Getting a Mortgage When Self-Employed

Being self-employed certainly has its perks, especially at tax time. One big downfall however is when it comes time to purchase a home. Navigating the mortgage process when buying a home is challenging for anyone, but when self-employed the process can become formidable. Fortunately, by planning ahead, you can work through any issues beforehand in order to make the process smoother when the time comes.

Notice the key word here…ahead. Without being able to show steady income via a pay stub, you need to be able to show steady annual income. That means having at least two years of taxes that show an amount sufficient for lenders to determine that you can make your monthly payment. Lenders will typically calculate your average “monthly income” by adding your Adjusted Gross Income for both years, and then dividing it by 24.

However, beware of red flags. Lenders don’t like to see huge increases or decreases from one year to the next. The ideal situation is one that shows a steady increase from year to year to prove business is good. Beware also of making any huge deposits during the mortgage process. This will only lead to having to answer more questions and provide more documentation.

One of the biggest things you may want to think about is taking fewer deductions. While this may mean a higher tax bill for the year, you’ll look better on paper. This means making clear separations between personal and business expenses too.

Be prepared to show extra documentation to prove your business exists. This can include items such as your business license, website, letters from clients and a letter from your CPA. Depending on what kind of business you have, you might also need to provide proof of worker’s comp insurance, employer’s liability insurance, or bond insurance.

And, of course, make sure your credit score is as high as possible. Good credit can improve anyone’s chances of getting a loan, so if you’re self-employed, you especially want to make sure your credit is in good shape. 740 or above is a good number to aim for, but you’ll need at least a 640 just to be approved. By planning ahead and checking your credit in advance of purchasing a home you will have time work on any irregular issues and make sure your accounts are in good standing.

Keep in mind you may need to lower the amount of the loan to match your income on paper. As a last resort, you may want to look into alternative financing options or finding a co-signer with a regular source of income.

While it is more challenging to purchase a home if you work for yourself, knowing what to expect will help you prepare and be ready to make your dream of owning a home become a reality.

FICO Announces New Credit Score Based on Alternative Data

From The Wall Street Journal * April 2, 2015

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Fair Isaac Corp., the creator of the most widely used consumer credit scores, announced Thursday a new score intended to make millions of people who have had difficulty getting approved for financing creditworthy.

The Wall Street Journal reported the creation of the new score, currently in a pilot phase, on Wednesday.

The pilot program from Fair Isaac, also known as FICO, allows 12 of the largest U.S. credit-card issuers to identify consumers who would otherwise have difficulty getting approved for credit, though FICO didn’t name the issuers.

FICO said the score complies with regulations that will allow lenders to “extend credit responsibly.” The firm plans to complete the pilot program and make the score available to more lenders this year.

The announcement was made in conjunction with credit-reporting firm Equifax Inc. and LexisNexis Risk Solutions, which provides risk-related data to lenders. Both firms are providing alternative data for the new score, including payment history on utility bills, cable bills and cellphone bills—information held in a database maintained by Equifax—as well as public record information, including address history, held in the LexisNexis database.

Some 15 million previously unscorable consumers can now be scored based on the alternative data, FICO said. In total, some 53 million people in the U.S. don’t have FICO credit scores, according to FICO, most of whom either don’t use debt by choice or because a negative credit event, such as bankruptcy, foreclosure or a collection, has shut them out of mainstream borrowing. Traditional FICO scores are used in 90% of consumer-lending decisions, according to CEB TowerGroup, a financial-services research firm.

With the new score, consumers who receive a credit card and handle their payments well—avoiding falling behind on payments and maintaining low balances—for at least six months will then receive regular FICO scores, which will make it easier for them to get approved for other loans, including car loans and mortgages.

There is evidence the new score will help to give more people access to many forms of credit. Some one-third of the 15 million individuals who have a score under the new system have a score that is above 620, FICO said. The new FICO score, like the traditional ones, ranges from 300 to 850. Credit-card issuers, car-loan lenders and more mortgage lenders often approve applicants with traditional FICO scores above 620. The percentage of individuals getting scores above 620 on the new gauge “is a good indication that this is a process to onboard more consumers and allow them to maintain more creditworthiness,” said Jim Wehmann, executive vice president of scores at FICO.

