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Buying a Home is Becoming More Expensive

marcus — Fri, 29 Jan 2010 12:30:47 +0000

Although home prices haven’t increased much and interest rates have remained steady over the past year, it’s still going to be a more expensive to buy a home soon. The Federal Housing Authority (FHA) has decided to increase the down payment requirements on the mortgage loans they guarantee/insure. This down payment was increased a year ago to its current level of 3.5% of the purchase price. (Ex. $100,000 purchase price X 3.5% =$3,500 down payment). Buyers can still obtain a mortgage for the 3.5% down payment, but they must meet a minimum credit score. Additionally, the FHA insurance premiums will increase on each loan and the amount a seller can contribute to offset the buyer’s closing costs will be reduced to 3% from 6%. FHA insures the majority of mortgage loans held by borrowers that would traditionally not qualify for a mortgage on more conventional mortgage loan routes…as called bank loans. FHA appears to be adopting more stringent guidelines for its borrowers, however, conventional loans generally require at least a 20% down payment and much higher credit scores. (Ex. $100,000 purchase price X 20% = $20,000 down payment). FHA is more lenient on past credit issues and is accepting of credit scores below 600.

marcus — Mon, 25 Jan 2010 21:27:23 +0000

Mortgages are loans made by banks and lenders that package these loans (securitize) and sell them on Wall Street in the form of bonds called mortgage backed securities (MBS). The money made from the sale of the MBS them goes back to the bank/lender so they can complete more loans. The mortgage payments made by the homeowner eventually pay the investor that has purchased the MBS in which your mortgage resides with other like mortgages.

When the foreclosures started piling up, investors on Wall Street didn’t want to buy these MBS, which dried up bank’s and lender’s continual cash resource from the investor markets. The dried cash pools prevented lenders from mortgage lending. The White House administration pledged $1 trillion dollars to the buy those unwanted MBS, so that lending could continue and keep the housing market alive. The federal government’s involvement allowed mortgage interest rates to fall from 6% to its lowest 4.7% within a year of its involvement and made the volatile housing market an attractive bet as the government announced a healthy profit from its investment into the housing market.

The US Treasury department believes the federal government’s involvement into the housing and MBS markets was supposed to be short-lived and its purpose now completed. Although, many believe it’s too early for a government pullout of the fragile housing market because sales are low and the economy is ailing, but investors and housing market professionals could easily become reliant on the government’s presence and never allow the markets to fully strengthen to a self supporting level.

Why Understanding the Financial News is Important

marcus — Wed, 28 Oct 2009 18:41:35 +0000

The stock market’s Dow Jones Industrials index recently reached the 10,000 mark and although the stock market hasn’t reached that mark in over a year, what is the significance of this seemingly random financial statistic to non-stock market investors?

The movements of the stock market reflect the confidence of investors in our economy’s corporate future. When upward or downward surges occur in the stock market, investors show their enthusiasm or distrust in the economy by purchasing or selling ownership in public-owned corporations listed on a stock market. By purchasing shares in a corporation, the investors feel confident they will profit in the near or distant future from partial ownership of that company. Investors sell of stocks to access cash, gain a profit from a stock reaching a certain price or out of fear of losing money. Investors base their decisions on a plethora of information provided by government agency reports, corporate financial statements or trends in an industry of which a corporation may hold a position. If the government issues a report that the military will need an additional 2 million tires a year for its fleet off vehicles, then public companies making tires may see an increase in their stock price, since they will improve profits by selling more tires.

At the end of every quarter (March, June, September & December) corporations report their “Profits & Loss” and other financial statements. The stock market reacts this information and the Dow Jones Industrial index and various other indices will shift up or down by causing a reaction from investors. So why does this all matter to most of us? This investor activity drives bank lending practices, rates and activity. Commerce is driven by these banks’ ability to lend to growing companies and thus creating a stable employment market and industry growth. You have a vested interest in the movements of thee stock market, whether you literally place money in one of the stock markets or not.

