometimes I am distracted by so many different things that it has caused me to waste a huge amount of time. Therefore, I have not been able to live in the moment like I would really like to.

Currently, though, I am trying to be as productive as I can, and trying to get ahead on as much work as possible. We are about to sail away from Florida after a very busy summer traveling in the van, and being more productive now means I’ll have a better time when we are sailing.

That is one of the best benefits of learning how to be productive – you will have more time to focus on what you really love doing. You won’t be stressed out by things you still need to do, and you can just live in the moment without any distractions.

However, learning how to be productive can be very difficult for some people. It’s easy to get overwhelmed by a long to-do list. Negative thoughts can hold you back from believing you can accomplish your goals or tasks. And, social media can be a huge distraction.

While those things can prevent you from being productive, they are also a huge waste of time. 

And, the thing about wasting time is that it can hold you back from reaching your goals.

By learning how to be productive, you may be able to:

  • Begin a side hustle.
  • Eliminate your debt.
  • Spend more time with your those that you love.
  • Learn a new skill.
  • Enjoy life more.
  • Travel more.
  • Increase your income.
  • Reach your dreams, and more!

If you start today with just one of the ideas for how to be more productive, you will be that much closer to reaching your goals. So, when you read through this article, pick one idea you’d like to try today. You can try more once you see how well just one of them works.

Related reads:

Hopefully the productivity tips in today’s article will help you find hours in your week, no matter how you lose them.

How to be productive – 17 tips for success

 

1. Realize how much time you have to work with.

The first step is to be realistic with yourself.

Everyone has the same 24 hours in a day, but others may be more limited with their time. I understand that different situations can make a person quite busy, so you need to be honest with yourself about much available time you have.

You don’t want to run yourself ragged, forget about the things that truly matter in life, hurt your work performance, and more.

However, many people do have extra time in their days but just don’t realize it. For one week, I recommend keeping track of the time you spend on various tasks and see how much time you waste and how you can improve.

You’ll most likely be very surprised!

 

2. Leave your negative outlook behind and find positivity.

I know what you’re thinking – How is this related to learning how to be productive?!

According to the National Science Foundation, the average person has about 12,000 to 60,000 thoughts per day. Of those, 80% are negative and 95% are repetitive thoughts. (statistic found on Medium)

That is a lot of time wasted on negative thoughts!

Lately, though, I’ve been realizing that I waste a lot of time with negative and repetitive thoughts. It’s been crazy to realize how easy it is to turn something so little and simple into something negative.

This is one of the productivity tips that may be hard to adapt to, but learning to be positive will really help you in the long run.

Instead of focusing on negatives like regret, guilt, comparisons, and more, you can be more productive by using this time for things that actually matter.

When you find that you are thinking in a negative way, take a moment to think of something that makes you happy. Is it your family? Do you love what you do? Did someone do something nice for you today?

A positive outlook can be life changing.

Related articles that will help you learn how to have a productive and positive day:

 

3. Check your email less. Way less.

This is one area that I have always struggled with. Even though I am guilty of checking my email numerous times throughout the day, I am starting to take my own advice and checking it less often.

I think the problem for me is that I feel obligated to keep checking my email in case something pops up with my business or if a reader has a question. I want to be as available as much possible, but that means I am constantly checking my email. 

While it may not feel like you are spending that much time checking your email, the time and focus it takes to switch back and forth can really add up. It can also cause you to lose your train of thought when you should actually be doing something else.

If this is an issue for you and you want to learn how to be productive, I recommend setting time aside throughout the day to check your email. You can even set a rule that you only check after you finish a task. You can also turn off email notifications if they are distracting you.

You may want to work down to only checking your email just a few times a day, or even (EEEK!!!) once a day.

 

4. Unsubscribe from unnecessary emails.

Subscribing to emails is really easy to do. We’ve all done it to get a coupon code, at the cash register to get a receipt (isn’t that annoying?!), and sometimes you just mysteriously land on an email list.