The new score, which FICO says it has been working on for the better part of two years, comes in response to lender demand for a score that will make more people creditworthy. Lenders have been increasingly looking for ways to extend more credit in the past couple of years in an attempt to boost originations and revenue, but in a way that could limit the amount of risk introduced into the banking system.

Proponents of such a score have said that people who don’t use debt but who pay their monthly bills on time should be rewarded in the same way that people who pay their debts each month are when they go to apply for financing.

This isn’t FICO’s first take at alternative data. More than a decade ago, FICO rolled out a score that also looked at alternative data, the FICO Expansion score, but it failed to take off. The new alternative-data score has been developed from the ground up with a larger set of data, according to FICO. Interest in alternative data, which went away among many lenders right after the recession, “has come back in alignment with home prices and the economic recovery of jobs coming back,” said Craig Focardi, senior director at CEB TowerGroup.

Traditional FICO scores are calculated based on the information in the credit reports from the three major credit-reporting firms, Equifax, Experian PLC and TransUnion. The new score instead pulls data from the separate databases held by Equifax and LexisNexis.

By: Annamaria Andriotis  The Wall Street Journal  Apr 2, 2015

Best Affordable House in the US…Look No Further Than the Boise Market

From Real Estate News * Apr 7, 2015

boise_top

Cue the confetti. Unfurl the streamers. The nation’s best affordable home hails fromBoise, ID.

Interest in the two-story, 2,460-square-foot home in the suburb of Nampa propelled it through our brackets and on to a thrilling championship win over a charming ranch homein Detroit.

What made Boise the big winner?

Well, a price of $95 per square foot isn’t a bad place to start. Listed for $234,000, the four-bedroom home also offers a bonus room and large backyard.

In addition, Boise’s one of the hottest markets in the country right now. Inventory is tight, median prices are rising, and the median days on market for a listing in the metro area have dropped precipitously.

And despite the local economy chugging along, affordability remains strong. Job growth and rising incomes are commonplace, and an abundant supply of affordable homes helps to keep the market healthy.

It also has one of the lowest (and fastest dropping) unemployment rates in the country—3.5% in January 2015, about half of what it was in January 2013. In addition, over half of active inventory (55%) is within reach of the median household, which earns about $49,000 per year.

The winning home

Boise’s big winner has been on the market for only a couple of weeks, yet it’s amassed a huge influx of page views over that period. In fact, it’s racked up over eight times as many views as the average listing in Boise and over 10 times the national average.

Recapping the action

Boise vs. Nashville

Nashville came in as the favorite, but nothing prepared it for Boise’s magical day. Sorry, Music City.

Detroit vs. Richmond

Detroit motored through the first few rounds, leaving competitors in the dust. Richmond proved a much stronger contender, but Detroit’s firepower proved too much in the end.

The finals

Boise vs. Detroit

Detroit came out strong, but it was a performance and tournament for the ages for Boise, an unlikely but well-deserved champion.

 

final_bracket

Market Looking Good Heading Into Busy Buying Season

Bloomberg Business recently published an article on how positive things are looking heading into this year’s busy home buying season. While the article refers to the nationwide market, it is closely consistent with McCall’s market as well. In a nutshell, here is the good news:

  • Previously owned home sales were up in March by the most in four years.
  • Houses were on the market for less time, 52 days on average.
  • Property values have appreciated.
  • More job growth is driving up sales.
  • First time home buyers sales were up.
  • Distressed properties were down, creating a healthier mix of properties on the market.
  • Mortgage applications are at highest level since June 2013.
  • Increase in inventory shows sellers are confident buyers will emerge.
  • More supply means better prices for buyers.

According to John Stumpf, chief executive officer at Wells Fargo & Co., the nation’s largest home lender, “Interest rates remain low, homes are affordable, consumer and small business confidence remains high, and the labor market is approaching full employment.” All of this is good news for the housing market in the nation, and in McCall. If you are thinking about buying or selling your home, now is the time to take the plunge!

