Contingency Removal Date: What You Need To Know

The contingency removal date is the date defined in the offer when the buyer will remove contingencies and commit to a firm intent to close escrow. Standard real estate contingencies typically include the right to review title, inspect the property and review the seller’s disclosure packet.

The importance of the contingency removal date

When a buyer and seller agree on an offer, the buyer effectively has an option to purchase the property, subject to their satisfaction of various contingencies. Once the buyer removes contingencies through the delivery of a contingency removal form in California, or passing a contingency date in Florida, the option turns into a binding commitment.

Contract attorneys often point out that an offer to purchase real estate isn’t literally an option. Though they are right, in practice, an offer very much resembles an option. For this reason, the shorter the contingency period, the better for the seller because the sale has the opportunity to move forward more quickly. Conversely, the longer the contingency period, the better for the buyer because they have more time to make sure the house they’re pursuing is a good fit for them.

For this reason, the shorter the contingency period, the better for the seller because the sale has the opportunity to move forward more quickly. Conversely, the longer the contingency period, the better for the buyer because they have more time to make sure the house they’re pursuing is a good fit for them.

Differences per state

With the exception of California (see below), in all other states that Home Bay is in thus far (Colorado, Florida, Georgia, Illinois and Texas) the passage of the date itself removes the contingency.

Terminology

Terminology also varies in each state. For instance in Texas they do not use the term “Inspection Contingency” rather they use term “Option Period” referring to the buyer’s right to terminate during the option period. A buyer typically pays the seller a non-refundable fee for the option period as well. The fee is typically around $100 but can vary.

In Florida they refer to the contingency as a “Inspection Period”.

In Georgia, they refer to the contingency as a “Inspection and Due Diligence Period”. There is an Option Payment for the Due Diligence Period that defaults in the contact to $10.

Details on contingency removal in California

In California, the contingency removal date is typically 17 days from acceptance. Acceptance occurs on the date that the buyer and seller agree on offer terms, contingencies included. As mentioned at the beginning of this post, there are a number of different contingencies that are present in most real estate offers. One of the most common is called a loan contingency. This is the clause that states your buyer’s offer is contingent on being able to secure financing for your house. It’s quite common for a loan contingency to extend beyond than 17 days and for it to have a separate removal date.

If certain criteria are met, it’s also possible to have a contingency period that’s less than 17 days.

You can have a shorter contingency period if:

  • The seller completes all disclosures prior to listing
  • The seller has a general home inspection prior to listing
  • The seller shares a completed disclosure packet and an inspection report with the buyer before the buyer submits an offer

California’s contingency removal form

In California, the contingency removal date itself is not what actually removes contingencies. Rather, it’s a buyer’s submission of the contingency removal form. If the contingency removal date is March 1, 2015 and no form has been submitted, that day can come and go and contingencies will still exist. Contingencies will only be removed when the buyer submits the removal form; and that can happen before, on or after the removal date. Once the removal form is submitted, the sale can move forward.

Essentially, in California, the removal date can be thought of as the deadline for buyer to submit the removal form. If the buyer fails to submit the form by the date outlined in the contract, then the seller can take steps related to a buyer breach. This can include serving a notice to perform or seeking to cancel escrow.

Source: homebay.com ~ Image: homebay.com

How Much House Can I Afford?

Debt to Income Ratio: Follow the 36% rule

Most financial advisers agree that people should spend no more than 36 percent of their gross income when determining how much house you can afford. The 36% rule is the tried-and-true home mortgage affordability tip that you should take into account when establishing a baseline for what you can afford to pay every month.

Depending on where you live, your annual income could be more than enough to cover a mortgage or it could fall short. Knowing what you can afford can help you take financially sound next steps. The last thing you want to do is jump into a 30-year home loan that’s too expensive for your budget, even if you can find a lender willing to write the mortgage.

Set a budget

The most basic research on homebuying will inevitably lead you to this general fact: houses are one of, if not the most, expensive purchases you’ll make in your lifetime. There aren’t many other opportunities to drop hundreds of thousands of dollars in one sitting… or over 30 years.

This is why setting a house budget is crucial in the homebuying process. Even more modest purchases, like a new car, require examining the bank account, debt and income situation. With a home purchase, this kind of serious financial evaluation is everything if you are to have any hope of success.

Calculate the Cost

NOTE: Go to managecasa.com to use the Calculator.

If your monthly income is $5,000 per month then your mortgage payment shouldn’t exceed $1,400 per month. The calculator… allows you to plug in all the essential data to produce a budget estimate for how much house you can afford based on your income, down payment, and other expenses.