Over the years, I’ve subscribed to plenty of different websites and companies. I got hundreds of unnecessary emails every day, and even though I set up tabs to organize my email, I was still spending so much time filtering through them. 

It was tedious, and they were mostly junk. But, sometimes real emails got lost in the mix as well!

So, I unsubscribed from almost all emails, except for blogs that I enjoy and whatever is absolutely necessary.

Everything else has been removed.

If you find that you are spending too much time everyday checking, reading, and deleting emails that it isn’t allowing you to live in the moment and live your best life, I definitely suggest unsubscribing to the ones that aren’t meaningful to you.

You can find an unsubscribe button on the bottom of most emails, and it just takes a couple of clicks to get off an email list. 

 

5. Wake up earlier.

Some say that they are most productive early in the morning. If this is the case, then use this to your advantage!

When I had my day job, I would usually wake up around one to two hours before I had to start getting ready for work. I would use this time to work on my side hustles, which included replying to emails, brainstorming ideas, managing my blog, finding mystery shop jobs, and more.

Sometimes, waking up early was extremely rough, but it was nice to get everything done before I went to work. This was also one of the ways I learned how to be productive at home, because I could also use this time to straighten things up around the house or clean.

If you’re not a morning person, you can always try to fit in time before you go to bed. Often I would even work on my side hustles for a few hours before I went to bed.

Related: 9 Tips To Wake Up Early & Why It Feels So Good

 

6. Organization is your friend.

Your productivity can be greatly influenced by how organized you are. 

Here are some surprising statistics I found from Simply Orderly about being unorganized:

  • The average person spends 12 days per year looking for things they can’t find.
  • Every day, the average office worker spends 1.5 hours looking for things.
  • In a recent survey, 55% of consumers stated they would save anywhere from 16 to 60 minutes a day if they were organized.
  • 23% of people pay bills late and have to pay late fees because they are unable to find their bills.

Becoming more organized can be hard at first, but it can really help you reclaim time in your day. If you want to learn how to be productive by organizing your life, here are several helpful tips:

  • Put things away when you are finished using them.
  • Make a schedule and stick to it.
  • Write things down in a notebook or planner so you don’t forget anything.
  • Regularly tidy things up.
  • Switch to a minimalist lifestyle.

Like I said, learning good organizational skills can be difficult, and you will have to commit if you really want to take part in this tip. But, being organized will ensure that your living and working spaces are functional, and it will probably even clear some mental clutter.

Posts related to minimalist living:

Also, organize your finances!

This is one of the tips that won’t just help you learn how to be productive with your time, it will help you gain control of your financial situation. Organizing your finances includes things like setting up auto pay on your bills, creating a budget, and using an online platform to show you all of your accounts.

My favorite online tool for keeping track of my finances is Personal Capital. Personal Capital allows you to aggregate your financial accounts so that you can easily see your financial situation. You can connect accounts such as your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more. And, it is FREE.

 

7. Use short gaps in your day wisely.

Everyone has gaps of time in their day. This could be a gap before you have a meeting, a gap between your day job and night classes, a gap before you have to pick up the kids from school, or something else.

Maybe you have 15 to 30 minutes or an hour. Most people will just plunk down on the couch and watch TV or browse Facebook.

However, if you want to learn how to be productive, find ways to wisely use these gaps in your day. 

Here are some examples of how you can take advantage of short gaps in your day:

  • You can use a gap to write out tomorrow’s to do list. 
  • You can pay a bill or two.
  • If you’re a freelancer, you can use this time to bill your clients. 
  • Use this time to schedule appointments.
  • Make a meal plan and grocery list.

 

8. Watch less TV.

Fun fact: I haven’t watched TV in over a month!

Less fun fact: I’m not perfect and often binge watch TV shows when I happen to find a good one.