Mortgage Rates Remain Steady This Spring

Mortgage rates are ever-changing and it is hard to know whether to jump into a home now or wait a couple months to see if rates drop. But there’s also the chance that rates will rise. So what’s a potential homebuyer to do? Fortunately there are those who watch the market and have a handle on what rates are going to do. Although not guaranteed, it’s wise to follow the experts if home buying is in your future as it could mean the difference of a few hundred dollars a month on your mortgage.

This spring, rates have remained fairly steady, averaging at around 3.70% for a 30-year fixed rate mortgage. This is down from about 4.41% this time last year. In fact, according to the latest data from Freddie Mac, fixed mortgages were essentially flat this week. All of this is good news for those considering purchasing a home in the near future.

But should you wait? While there has been speculation that rates may go up in June, Paul Edelstein, director of U.S. financial economics at IHS says, “June is more or less off the table unless there is a big, positive surprise in the economy. We’re thinking September, and I won’t rule out December or even next year.”

Heading into the busy home-buying spring season, waiting could be an option, but with rates hovering near all-time lows, you may want to consider getting into that home right now after all.

Sources:

http://www.bankrate.com/finance/mortgages/mortgage-analysis-041615.aspx

http://www.realtor.com/news/mortgage-rates-unchanged-calm-before-the-storm/

http://www.washingtonpost.com/blogs/where-we-live/wp/2015/04/16/mortgage-rates-remain-low-heading-into-spring-buying-season/

Luxury Kitchen Upgrade

The kitchen is the heart of the home, so they say. And let’s face it, most of us tend to spend a lot of time there. So maybe it’s time to think of adding some luxury upgrades to your kitchen. Here are some ideas to take your kitchen up a luxurious notch. Be sure to check out the gallery of images below.

Cooking

  • Steam Oven
  • Double Wall Ovens
  • 5-burner Island Induction Cooktops
  • Warming Drawers

Storage

  • Touch open cabinets
  • Refrigerated Drawers
  • All-Star pantries
  • Built-In refrigerators

Water & Dishwashing

  • Drawer Dishwashers
  • Farm sinks
  • Bosch 800 Series Dishwashers
  • Pot fillers and bar sinks

Exotic Woods

  • Wood countertops
  • Enviro friendly wood floors 

Renting vs. Buying in McCall

For the last few years renting a home has typically been less expensive than paying a mortgage. But with historically low mortgage rates and rising rent costs that trend may be shifting. In fact, rents are expected to rise even faster than home values in 2015 in McCall. But, the choice between renting and buying a home can be one of the most difficult decisions you will ever make. There is no right or wrong answer but ultimately, making that decision depends on your financial situation, your future plans and the lifestyle you wish to live.

In general, home ownership is often a better alternative to renting as it offers significant financial benefits and also peace-of-mind.

  • Buying can be cheaper than renting, especially if you plan on being in the home for at least 4-6 years.
  • Equity is built up as the mortgage is paid down.
  • Many homeowners can deduct mortgage interest and property taxes from their income-tax bills.
  • You can tap into the equity of your home for big-ticket expenses, such as college tuition, at interest rates that can be lower than other financing options.
  • Your monthly payments will remain stable and you won’t have to worry about a spike in rents.
  • Beyond financial calculations, homeownership can create stability and security for you and your family.
  • You can own pets and paint the walls any color you like without getting permission.

However, you may want to consider renting if:

  • Your lifestyle and career require mobility and you do not see yourself staying in a home for more than four years.
  • You plan on downsizing or retiring in the near future.
  • Your rent is lower than average—and you expect it to stay that way.
  • You are building your savings and your credit and can get better-than-average returns from whatever you’re investing your cash into.
  • You’re in a super-expensive housing market or the monthly cost of renting is lower for a home of similar size and quality in the same community.
  • You do not have adequate income or savings for maintenance or repair costs in a home.
  • You do not have the time or desire to take on necessary home maintenance that accompanies homeownership.