How much of my income should I spend on my house?

Financial experts generally advise that no more than 28 percent of your gross income should go to a mortgage payment. This means if, after expenses and debt, your monthly income is $5,000 per month then your mortgage payment should not be more than $1,400 per month. That said, everyone has different financial goals and lifestyle needs. Some folks choose to underspend on their house and use the extra money for investments or travel, while others might need more space due to family size. Be sure to factor in your long-term goals so you don’t get stuck with more house (and mortgage) than you need.

How much income do I need to qualify for a mortgage?

Many factors go into a lender’s decision to give you a mortgage. Among them are your credit scoredebt-to-income ratio, employment history and income. Qualifying income is not just employment salary but other sources such as alimony, royalties, Social Security and trust income. Lenders will tally total income, subtract your debt and use the remainder to determine how much you can afford. Lenders generally use the 28/36 rule for underwriting. This rule states that a household should spend 28 percent or less of their gross income on total housing expenses, including things like HOA fees, home insurance and property taxes. Likewise, total household debt — which includes everything from your mortgage to credit card bills and student loans, shouldn’t exceed 36 percent.

Source: bankrate.com ~ By:  ~ Image: 21online Asset Library

6 Killer Mistakes You Can’t Afford to Make When Buying in the Winter

Winter is supposed to be a buyer’s market, right? Fewer buyers = way less competition. After all, you have no problem trekking through the snow to find the perfect home. Let the others wait until spring. Right?

But winter home-buying assumptions can cost you. Just because the market moves slower doesn’t mean there aren’t pitfalls lying beneath the powder. Keep in mind these six common mistakes—otherwise you might just lose out on your dream space. And that would lead to a very long winter indeed.

1. Landing yourself in holiday debt

Your kiddos are clamoring for a few Hatchimals, your wonderful husband deserves the Google Pixel, and Mom and Dad desperately need a new set of artisanal kitchen knives. But don’t rack up new debt buying everyone gifts.

“Even if your credit is in good standing, suddenly racking up a ton of holiday shopping debt will change your debt-to-income ratio and potentially negate your pre-approval,” says Alicia Brison, a real estate agent in Sacramento, CA.

Budget for your generous splurges ahead of time. Or you know what? Tell your family they’re getting the best gift of all: a new home.

2. Failing to use your imagination

Yes, the property looks a bit … drab. But don’t all homes seem sad in winter, especially if they’re not charmingly covered in snow? Don’t dismiss a property because of bare tree limbs and dead grass. Imagine what the home could be in all its springtime glory.

Pretend the trees are blooming and the rose bushes are covered in color. That’s the mental picture you should use to make your decision.

3. Ignoring possible closing date delays

Don’t assume everything will go as planned. This will go wrong, trust us. Does the plumbing need updating? Is the wiring a little funky? These delay-causing problems are always annoying, but in winter they can create a full-on migraine. This goes double for custom or new-build homes.

“While many trades will work through the winter, there are certain processes that cannot be completed during heavy snowfall or dramatically low temperatures,” says Luke Sahlani, the lead project manager and director of Sensus Design & Build. “This can be frustrating and particularly problematic if the home buyers’ closing date on their current home is coming up quickly.”

Build in some buffer time for your new home’s closing—or just a little snow might crash your move-in day hopes.

4. Lacking flexibility

House hunting always requires a certain level of spontaneity—you have to be ready to pounce as soon as you hear a place fitting all your criteria is on the market. But when the weather’s against you, make sure to loosen your schedule even more.

Flexibility “is even more critical during the winter season,” Brison says. “Weather can cause unexpected delays, and buyers need to be willing to plan viewings during the busy holidays.”

Yes, you’re excited for cousin Humbert’s one-of-a-kind pumpkin pie, but if 2 p.m. the day after Christmas is the only time you can check out your dream abode, you might have to skip a second serving.

5. Assuming you’ll automatically score a sweet deal

In the winter (generally speaking), home prices are lower. Sellers are motivated. The competition’s bundled up inside, warming their hands by the fire. Bidding wars are a vestige of the summer months. Now’s a great time to buy, right?

Unfortunately, the math doesn’t necessarily work in your favor.

“A lot of buyers assume they can get a better deal in winter because [fewer] people are competing,” Brison says. “That’s not usually the case. Inventory is lower, so the number of people who are competing is similar.”

No, prices may not rocket to the sky-high levels seen when the weather is warm. But if you expect to score a bargain-basement home deal, you might be disappointed.