TV absolutely kills my productivity level. I know how easily I can get sucked into the world of Netflix, so I haven’t even tried watching anything lately.

I love a good TV show, and I can honestly say that I once wasted a lot of time by watching too much TV. The average person watches TV for over 35 hours per week! I’m not sure if I was watching that much, but I know I was close.

Can you imagine what you could do by reclaiming just half of those hours each week?

Cutting out the amount of TV you watch will really help you if you want to learn how to be more productive. By cutting back on TV, you will have a few more hours everyday to focus on more important things.

Related: 16 Alternatives To Cable TV That WILL Save You Money

 

9. Spend less time getting ready.

Being more productive often involves saving time on littles aspects of your daily life. These things are often overlooked and can add up to a lot of wasted time, like taking forever to get ready. There are lots of people who spend way too much time picking out outfits and trying to get ready, and I was once one of them.

Since we had to downsize to travel full-time, I had to get rid of a lot of my clothes. It was a little hard at first because I had so many! But, by having less clothing options and/or choosing your outfit the night before, you can save valuable minutes each day.

Before we downsized, I couldn’t even remember all of the clothes I had, but now I save time each day because I know what I have and what looks good together.

For more information, I recommend checking out Becoming Minimalist’s blog post, Capsule Wardrobe: Why Some Are Wearing the Same Thing Every Day.

 

10. Have a to do list and use your calendar.

I love my constant to do list and having a full calendar.

Without these two things in my life, I would feel lost, unorganized, and probably even confused about what to do! 

Yes, I rely heavily on my to do list, but putting a to do list together doesn’t have to be hard. I keep my to do list on my phone, and it’s just a simple list of things I need to do throughout the day, week, month, and year. I can even set reminders so I don’t forget when things need to be done. Others find that planners work for well for them too.

This is a tip that will help you learn how to be productive in every aspect of your life, as you can have a to do list for work, home, etc. Your to do list will keep you on track so you don’t forget what needs to be done on a daily, weekly, or monthly basis. This will keep you motivated and working towards your goals.

Related: 15 Of My Best Working From Home Tips So You Can Succeed

11. Make sure your to do list is doable.

Even though I have an on-going to do list, many people benefit from having a smaller and more approachable list. 

You can start by asking yourself, “is this something I can really do today?” If the answer is “yes,” then add it to your list. If you are unsure, you might want to break it down into smaller tasks or save it for another day.

By having a smaller list, you may feel a greater sense of accomplishment knowing that you’ve crossed everything off your list for the day, even if it is just a couple of things. This can motivate you to work on bigger tasks and goals over time.

12. Practice self-care.

Yes, self-care is important for your productivity levels!

Self-care is simply doing something to protect your mental or physical health. It can be something like taking a nice long bath, meditating, drinking more water, etc.

It’s spending a little bit of time to put yourself first.

When you are busy or overwhelmed with other aspects of your life, self-care is one of the last things you think you should do. But, when you take a small break to take care of yourself, the effects can ripple out through the rest of your life.

You may find that your stress is reduced, you’re more productive, happier, and more.

This tip is often overlooked when people want to learn how to be productive, but it’s always important to take care of yourself.

 

13. Procrastinating doesn’t help anyone.

Procrastination can waste time and kill your productivity as you may find anything else you can possibly do before completing a certain task.

Then, you might do things that waste even more time, such as just standing around, watching TV, cleaning the same area you’ve already cleaned 10 times that day, and more.

People procrastinate for all sorts of reasons, like anxiety, avoidance, etc. When you figure out why you are procrastinating, you can then create an action plan. By focusing on what you need to do, you will stop wasting time!

 

14. Get off social media.

Okay, you’re probably thinking, “there’s no way that I can cut out social media!” I’m not saying that you need to cut it out entirely, but if you spend a little less time everyday on social media, you will find valuable hours each week.

Social Media Today found that the average person spends nearly two hours a day on social media. When you add all of that time up, it equals to wasting over 5 YEARS of your life on social media. That’s shocking!

