Archive for the ‘Personal Finances’ Category

Repairing a Low Credit Score

June 15, 2011

There are a couple points to make at the outset.  First, there are no easy fix, fast track methods to repairing and rebuilding poor credit.  It… just… takes… time.  Remember your credit score (and report) reveal your track record of managing payments.  If your score is a consequence of your actions, time is how your score will be repaired.  You didn’t drop to a low score overnight, even if “life” did happen (job loss, health problems, divorce, etc.).  This situation took time.  Don’t expect to bounce back to a 780 score overnight.  You need time to prove your ability to manage your finances and to pay expenses responsibly. 

The second point is to avoid unscrupulous credit repair service companies.  These companies often prey upon unsuspecting consumers promising to “fix” someone’s credit and to remove unfavorable information for “3 easy payments of $49.95”.  Nothing could be farther from the truth.  While errors on reports are not uncommon, truthful information no matter how unsavory cannot be removed.  If a bankruptcy or foreclosure happened, it will be reported and will be there for some time.  If you have a credit score, you are an adult.  Let’s not whine about a low score, let’s be proactive and start on a better path.  (If you have not reviewed your credit report in some time, visit http://www.annualcreditreport.com/ where you can receive a free report with your current scores once every 12 months.)

Okay, so you are behaving.  Your bills are paid as promised, you have a very low debt to income ratio, manage your money well and stick to your budget, and learn your credit score is not where you expected it to be.  Now what??

Start by reading your credit report.  Is the information listed correct?  Many times a keystroke error is all it takes to suddenly combine someone else’s credit history to yours and negatively affect your score.  If you are a “Jr.” or “Sr.” you can certainly understand this scenario.  Other times it may be that a debt has been fully paid and the creditor has stopped reporting the information to the credit bureaus so that a remaining balance still shows. 

If you believe your credit report contains an error you have the right to contact the credit bureau that reported it and dispute the information.  There is no cost to dispute this information and it isn’t complicated.  The best way to communicate with any credit bureau is in writing.  (Our website contains a sample dispute letter you can use.)  Provide your complete name and address, the item(s) in question, why the item is being disputed, and your request to have this corrected or removed.  Include a copy (never the original) of the documentation you have supporting your claim and a copy of your credit report with the items in question circled.  Keep a separate copy of everything you are sending to the bureau along with a diary of any activity, conversations and contacts. 

The reporting credit bureau has 30 days to investigate the disputed information and provide you with a written report of the findings.  The bureau is also required to send you a copy of your updated credit report if the disputed item has been changed as a result.

In general with time, a solid financial plan, and some perseverance you can repair, build and maintain your own credit standing.

Where does YOUR Money Go?

April 12, 2011

Tax season is in full swing and the deadline for submitting your portion is fast approaching.  This year the deadline for filing your federal taxes has been extended by three days to April 18.  (In case you were wondering why, it is in observance of Emancipation Day in the District of Columbia.)  Your state taxes however, may still due by April 15.  Check with your state government office for your exact deadline.

The history of taxes and taxation take us back to our colonial days and part of the reason for our succession from Great Britain.  The beginning purposes of federal taxes in the United States though were to fund our war effort in the American Civil War.  Today besides funding war efforts, taxes pay for a wide variety of expenses and programs.  Not surprising though, most of us really don’t know where our tax dollars go within the federal budget.

We thought you might be curious.  Take a peek:

Social Security 20.4%
Defense 20.2%
Medicare 13.1%
Low-income Assistance 9.3%
Medicaid 7.9%
Net interest Payments 6.6%
Unemployment Compensation 4.7%
Veterans Affairs 3.1%
Education 2.9%
Law Enforcement & Homeland Security 2.4%
Transportation 2.3%
Health (not Medicare or Medicaid) 2.0%
Management of Federal Employees & Buildings 1.4%
Environmental Protection & Natural Resources 1.0%
Space & Science 0.7%
Agriculture 0.7%
Housing & Community Planning 0.6%
Social Services 0.6%
Foreign Aid 0.6%
Workplace Safety & Rights 0.5%
Diplomacy & Embassies 0.4%
Internal Revenue Service (IRS) 0.4%
Energy 0.4%
Statistics & Weather 0.3%
Telecommunications 0.3%
Trade & Economic Development 0.3%
Native Americans 0.2%
Congress 0.2%
Post Office 0.1%
Arts & Culture 0.1%
District of Columbia <0.1%
White House <0.1%
Bailouts, Currency & Financial Regulation -3.7%

If you would like to know how this specifically applies to you.  Visit: thirdway.org/taxreceipt.  You can enter the amount of your federal taxes paid in 2010 to see exactly how much went to each category.  You can also review each category for a sub-list of what is included in each one and how those areas are divided.