6. Lowballing your offer

If you don’t get a discount on a home during the winter months, maybe you think you can create your own discount with a lowball offer. Sellers listing their homes in the winter must be desperate to sell, the theory goes.

Think again.

“Not only can a lowball offer be off-putting to the seller, but sometimes they can be so offended, they will be closed to a counteroffer,” says Denise Supplee, the director of operations at SparkRental.com.

Work with your Realtor® to craft a competitive offer that isn’t offensive. Nothing is worse than losing the home you love to another buyer because you prioritized the deal over finding a place that perfectly fits your family.

Source: realtor.com ~ By: Jamie Wiebe ~ Image: pixabay

4 Things First-time Homebuyers Should Know About Credit Scores and Mortgage Payments

With the housing market improving, you might be tempted to finally start looking for a place to call home. Before you begin your home search and choose a real estate agent to work with, you should consider looking at your own situation and determine whether you are financially ready to apply for a mortgage and pay for a property.

Here are four things every first-time homebuyer should consider before buying a house:

1. Have a Good Credit Score
The first step you should take before looking for a home is to request your credit report from one of the three main credit reporting bureaus. You will then get a better idea of your financial standing as a potential homebuyer in the eyes of potential lenders. Lending standards have tightened since the housing market collapse and lenders will be evaluating applications for mortgages more carefully. As part of this process, lenders will look at your credit score to ensure you are able to handle a long-term obligation like mortgage payments, which not only includes the loan payments themselves, but also property taxes, insurance and private mortgage insurance if applicable. The minimum credit score lenders will consider is 620 and ideally, lenders will want to see a credit score that is in the mid-700s or above.

2. Hard Inquires Could Lower Your Score
When a lender has to pull your credit report, this event will be marked as a hard inquiry on your credit history. Similar to when banks will check your credit before deciding to approve you for a credit card, mortgage lenders will examine your history to determine whether your score is up to par after you apply for pre-approval for a home loan. Having a hard inquiry will potentially drop your credit score and when you are shopping around for the right lender or interest rate, the number of hard inquiries on your report could accumulate fast. Although hard inquires could decrease your credit score, there is good news as credit score provider FICO will consider all hard inquiries as one inquiry if they are made within a 45-day period. As long as you are able to get pre-approved for a loan within this time span, you can limit the hit hard inquiries will have on your score during your home search.

3. Higher Credit Score Means Lower Interest
Although you might be approved for a home loan, the interest associated with your loan may vary depending on your credit score. The lower the credit score, the more you are likely to spend on interest per month. Lenders tend to see consumers with higher credit scores as less of a risk. According to FICO, a score between 760 to 850 could result in the lowest interest rate. The chart provided by FICO shows an interest rate of 3.866 percent for consumers with this score. In contrast, if you have a score ranging between 620 and 639 – hovering just above the minimum score needed for approval – your interest rate could be 5.455 percent, which is more than 1.5 percent higher. Although an interest rate that is 1.5 percent more might not seem like a big difference, these payments add up significantly, especially with interest on a 30-year mortgage.

4. Be Prepared to Juggle Mortgage Payments with Other Bills
First-time homebuyers should plan out their house hunting budgets with their mortgages in mind. Mortgage payments can represent a huge chunk in their monthly spending and first-time homebuyers need to determine whether they can comfortably handle their mortgage payments in addition to their other bills. If buyers cannot juggle their mortgage payments with other credit obligations, they should seriously reconsider whether a home in a higher price range is right for them.

With these tips in mind, first-time homebuyers are more prepared to apply and be approved for a home of their dreams.

Source: lexingtonlaw.com ~ Image: 21Online Asset Library

Why Your Job Matters When Buying a Home

Did you recently change jobs or receive a promotion? Despite what you might have heard, it is still possible to qualify for a mortgage to buy or refinance a home using your new income. The lending atmosphere is rife with misconceptions about job gaps, job changes and occupational changes within the course of an employment time frame. You can get a mortgage if you switched jobs or even changed industries, you just have to approach it the right way to seal the deal.

When determining your ability to pay (and therefore determining how much house you can afford), a lender will calculate your average income based on your pay from the past 24 months. It’s pretty straightforward if you’ve had the same job and same income and pay structure, but if any of those things changed in the past two years — or will change soon, you may face challenges when trying to get a mortgage.

In the past, lenders were ready to strike down loan applications in which there was a job or an industry change. Even real estate professionals will tell you not to change jobs before applying for a home loan. While that very well may be the case for most situations, it is not necessarily so black-and-white.

If you have had a job change, no matter what, a lender is going to need the following things from you — and your employer — in order to close on a mortgage: an offer letter, a role change letter if you have a title change and commensurate compensation package change, and the most recent pay stub and verification of employment.