If you find that you are spending too much time on social media and that it’s preventing you from being productive, you may want to close the accounts you are spending too much time on. You can even create a time block so you cannot access your accounts during certain periods of the day, and so on.

 

15. Singletask more.

There are some people who say that learning to multitask can help you learn how to be productive, but I don’t 100% agree with that. 

Now, some people can multitask successfully, but many people cannot with the large amount of time it takes to refocus on a new task. So, when you are constantly switching back and forth, you waste time refocusing.

This is one tip that is helpful if you want to learn how to be more productive at work.

It’s best to realize your strengths and weaknesses to know whether or not multitasking actually helps you save time. For myself, I’ve found that focusing on one thing at a time is actually how I save the most time when working.

16. The snooze button is probably hurting you.

Getting an extra five minutes of sleep after your alarm goes off isn’t going to change your life. There are many scientific studies proving that hitting the snooze button does nothing good for you.

I know many people who set their alarms to go off anywhere from 30 minutes to an hour before they actually want to wake up. 

I’m not going to lie. I used to do this as well and thought it was the only way I could get up. It definitely did not work, as I always felt extremely groggy and sometimes even more tired!

If you want to learn how to be productive, wake up when your alarm first goes off to use those minutes valuably. If you are so tired in the morning that you feel you need to hit the snooze button, then you should either start going to sleep earlier in the evening or set your alarm for when you actually need to get out of bed.

17. Know your peak hours.

Each of us has certain hours of the day that we work more efficiently. For some people, it’s in the morning, while others work well late at night. I’ve even read that many people are the most productive right before lunch because they are hungry.

You can learn how to be productive by spending a week paying attention to the times of the day when you are most focused. Those are your peak hours, and most people have two peak hours per day.

Knowing your peak hours will help you learn how to concentrate and complete high-priority tasks. This will help you get the most important or complicated things done.

What are your top tips on how to be productive? Do you think you waste time each day?

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A mortgage escrow account is an integral part of the financial picture for many homeowners. These accounts are typically used in two ways: to hold an earnest money deposit a buyer puts on a home after signing a contract with the seller (it’s released at the closing), and to pay a homeowner’s property taxes, mortgage insurance and homeowners insurance premiums.

When it comes to the latter, some homebuyers are required by their mortgage lender to have an escrow account; others may opt into one through their mortgage servicer. Here’s how mortgage escrow accounts work, and if you do have a choice, the pros and cons to consider.

How do mortgage escrow accounts work?

Once you become a homeowner, a mortgage escrow account is an account used to hold and ensure that some of the major, ongoing expenses associated with your home are paid on time. Typically these expenses include:

  • Mortgage insurance payments
  • Homeowners insurance premiums
  • Property taxes

Instead of paying insurance and taxes separately, from a personal account, the money to cover these bills — plus a little extra, known as a “cushion” — is included in your total monthly mortgage payment. The mortgage lender or servicer holds these funds in an escrow account and makes the payments on the homeowner’s behalf as they are due. Payments might be made monthly, quarterly or bi-annually.

The key difference between an escrow account and any other financial account you might have: You don’t manage an escrow account yourself. Escrow is facilitated by a third party — in this case, your lender or servicer.

Should you use an escrow account?

Depending on the type of loan and its specifics, you might not have the option to forgo an escrow account. If you’re obtaining a conventional mortgage — that is, one from a private bank or lender — an escrow account is often required with a down payment of less than the standard 20 percent, as is mortgage insurance. You often don’t have a choice if you’re getting a federally backed loan, either. FHA loans and USDA loans require escrow accounts, though VA loans do not.