Buying and owning your own home can be a very rewarding experience if you are properly prepared, know what to expect and make the right financial decisions. There are several advantages to homeownership, but it comes with additional responsibilities and potential risks as well. Essentially, in making the decision to buy vs. rent you need to evaluate your finances, recognize where you are in life and determine what will suit your situation the best. 

Reconsider Writing That Love Letter

With the recent market situation in McCall, meaning fewer homes on the market and more buyers, advice has been abounding about how to close the deal, including writing a letter to the sellers telling them how much you love the home and why you should be the ones to live in it. All too often buyers get emotionally wrapped up in the purchase of their “dream home” and feel that writing a letter to the seller explaining how much they love the home and how they plan to (fill in the blank: raise a family, watch the grand kids play, live out their dreams etc.) is the best way to get their offer accepted.

While all this is true and nice, most likely what is happening is that the buyer is giving up all of their cards, which in turn can hurt their negotiating position. When the seller knows how much the buyer must have the house it is far more likely that they will be less forgiving and flexible when it comes time to negotiate. In the end, writing the letter can hurt you more often then not. If you feel that you absolutely need to write the letter, consider doing it after the sale has been completed. Then you can thank the seller for the home and let them know how much you love it.

The same works in reverse for sellers who feel they have to write a letter and leave it on the counter for showings or email it to the selling agent. Most of the time these “love letters” depict how much they loved the home, how they raised their children/grand children but now that ____________ happened or now that _____________ got sick they have to sell the home to “down size, move closer to a hospital, move closer to children so they can help, etc etc etc.”  All this is doing is giving up the seller’s cards so that when its time to negotiate they have already lost some negotiating power.

Furthermore, according to Christine Smith with the National Association of Realtor’s, buyers’ letters could pose problems with the Fair Housing Act, which makes it illegal to refuse to sell or rent to a prospective tenant based on their race, religion, color, sex, national origin, family status, or disability. Consider the letter from a married couple mentioning that their kids really love the house, which is close to their church. Say the letter moves the seller to reject a higher offer from an unmarried buyer of a different religion—this might turn into a legal problem. Letters can be subpoenaed and used as evidence, even if there was no discriminatory intent. Sellers, buyer agents, and listing agents could all be found in violation of fair housing laws.

The lesson here is to keep your cards close and let the negotiating take place without the emotional element.

Buying A House in McCall? How To Get Your Finances In Order

Tax season is upon us which makes it the perfect time to start thinking about getting your finances in order for a future home purchase. The home buying process actually begins with putting effort into getting your finances in good standing. A good rule of thumb is to start the process up to a year in advance. Begin with the following five steps.

1. Get your credit in order. Your credit score is a large factor in qualifying for a mortgage. The higher the score, the easier it will be to qualify for a loan. Start off by accessing your scores. You can either purchase them directly from the credit bureaus listed below or pay for them as you get your free reports from Annual Credit Report Request Service. Read each report carefully to make sure all information is accurate as errors can significantly impact your ability to get a loan. If there is incorrect information on your reports, immediately dispute it with the bureaus as this process can take several months.

2. Get your monthly bills in check. Check your total monthly debt in relation to your income. The bank wants your total debt to be no more than about 30% of your net income. Coming up with a realistic debt-to-income ration will help you know how much you can afford for monthly housing costs (including taxes, insurance and utilities). Pay down your debt as much as possible to increase your borrowing power. Pay down the highest-interest debt first (credit cards) before lower interest debt (car loans, student loans). However, keep some trade lines open as paying them off or closing them can impact your credit score.

3. Know how much you can afford. Once you have your monthly bills in check, determine a comfortable monthly housing payment. Plan ahead by “trying on” your new mortgage. Bank the difference between that and what you’re paying now. Not only will you build your savings, you’ll know exactly if that new payment works for you. If you find yourself struggling to make ends meet each month, you’ll be able to lower that monthly mortgage payment before it’s too late.