How Lenders View Hourly Employees

Hourly employees are under the tightest microscope when it comes to getting a mortgage. Why? An hourly employee may have a set full-time schedule, which is ideal for lending purposes. However, if you work slightly less than a full-time schedule, with hours that fluctuate from week to week, this can muddy the waters.

The income gets averaged as long as you’ve been an hourly employee — even if you’re making more money now on a per-hour basis. That’s right, if you were making $40 an hour, and now you earn $50 per hour, the averaged income during the past 24 months – including the lower wage — would apply. So what can you do to get the higher hourly rate factored in to your ability-to-pay calculation?

Here’s what you’ll need from your employer: An offer letter, a current pay sub and a detailed description of the compensation structure with a new employer. These items could get you an exception due to relocation or an alternative circumstance. In either capacity, a most recent verification of employment can bridge the gap between how many hours worked in the year to date, supporting the new federal ability-to-repay requirements.

How Lenders View Salaried Employees

Lenders love salaried employees the most because a set salary streamlines the income calculation in the qualifying process. If you’re changing from one salaried role to another salaried role, despite a job gap, this should be no problem for qualifying for a mortgage so long as you can explain any gaps in the most recent 24 months.

Each job you’ve held in the past 24 months — even if you’ve held multiple jobs — all have to be detailed and itemized with dates so there is no gap in employment. If there is a gap in employment, the lender will need a written explanation detailing the transition. If you have changed jobs from one salaried role to another salaried role, with a different title and a different position — even within a different industry — that still should be fine for your lender as long as you are paid the same way — a flat salaried income.

What If You’re Salaried With Overtime, Commissions or Bonuses?

Have a new job? Or a new salaried role with big commissions, overtime or bonuses? If you do not have a history of this additional add-on income, it cannot be counted for use when qualifying for a new loan.

Here’s an example of a transition that a lender will find acceptable when calculating average income: A police officer has earned overtime plus salary for the past 24 months, and decides to change jobs to become firefighter with overtime potential. In this case, the overtime will be included in the 24-month average. The overtime, bonuses or commissions must be consistent during that time period for that type of income to be included in the average. A borrower can’t have a history of overtime, then change jobs and now have add-on commission income and expect the lender to include the add-on income in the 24-month average when there is no prior history of it.

Changing From Salary to Hourly Pay

If you are moving from a salary role to an hourly role, the lender is going to have to use your hourly income supported with a pay stub and verification of employment. As long as the change is within the same field and your title and role are similar, you should be in the clear.

Future Promotion or Raise On Deck

Congratulations, you’ve been offered a promotion! But first: Has it actually occurred yet? If not, you will be hard-pressed to get the lender to use the projected income, even if it is guaranteed.

If you cannot provide a pay stub with year-to-date income (usually a 30-day pay stub depending on your specific lender requirement), along with a letter detailing the change, you won’t get approved for the loan. Let’s say, for example, you are searching for the house and you know in the next four months your income is going to increase to $6,000 per month because you’ll have a new role within your company. In order for that $6,000 per month income to be used in the calculation, you’d have to get the details of the raise, including the role change letter and at least one pay stub.

So if you are thinking about getting a mortgage, even if it is further down the road, consider opening a dialogue with a lender now so you can be guided through any income bumps the past or future may hold. It is especially critical for homebuyers to get pre-approved with a lender upfront prior to house-hunting. This process includes allowing a lender to review your credit, debt, income and assets to assess your ability to qualify.

This is also a good time to start looking over your credit reports and checking your credit scores so you can address any problems in advance of applying for a mortgage.

Source: blog.credit.com ~ By Scott Sheldon ~ Image: pixabay.com

Homebuyers Are Willing to Make Big Sacrifices for Top Schools

  • About 75 percent of homebuyers said that access to excellent schools was important in their search.
  • Nearly 80 percent of buyers gave up some home features to land in their preferred school district, with about one in five sacrificing a garage.
  • Palo Alto is home to the top-ranked school district and high school in California this year and also claims America’s best college.

Purchasing a home in a good school district has always been a high priority for buyers who have or want children, and recent survey results show just how much a neighborhood’s educational pedigree matters.

Nearly three-quarters of successful homebuyers said that the quality of the school district was either important or very important in their purchasing decision, according to a realtor.com poll and an accompanying analysis by company Chief Economist Danielle Hale. About the same amount — 78 percent — sacrificed some features to score a home in their desired school district.