Let’s assume you do have a choice. There are viable reasons to have an escrow account: It can be an easy, hassle-free way to make payments for your mortgage, homeowners and mortgage insurance and property taxes, and the cushion can help cover potential shortfalls. You don’t need to be diligent about setting aside the funds, including extra for any unforeseen increases in premiums or taxes, and then making sure you meet the due dates for payments. Of course, there are negatives as well — it increases your monthly mortgage payment, and you might prefer to handle your own finances yourself, without a third party involved.

Pros of a mortgage escrow account

It’s automatic

Having your mortgage lender or servicer hold your property tax and homeowners insurance payments in escrow ensures that those bills are paid on time, automatically. You don’t have to keep track of it, or even think about it, and you avoid penalties such as late fees or potential liens against your home.

You’re covered when there are shortfalls

Homeowners insurance premiums and property tax assessments can fluctuate over time. For example, if your escrow account happens to be short due to your property tax bill increasing, your servicer will typically cover the difference temporarily. To make up for it, they’ll eventually increase your monthly mortgage payment.

No surprises

The exact amount needed for escrow is added to your monthly mortgage payment for you, so you’ll know what to expect the majority of the time. If the escrow component of your monthly mortgage payment needs to increase, you’ll get a notice from your lender or servicer in writing. Plus, your lender or servicer is required to send you an annual escrow statement that shows the amounts you’ve paid (and the drawdowns) along with any overages or shortages.

“Escrow accounts make life a lot easier for the majority of homeowners that want to add predictability to their monthly expenses, rather than getting whacked twice a year with big insurance and property tax bills,” says Greg McBride, CFA, Bankrate’s chief financial analyst.

Potentially lower mortgage costs

Depending on your mortgage lender, you may be able to get a discount on your interest rate or closing costs just by having an escrow account.

Cons of a mortgage escrow account

It’s automatic

While it’s convenient to not have to think about making various payments on time, this pro can actually be a con for organized homeowners who prefer to have full control over their payments. Many mortgage lenders allow homeowners to make property tax payments directly to the county assessor and homeowners insurance payments to their insurer.

You might miss out on investment opportunities

In particular, the money that might end up as an overage in an escrow account could be used for short-term investments. Earning interest on such investments may make more financial sense for you, instead of allowing a bank or lender to reap the gains.

Digital tools and attractive CD rates can help you invest your money outside of escrow and earn a better return for the long term, notes Henry Yoshida, founder and CEO of Rocket Dollar, a platform based in Austin, Texas, that enables users to invest funds from tax-advantaged retirement accounts.

“With interest rates where they are, there is limited opportunity cost from forgoing interest earnings on money that is instead being escrowed by the loan servicer throughout the year,” McBride says.

A large upfront deposit

Often, setting up an escrow account requires a homebuyer to deposit an amount equal to two to three months’ worth of property taxes and insurance premiums. These are sometimes called “prepaids,” and they can significantly add to your mortgage closing costs.

Because you’ll be paying for insurance and taxes with your regular mortgage payment, you’ll have a higher payment each month. Of course, you have to pay for insurance and taxes anyway, so they aren’t an additional cost. But having them in your monthly payment could leave less room in your budget month-to-month, and prepaids can exacerbate that.

Can be a target for scammers

Large sums parked in an escrow account make it an attractive target for fraudsters. Common mortgage escrow fraud schemes include cyber-thieves setting up fake websites that look similar to the servicer you’re working with, or spoof email addresses to try to get your personal information. Some sophisticated scammers even set up fake phone lines in an attempt to build trust. Under these false pretenses, fraudsters might try to persuade you to wire them money.

Possibility of incorrect estimates

The amount that needs to be tucked away in your escrow account hinges on your insurance premiums and property taxes, which can vary year-to-year. Generally, the previous year’s bills are used to figure out how much you’ll need, but incorrect estimates can happen if, for example, the assessed value of your home has increased — or you appeal and get a reduction in your property taxes.

FAQs

  • No. Mortgage escrow accounts are typically only required with certain types of loans — if you’re not financing your home purchase with a mortgage loan, it’s not a requirement. You can pay your insurance and property taxes on your own if you choose, as you would any other types of bills, or you can set up an escrow account at your bank if you’d like the convenience of them doing it for you.