Paying Your Credit Cards is No Longer Enough

marcus — Tue, 20 Oct 2009 12:43:25 +0000

Most people believe that paying their credit cards on time will prevent them from paying extra charges. However, card holders should double and thrice check their statements as many banks including Citibank are charging extra fees in the form of supplemental annual fees for instances such as a lack of transaction activity. (Remember if these fees aren’t paid tey will reflect as unpaid each month of a credit profile and slowly reduce one’s credit scores) Banks are preparing for the reduction in interest and fees they will be allowed to bill customers when the new credit card reform act comes into being in February 2010. Many banks are making these profitable fees up with new rules and guidelines. Financially literate credit card holders would be wise to read all correspondence from their issuing banks and to review statements for new or additional charges. In addition, an occasional call with the bank to question fees and inquire of discounts and offers is always a good idea. Make sure to maintain and record any agreements and changes in charges to your account for future reference should questions ever arise.

Understanding Affordability is a Major Part of Financial Literacy

marcus — Thu, 11 Jun 2009 04:09:38 +0000

I recently got a call from a friend whose grandparents (80 years old) were placed into an expensive “no documentation” residential mortgage loan that is now foreclosing. The grandparents were seeking cash for medical expenses and didn’t qualify for a loan requiring full documentation of income and income sources. However, due to their excellent credit scores, they qualified for a riskier loan product that would forgo the process of verifying financial ability and documentation. Well, the mortgage interest rate adjusted and the medical expenses increased, the grandparents found themselves in an all too familiar situation… unable to afford their home of over 25 years and facing foreclosure. Key point to remember here is that everyone must understand bank loan qualifying standards are set to insure the loan applicant has a clear and certain ability to repay the loan in a timely manner. The mortgage company that determined the grandparents couldn’t afford the mortgage under normal conditions was wrong for suggesting the “no documentation” loan product with an unchanged understanding of the grandparent’s finances. Of course, after managing to maintain stellar credit, the grandparents should have been able to see that the riskier mortgage was more expensive and could reach an unaffordable level. But the thought of receiving an approval by creditors gives a false sense of security that the bank believes the loan requirements were manageable and affordable. In mortgage lending, irresponsibility in one’s fiduciary relationship to the client is inexcusable. The applicants are people… grandparents… who are relying on the guidance of the mortgage professionals and misuse of this trust relationship can lead to heavy fines on the lender. However, when mortgage professional are dealing with the elderly, there are additional laws that prevent and prosecute predatory lenders.
I know it’s not always great to get an unapproved status back on a loan application, but sometimes it for the best. Beware of risky loan products that speak beyond your level of financial literacy and discuss options with unbiased financial professionals (like CPA’s) outside of the transaction. If you feel you or someone else has been illegally advised on a mortgage transaction, contact your state’s attorney general and professional licensing commission arm.

What’s Really on a Credit Report?

marcus — Tue, 12 May 2009 02:47:18 +0000

In the banking industry, the credit report / credit profile is often referred to as the “character report.” The credit/character report does not determine if a person has “good” or “bad” credit, as much as it helps illustrate a financial picture of a person’s consistency to uphold to their financial responsibility. The credit report answers questions like… does a person pay their financial obligations each month within 30 days? …How many times over the last two years has this person been more than 30 days late on those obligations?… Does a credit holder rely on the bank’s money more to manage their own money by carrying balances beyond their monthly and yearly earning potential? The answers to these lines of question help a creditor determine the risk of offering credit/money to a person and assess the likelihood of timely installment payments until the debt is repaid. That risk is expressed in the form of the credits interest rate.
Does a low credit score translate to a financial deadbeat? Absolutely not, I have known some really great people that have experienced “bad” credit situations, but not because they were “bad” people. In fact, after my father’s death, I became very detached from my finances (and other responsibilities) as I dealt with my loss. Although death isn’t an excuse to mentally checkout on finances, my actions became a sign of a potential credit risk I could become should I fall victim to my emotions again. I was traveling with a friend in the city when he received a parking ticket. As soon as he pulled the ticket from his windshield, he drove to the address on the citation and paid the fine. Out of curiosity, I asked him his credit scores and he quickly responded 814. Both the actions of paying the ticket immediately and knowing his exact score are the characteristic traits of an 800+ credit score person. Equally, the characteristic traits of the person that pays the “minimum due” each month and carries high credit card balances, typically carries a 600+ credit score. These character traits may walk on the edge of risky for one person and may be perfectly normal to another, but the manner of attention given to one’s financial obligations are the only concern of the creditors.
No one is necessarily bad or good because of the way they address financial obligations, but the everyday decisions that make up who they “are” as a person, exemplify what the character report will reveal towards those obligations. Improving one’s credit score is as much about managing money as it is about managing one’s personality and mental whims.