Although a separate survey conducted by realtor.com earlier this year found that a garage was the No. 1 home amenity, 19 percent of buyers gave up that essential to gain access to an excellent school district. Eighteen percent sacrificed a large backyard, 17 percent gave up an updated kitchen and additional bedrooms, and 16 percent were willing to forgo an outdoor living space.

So what criteria defines a good school in the eyes of homebuyers? For 59 percent, test scores are the most important thing to look for. Next on the list are accelerated curriculums (53 percent) and music programs (49 percent).

The analysis also examined the most popular schools in every state based on 2018 search data from realtor.com. In California, the most searched elementary school is Cordelia Hills Elementary Hills in the Solano County city of Fairfield. For high schools, buyers are performing the most searches for Clovis North High School, located on the outskirts of Fresno.

Excellent educational opportunities are one of the reasons that Silicon Valley remains such a sought-after — and expensive — destination for California homebuyers. Earlier this year, Niche.com ranked school districts in Palo Alto, Los Gatos, Saratoga, and Mountain View as the best in California. Palo Alto’s Henry M. Gunn High School ranks No. 1 in the Golden State, while Stanford University is at the head of the class on Niche.com’s 2018 list of America’s best colleges.

But buyers who are intent on providing their children with a top-tier Palo Alto education will need to dig deep to pull it off. According to MLS data, the median price for a single-family home in the Santa Clara County city in the second quarter was $3.29 million, a year-over-year gain of 15.5 percent.

Source: blog.pacificunion.com ~ Image: pixabay.com

How to Buy a Vacation Home in 5 Steps

Turn your getaway daydreams into reality — this guide will walk you through it, step by step.

Dream of owning a vacation home but find the idea of buying one too intimidating? It’s actually easier than you may think.

Here’s a guide to help you analyze your options.

1. Match housing choices to your lifestyle

Many people assume they must own a primary residence before owning a vacation home, but that’s not necessarily true. What’s really important is matching your housing choices to your lifestyle.

You may live in a city and want lots of space that you can’t afford there. You could rent a modest condo in the city and buy a large vacation home outside the metro area.

Or you may live in a large country house and want to enjoy city life as much as you can. In that case, you could own your country home and also buy a vacation condo in the city.

Either way, the financing and tax implications are almost the same.

2. Decide how you’ll use it

From a financing and tax standpoint, you need to consider how you intend to own and use your property. You have three options:

  • Primary residence. You can buy for as little as 3 percent down (if your loan doesn’t exceed $417,000), and you get significant homeowner tax benefits.
  • Second home. You can use your second home anytime you want, but lenders won’t let you rent the home. Buy for as little as 20 percent down, and qualify for the loan using your full primary residence cost plus your full second home cost. Mortgage rates and tax benefits are the same as primary residences.
  • Investment property. You can rent the home and use it when it’s not rented. Rates are .25 percent to .375 percent higher than second home rates, and your down payment usually starts at 30 percent. You qualify for the loan using your full primary residence cost plus your full investment home cost, but you can use rental income to help qualify. Tax treatment is less beneficial, but the extra income can help with affordability.

3. Understand the total cost of owning it

You can determine what you can afford in seconds. Then you’ll find a lender to formally analyze the cash available for down payment, closing costs and reserves. You’ll also calculate the total monthly cost on your existing home (whether you rent or own), plus the total monthly cost on the vacation home.

You also need to plan for personal budget items that lenders don’t use in their qualifying calculations:

  • Gas, electric, cable TV and internet
  • Furniture and housewares
  • Travel costs to your vacation home
  • Total cost of property maintenance items, like cleaning, landscaping and pool/spa upkeep

4. Review monthly and transactional cost line items

Suppose you live in San Francisco and want to purchase a home in the wine country of Sonoma County, CA, for $600,000. Here’s how much it would cost as a primary residence, second home and investment property.

Estimated monthly costs
Primary or second home Investment property
Mortgage payment $2,223 (30-year fixed mortgage at 3.75%) $2,035 (30-year fixed mortgage at 4.125%)
Insurance $100 $100
Property tax $600 $600
TOTAL ESTIMATED MONTHLY COSTS $2,923 $2,735
Estimated cash to close
Primary or second home Investment property
Down payment $120,000 (20%) $180,000 (30%)
Lender fees $2,500 $2,500
Title/escrow/inspection fees $3,500 $3,500
TOTAL ESTIMATED CASH TO CLOSE $126,000 $186,000

5. Make an offer using a local real estate agent and lender

Many vacation properties are in specialized local markets, so it’s best to find local real estate agents and lenders.