4. Prepare for expenses before you buy. Save ahead for pre-purchase expenses. By having a healthy savings account you’ll be able to make that down payment, pay for closing costs and loan fees, have a few months’ worth of mortgage payments in reserve and money for extras like moving costs, furniture, and repairs. Start saving, and save more than you think you’ll need.

5. Consult a real estate professional. The right real estate professional can walk you through all the steps for preparing to buy a home, not only by helping you get ready, but by negotiating the best deal and helping you navigate through financing, contingencies and closing.

With the pre approval process much more extensive than it was a few years ago, planning ahead is crucial to getting the best rate possible. The best thing you can do is to have everything in order. By going through the pre-approval process a year in advance, you’ll learn where you stand. The loan officer can counsel you about what you can do in the next year so that you’ll be ready when you actually apply for a loan. So, use this tax season to see where you stand and let it help you get prepared for buying that perfect home.

Are Bidding Wars In Your Future?

In McCall, just as in many places around the country, demand for housing is outpacing availability. This is especially true in our area for single family homes under $300,000 as many buyers are looking to take advantage of current low interest rates.

But, when supply is down, prices go up. According to new data from the National Realtors of America, prices rose 6% in the fourth quarter of 2014 as buyers competed for fewer and fewer available homes for sale.

As a seller, this is good news as it could mean that you will get asking price for your home and sell quickly. As a buyer, this may mean that you need to prepare yourself for bidding wars.

But, before you find yourself in the midst of a bidding war there are a few things you should consider, beginning with asking yourself if you should even enter into it in the first place. According to Michele Lerner at realtor.com,

“If your offers have been turned down by several sellers because of competing buyers, then you may feel pushed to make an aggressive offer for the next home you like.

You should stop yourself from competing just because you think the time is right to become a homeowner or to move up into a new place. Instead, think about whether you really want the particular house enough to fight for it.

To guard against making an emotion-fueled offer for a house, take a hard look at your finances. While it may feel good at first to beat out other buyers and to purchase a property, it won’t feel so great in a year or two when you are struggling to make the payments on a house beyond your means. Know your limits before you begin to bid.”

If you determine that you do, indeed, want to go for it then you need to be strategic in how you present your offer. Make sure you use an experienced local realtor with the ability to communicate well and who will move quickly to present offers and counter offers. Then check with your lender. Find out the max you can borrow and be prepared to begin bidding at a lower amount, which may mean looking for homes in a lower price bracket.

When presenting an offer, don’t always assume money is the main motivator for the seller. Again, from Michele Lerner, here are other ways to make your offer more attractive:

  • Solid financing: You may be competing against cash buyers, so make sure your loan pre-approval is in place and you have completed all required documentation other than identifying a specific property.
  • Eliminate contingencies—carefully: If you own a home now, you may want to offer to buy another home without making your contract contingent on the sale of your current home. You take the risk of carrying two mortgages for a while, so make sure you can safely handle the payments. You can also decide to have an “information only” home inspection rather than making your offer contingent on the outcome of the inspection.
  • Make the settlement date convenient for the sellers: Rather than negotiating on a closing date convenient to all sides, you can tell the sellers you will work with their schedule or rent back the property to them after the closing.
  • Offer to pay all closing costs: You can reduce the sellers’ out-of-pocket expenses by offering to pay their share of the settlement fees, but before you do this get an accurate estimate of what those costs will be and make sure you have the funds available to pay them.
  • Personalize the transaction: Sometimes the tipping point for sellers who receive multiple offers is something emotional rather than financial. A personal letter describing your love of their home may tilt the scale in your favor.
  • Try an escalation clause: Money talks, too, so you can add an escalation clause to your offer that increases your bid by a certain amount above other offers. Just make sure you set a limit on how high your offer will go.
  • Control yourself: Remember that any offer is subject to an appraisal (unless you waive that contingency, but that’s not recommended unless you have plenty of cash), so be careful not to bid above the market value of any property.

If you are considering buying or selling a home in today’s market, using Haden Tanner as your realtor is a natural choice. Haden has become intimately involved with the Valley County real estate market over the past several years and knows how to get things done quickly and efficiently. Call him today at (208) 315-2242 to begin the buying or selling process.