  • An escrow account for a home purchase is managed by a third party, such as a mortgage servicing company, escrow agent or escrow company. Its purpose is to pay for taxes and insurance — the funds are included in your total monthly mortgage payment, and the servicer or agent makes the payments automatically on your behalf. Many people find this convenient, but some would rather manage their finances themselves.

  • No, you cannot take money out of your escrow account. The money held in a mortgage escrow account is held by the lender or loan servicing company on your behalf, to serve a specific purpose, and it is not typically accessible to the homeowner.

Bottom line

With a mortgage escrow account, your mortgage lender or servicer is allowed to collect the amount of your homeowners insurance, mortgage insurance and property tax payments, sometimes plus a cushion, month in and month out. It’s a very common financial tool and helps to ensure your obligations as a homeowner are met without much effort on your part (aside from making your mortgage payment). However, if escrow isn’t required, you might want to explore alternative uses for those funds.

Source: thesimpledollar.com

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An investment property is real estate purchased with the intention of earning returns through rental income or profit at resale. Just over 70 percent of single-family rental properties are owned by individual investors, according to the latest Census data. If you’re looking to take the plunge and buy an investment property, here are some initial considerations to make.

Considerations when investing in rental property

Here are a few considerations to think through before you get serious about an investment or rental property.

Location matters

Remember, it’s easier to look in on a property across town rather than one that’s two or more hours away. True, you can always hire a local property manager to keep the home in tip-top shape, but that’ll eat into the passive income you hope to gain.

It’s also important to consider the location with an investor’s eye for what’ll net you the most return. When evaluating locations, it’s often best to avoid areas with lots of vacancies and instead look to neighborhoods close to amenities such as parks and shopping, as well as transit, says Trent Ellingford, an investor and co-founder of the Real Estate Knowledge Institute.

After researching promising neighborhoods, connect with a real estate agent experienced in the local rental property market.

“Don’t use just a real estate agent,” says Kathy Fettke, CEO of Real Wealth Network, host of “The Real Wealth Show” and “Real Estate News for Investors” podcasts and author of “Retire Rich with Rentals.” “It’s best to look for an agent who specializes in real estate investments. Ideally, look for someone who owns them nearby. Oftentimes, property managers have brokers in-office to help.”

Types of rental properties

The kind of property you buy is equally important. The three main types are:

  • Single-family homes: These are one-unit properties, typically for either long-term tenants or on a short-term basis through platforms like Airbnb or VRBO. If it appreciates in value, you might be able to make additional profit down the line when you sell. With a single-family home, your cash return will be lower than if you had purchased a rental property that can house multiple tenants. Compared to a condo, you’ll also be responsible for all the maintenance.
  • Condos: Condos are generally more affordable upfront than single-family homes, and you could be spared many maintenance hassles thanks to the presence of an HOA. Keep in mind, however, some condo associations significantly restrict what you can do with the property, including renting it out, and mortgage lenders will factor in the monthly HOA fee when determining what size loan to extend to you.
  • Multifamily homes: Multifamily homes include duplexes (two units), triplexes (three units) and properties with four units or more. These allow you to rent to more tenants, generating more income, but also cost more than a single-family home or condo. You might have many more responsibilities as far as being a landlord, as well.

“Single-family homes are the most popular,” says Bruce Ailion, an attorney and Realtor with RE/MAX Town and Country in Georgia. “Some areas have a tradition of two- to four-family homes, while others do not. Multifamily properties of less than 100 units tend to be owned by individual owners or owner groups. Apartments over 100 units tend to be owned by institutions and professional real estate investors, and retail office and warehouse spaces tend to attract higher-income and more sophisticated investors.”