Your real estate agent will clarify local transaction fees, taxes and commissions, as well as advise on local zoning and property rental rules. For example, the town of Sonoma doesn’t allow short-term rentals for vacation homes, but other towns in Sonoma County do.

In destination areas, real estate agent commissions can be higher and can also be seller- or buyer-paid, depending on the area. Only a local expert can advise properly. And, of course, they will structure your offer for you and negotiate on all facets of the deal that are a priority to you.

Likewise, local lenders will be comfortable with appraisals and lending in rural areas. Appraisals are more difficult in less populated areas because comparable sales can be old and hard to find.

If you follow these steps, your closing will be a snap, and you’ll be relaxing in your vacation home before you know it.

Source: zillow.com ~ By: JULIAN HEBRON ~ Image: pixabay.com

Mortgage protection insurance: Should you buy it?

When you take out a mortgage, you can expect to be pitched mortgage protection insurance. It comes in several forms, but it typically covers your loan payments if you lose your job or become disabled, or it pays off your mortgage when you die.

Would you benefit from mortgage protection insurance? Or is it just another way for your mortgage company to siphon extra money out of your wallet each month while protecting itself upon your death?

The answer depends on your health, financial situation and what you want to happen when you die. Here are the pros and cons of mortgage protection insurance, along with tips for getting the best policy at the right price.

What is mortgage protection insurance?

Mortgage protection insurance, or MPI (sometimes called mortgage payment protection insurance), is simply a form of life insurance. The cost depends on factors such as the amount of your mortgage, your age and your health. For MPI policies that cover a mortgage in the event of disability, costs also vary depending on your occupation.

If you purchase mortgage protection insurance that pays off your mortgage when you die, the insurance company will send a check directly to your mortgage company, leaving your heirs with a home unencumbered by a mortgage.

Payments also go directly to your mortgage company if your policy pays upon disability or job loss — but only for a certain period, typically a year or two, and there may be a waiting period before payments kick in. Also note that disability or job-loss policies pay only the principal and interest on your mortgage. But you may be able to get a rider to cover other mortgage-related expenses, like homeowners association fees.

Many people confuse MPI with private mortgage insurance, or PMI.

“You’re required by law to get PMI if you put less than 20 percent down to purchase your home,” explains Christopher Ketcham, a visiting assistant professor at the University of Houston Downtown, who teaches courses about insurance. “It has nothing to do with disability, job loss or death. It pays the bank if you’re foreclosed on.”

Pluses of MPI

A major benefit of mortgage protection insurance is that it’s typically issued on a “guaranteed acceptance” basis.

“If you fill out the application, few questions will be asked to keep you from getting coverage,” says Kevin Lynch, an assistant professor of insurance at The American College in Bryn Mawr, Pennsylvania. “That’s valuable for people who are uninsurable or insurable at a high rate because of health issues.”

It’s also valuable for people who work in high-risk occupations, such as roofers, who usually can’t get disability insurance.

Consider whether you want to spend the money on a mortgage protection insurance policy after you’ve factored all of the other big costs of owning a home.

Minuses of MPI

Mortgage protection insurance is a waste of money if you own your home outright. In addition, MPI is a declining-benefit policy, which means that even though you pay a set premium for the life of your mortgage, the payoff amount decreases as you pay down your home loan.

Having a policy that wipes out your mortgage if you die may not be best for your family. “When my father passed away very young, my mother’s home was paid off by a lump-sum payment to the mortgage company,” Lynch says. “Her mortgage payment was something like $112 a month. It would have been more beneficial for her to receive the lump sum and earn the 18 percent interest banks were paying in the 1980s while continuing to make the mortgage payment.”

Some financial planners say purchasing MPI is like buying tires, when what you really need is a car.

“Focusing on insuring for the mortgage is relatively myopic,” says Vernon Holleman III, principal at BCG Holleman, a financial planning company in Chevy Chase, Maryland. “Whether to pay off the mortgage upon a breadwinner’s death is a question you can’t answer unless you’re taking a comprehensive look at the family’s finances.”

Choosing and saving on MPI

If you have health or job risks that make life or disability insurance unavailable or too expensive, mortgage protection insurance is probably a smart option. But don’t sign up through your mortgage company without shopping around.

“Ask about the price and features of each policy and whether it can be converted into whole life insurance,” says Ketcham. “Also investigate the insurer’s financial condition through A.M. Best Co., which rates insurers.”

If you’re considering MPI payable upon your death, you might buy a level life insurance instead. Your policy wouldn’t decline in value and would cover not only your mortgage but also your family’s living and educational expenses in the absence of your income.