Consider the full financial commitment

How much money do you have on hand to make a down payment, or potentially pay for the home in full? Calculate your approximate return on investment (ROI) before you purchase a property. Estimate how much income you’ll get from the property and what your expenses will be. Subtract your expenses from your income to find your net operating income. A rental property’s expenses generally include:

  • Rental property insurance: Varies based on location; about 25 percent higher than standard homeowners insurance
  • Rental property taxes: Varies based on location; the average nationally for a single-family home was $3,785 in 2021, according to ATTOM
  • Utilities: Includes electric, gas, heating and water, some of which tenants might pay, but you’ll be on the hook for during vacant periods
  • Home maintenance and repairs: Varies; the average nationally was $3,018 for maintenance and $2,321 for “emergency spending” in 2021, according to Angi
  • Advertising costs: Includes real estate agent commission, typically 5 percent to 6 percent of the property’s purchase price; or vacation rental site service fees, typically 3 percent to 5 percent based on rent amount
  • Property management and other fees: Includes property management setup, management and maintenance fees, as well as tenant screening, eviction or other expenses; property managers typically charge between 6 percent and 10 percent of the rent for ongoing service, says Ailion
  • HOA fees (if applicable): Averages several hundred dollars
  • Rental income taxes: “Income taxes must be paid for all money made on the property,” says Ellingford. “Of course, everyone thinks of the monthly rent; however, income also includes any other money you collect, such as late fees, pet fees or even work by the tenant in lieu of rent.”

Keep in mind, while you’ll need to report all of your rental income to the IRS, you can typically deduct most or all of your expenses, along with depreciation and mortgage interest. Review IRS Publication 527 or consult with a trusted tax professional for more specifics pertaining to your rental property situation.

Understand differences between investment properties and second homes

A second or vacation home is different in many ways from an investment or rental property, and not just because of how it’s used. For one, your mortgage interest rate will likely be higher for a rental property because it’s not your primary residence, meaning the lender is taking on more risk. With mortgage rates going up, it’ll cost even more than it would have say last year.

Know the laws

Do you know what to do when your tenants won’t pay up? For example, certain states require a grace period when your tenant is behind on rent. In other words, you can’t evict a tenant until the grace period is over, but you can still charge late fees. Know the laws in your state before you rent out your property, including what constitutes a compliant lease agreement (including security deposit requirements), discriminatory practices and tenants’ right to privacy.

Determine your vacancy plan

You’re not always going to be able to rent out your property. You might have trouble finding renters, have to rip up carpet and patch drywall or provide a rent-free place for a family member to temporarily stay. There could be any number of reasons why income from your rental property might dry up. How will that impact your financial situation, and how will you cope?

Financing your rental property

A mortgage for a rental property isn’t the same as a home loan for a primary residence, or even a second or vacation home. Keep the following in mind:

  • Make a sizable down payment: You’ll typically need to put down at least 20 percent for a rental property, but if you want to look more attractive to a mortgage lender, you might want to put down more than that.
  • Be a strong borrower: You’ll also need a credit score of at least 640 and a debt-to-income (DTI) ratio of no more than 45 percent, based on Fannie Mae standards. The DTI ratio is your monthly debt payments divided by gross monthly income. (Need to improve your credit score? Learn some tips.)
  • Go outside of big banks: Big banks might not readily loan to you compared to a small bank, or offer you as desirable of loan terms. Compare options from both big and small banks, including community lenders, to find the best combination of rate, fees and customer service. It might help if you already have a relationship with the bank or lender.
  • Ask for owner financing: Owner financing means that the seller agrees to accept payments directly from you instead of requiring you to get a mortgage. This can benefit both you and the seller, but there are risks involved, so tread carefully; this arrangement isn’t for everyone.

Bottom line

A rental property could be a sound investment, particularly if the rent you collect offers you some extra income. Weigh all the aspects of purchasing a rental home, including financial implications, taxes you’ll have to pay, laws involved and how much extra time you have on your hands.

Source: thesimpledollar.com