“You’re far better off using a level product because most insurance carriers allow a later reduction in the policy’s face value,” Holleman says. “If at, say, year seven in your policy, you decide your need isn’t $1 million but only $800,000, you can reduce the face amount and save through the reduced premium. You’re better off controlling the benefit than having it automatically reduced.”

Source: bankrate.com ~ By: G.M. FILISKO

Do You Need A Home Warranty?

When you purchase a home, even a home that isn’t new, there is a very good chance that you will be offered a home warranty. The seller may offer to purchase one on your behalf to provide peace of mind that any component of the home that fails can be fixed affordably. If not, you will likely receive numerous mail solicitations to purchase a home warranty once the sale closes. A home warranty may sound like a great form of financial protection against expensive, unforeseen home repairs. But is it really the safety net homeowners expect?

What Is a Home Warranty?

A home warranty is not the same thing as homeowners insurance, nor is it a replacement for homeowners insurance. Homeowners insurance covers major perils such as fires, hail, property crimes and certain types of water damage that could affect the entire structure and/or the homeowner’s personal possessions. A home warranty does not cover these perils. Rather, it covers specific components of the home.

A home warranty is a contract between a homeowner and a home warranty company that provides for discounted repair and replacement service on a home’s major components, such as the furnace, air conditioning, plumbing and electrical system. A home warranty may also cover major appliances such as washers and dryers, refrigerators and swimming pools. Most plans have a basic component that provides all homeowners who purchase a policy with certain coverages. Homeowners can also purchase one or more optional components that provide additional coverage at additional cost.

Home warranty companies have agreements with approved service providers. When something that is covered by a home warranty breaks down, the homeowner calls the home warranty company, and the home warranty company sends one of its service providers to examine the problem. If the provider determines that the needed repair or replacement is covered by the warranty, he completes the work. The homeowner only pays a small service fee, plus the money she has already spent to purchase the warranty. (For for information, check 6 Tips To Sell Your Home Faster.

What Does It Cost?

A home warranty costs a few hundred dollars a year, paid up front (or in installments, if the warranty company offers a payment plan). The plan’s cost varies depending on the property type e.g., single-family detached, condo, townhome, duplex, and whether the homeowner purchases a basic or extended plan. The cost usually does not vary with the property’s age, unless the home is brand new, which increases the cost of coverage. The home’s square footage also does not affect the price in most cases, unless the property is more than 5,000 square feet. Separate structures, such as guest houses, usually are not covered by the basic policy but can be covered for an additional fee. However, garages should be covered by the basic policy.

In addition to an annual premium, home warranties charge a service call fee (also called a trade call fee) of around $75-$125 every time the warranty holder requests that a service provider come out to the house to examine a problem. If the problem requires more than one type of contractor to visit (e.g., a plumber and an electrician), the homeowner may have to pay the service fee for each contractor.

Having a home warranty doesn’t mean the homeowner will never have to spend a penny on home repairs. Some problems won’t be covered by the warranty, whether because the homeowner didn’t purchase coverage for that item or because the warranty company doesn’t offer coverage for that item. Also, home warranties usually don’t cover components that haven’t been properly maintained. Furthermore, if the warranty company denies a claim, the homeowner will still have to pay the service fee and will also be responsible for repair costs.

The Benefits of a Home Warranty

Like all warranties, a home warranty is supposed to protect against expensive, unforeseen repair bills and provide peace of mind. For a homeowner who doesn’t have an emergency fund or who wants to protect their emergency fund, a home warranty can act as a buffer. Home warranties also make sense for people who aren’t handy or who don’t want to worry about tracking down a contractor when they have a problem. Warranties can also make sense for people with expensive taste in appliances.

The subject of home warranties often comes up during the sale and purchase of a home. A home warranty can provide reassurance to a homebuyer who has limited information about how well the home’s components have been maintained (or how well the home has been built, in the case of new construction). A warranty can also be helpful for someone who has just depleted their savings to buy a home and wants to avoid any additional major expenses. For home sellers, offering the buyer a paid-up, one-year home warranty with the home purchase may provide a measure of protection against buyer complaints about any home defects that arise after the sale closes. However, providing a home warranty does not exempt the seller from her legal requirement to disclose any known problems with the home. (To learn more about protecting yourself, read Consumer Protection Laws You Need To Know.)

Home Warranties Have Drawbacks

If home warranties were perfect, everyone would have one. But they don’t. Why is that?

One major problem with a home warranty is that it will not cover items that have not been properly maintained. What is considered proper maintenance can be a significant gray area and is the source of many disagreements between home warranty companies and warranty holders. In a worst-case scenario, unscrupulous warranty companies may use the improper maintenance clause as an excuse to deny valid claims. In another scenario, the homeowner and the contractor who makes the house call may simply disagree over what constitutes proper maintenance.

Another common problem is that when a homeowner purchases a used home, it might come with a 10-year-old furnace that the previous owner did not maintain. At that point, no matter how well the new homeowner tries to care for the furnace going forward, he can’t correct the previous lack of maintenance. In addition, warranties have numerous exclusions, as well as dollar limits per repair and per year.

Home warranties aren’t expensive compared to the cost of repairing or replacing most of a home’s important components, and this fact is one of a warranty’s major selling points. However, there may be many years when nothing at all breaks down or wears out in the home. In these years, the homeowner gets nothing (except, perhaps, peace of mind) in exchange for his premium. That money could be put into an emergency fund for making the same repairs and replacements that the home warranty would cover. Also, if the homeowner tries to use the warranty and the claim is denied, he will probably feel like the money spent on the premium and the service call fee was wasted.

Home warranties do eliminate the need to find a contractor when something breaks. However, they also eliminate the freedom to choose your own independent contractor if you want the warranty to pay for the repair or replacement. If you don’t like the contractor or the work they do, you may be stuck with them. Furthermore, repairs may be more complicated with a third party (the home warranty company) involved in the process than a direct negotiation between a homeowner and a contractor would be. Also, the homeowner may have little or no say in the model or brand of a replacement component – though the warranty contract should provide for a similar- or equivalent-quality replacement.

The Bottom Line

A home warranty is not a perfect solution to the risks homeowners face. Before purchasing one, homeowners should read the fine print in the home warranty contract and carefully consider whether the warranty is likely to pay off. Home sellers who want to offer a warranty to buyers and homeowners/buyers who would feel more comfortable having a home warranty should also do careful research to find a reputable home warranty company that will actually pay for legitimate repairs when they are needed. (To help you with your home purchase, check out Top Tips For First-Time Home Buyers.)

Source: investopedia.com ~ By:  Amy Fontinelle

The Inside Workings of Credit Scores

Consumers are encouraged to check their credit reports once per year. The primary reason for doing so is to make sure there aren’t any mistakes. Unfortunately, credit reports are prone to contain mistakes. It’s not really the fault of the three main credit repositories, Equifax, Experian and TransUnion because all three are just a database. Whatever is reported to them is what you see. Further, someone with a similar name can show up on someone else’s report. If you’re not the only Bob Smith in town, this is certainly possible.

Someone else’s poor credit might very well be showing up on your report which can directly damage your credit scores. When you find an error work with your loan officer to get it fixed. Your loan officer has working relationships with credit agencies and can help get mistakes fixed and provide a method to get your scores back to where they should be.

But have you ever wondered how these scores are calculated in the first place? They follow an algorithm first developed by The FICO Company years ago. For a while, credit scores weren’t the primary force behind a credit decision but over time the impact of a credit score became more and more important. Most every loan program available today has a minimum credit score and if a score falls below the minimum, there’s some additional work that needs to be done to get those scores back on track.

There are five characteristics of your credit history that make up your three-digit score:  your payment history, account balances, how long you’ve had credit, the types of credit used and how often you’ve applied for new credit over the past couple of years.

Credit scores range from 300 to 850. Let’s say a borrower has a credit score of 600 but needs a 620 to qualify for a particular loan program. Credit scores will improve much more quickly by paying attention to the two categories that have the greatest immediate impact on a score- payment history and account balances.

Payment history accounts for 35 percent of the total score and account balances 30 percent. When someone makes a payment more than 30 days past the due date, scores will fall. An occasional “late pay” won’t really do much damage to a score but continued payments made more than 30, 60 or 90 days past the due date definitely will. By stopping the late payments scores will begin to recover.

Account balances compares outstanding loan balances with credit lines. If a credit card has a $10,000 credit line and there is a $3,300 balance, scores will actually improve. The ideal balance-to-limit is about one-third of the credit line. As the balance grows and approaches the limit, scores will begin to fall and fall even more should the account balance exceed the limit. This category contributes 30 percent to the total score.

The remaining three have relatively little impact. How long someone has used credit accounts for 15 percent of the score but there’s really nothing anyone can do to improve this area other than to wait. Types of credit and credit inquiries both make up 10 percent of the score. By concentrating on payment history and account balances, scores will improve significantly over the next few months.

Source: realtytimes.com ~ By: David Reed ~ Image: pixabay.com