Incidentally, as of January of this year our national debt was $14,025,215,218,709 of which every American has a share of $48,382.  Unfortunately, that amount is $5,768 more than it was in 2009.

If this information concerns you, get involved!  You can easily find out who your elected officials are and how to contact them by visiting: congress.org and simply entering your zip code under the “Get Involved” section.

Handling Credit After a Bankruptcy

December 1, 2010

Enduring a personal bankruptcy can be a very traumatic event in a person’s life.  Those who have faced this process often find they are extremely fearful of using any sort of credit, such as a car loan, mortgage or credit card, ever again.  However there are two critical steps that must happen to begin repairing the damage done to your personal credit.  We should disclose here that we are discussing a Chapter 7 Bankruptcy where debts are discharged and not a Chapter 13 Bankruptcy where debts are paid under a monitored repayment plan.

The first step is to make sure that your debts are fully discharged by your creditors.  At this point, there is no financial motivation for them to continue reporting to the credit bureaus so your credit report may still reflect a remaining balance owed.  This can easily be confirmed by requesting a copy of your credit report from all three credit bureaus.  Our website has information on how to do this.  If anything is incorrect, you will need to challenge the information.  Don’t let the sound of this intimidate you.  We also have details on how to handle this step with a sample dispute letter you can use on our website too.

The second significant step, and maybe the part that causes the most concern, is re-establishing your credit.  As scary as this seems, you cannot just ignore the financial world.  So many things are linked to your credit score like auto insurance and even future employment that you really can’t afford to ignore this.  Here are ten tips to get you started on re-establishing and maintaining good credit.  

  1. Apply for a credit card.  To establish a strong credit history you need a line of credit with consistent activity for at least 12 months after the date of discharge.  You don’t need a large line of credit or to charge high dollar amounts, just consistent use and timely payments.
  2. Make all your payments on time.  This not only includes lines of credit, but utility payments as well.
  3. Avoid late fees.
  4. Stay current on all payments.  Since you are starting over to rebuild positive credit there is little history to work with.  A single late payment on even a $20 balance can lower your credit score by as much as 100 points at this time.  The due date is when your payment must be received, not mailed.  Make your payments early whenever possible.
  5. Keep your credit card balances at less than 50% of your credit limit.  This is a little secret with huge implications. Staying below that 50% level has a strong and very positive affect on your credit score.
  6. Do not open new credit cards as a means of increasing your overall available credit.
  7. Review your credit annually.  You can obtain a free credit report once every 12 months from each credit bureau by visiting www.AnnualCreditReport.com
  8. Establish a realistic budget.
  9. As for help if you need it.  No one has all the answers, seek support if you have questions.
  10. Start now.

Facing a bankruptcy is traumatic, but it doesn’t have to define or limit you.  Our website has more details on these tips plus other information on building and maintaining your personal credit.  You are also invited to call us with your questions too at 866-982-9273.

What Can I Afford?

March 31, 2010

So you have decided that now is the time for you to buy a house.  Perhaps you’ve done some research on what area of town you would like to live, how many bedrooms you’d like, style of home, and other items that are essentials or mere wishes.  But have determined what you can afford?  If you have a monthly payment in mind, is this realistic for your budget?  How do you even determine this?

Calculating this mystical figure is really a simple mathematical equation – no smoke and mirrors.  Let’s start from the lender’s perspective.  They are looking at the percentage of income that your existing debt and future home loan will consume.  The idea is to make sure your new home loan payments do not overwhelm your monthly budget. 

Using industry averages, start by taking your total monthly income and multiplying by 38% (.38).  The answer represents the ideal amount of your new mortgage payment and total debts.  (Debts include installment loans like car payments and revolving debt like credit cards.) 

For example;  If you earn $42,000 a year, your monthly income is $3,500.  ($42,000/12 months = $3,500)

$3,500 x .38 = $1,330

$1,330 is the combined total of current monthly debt and projected house payment.

Take this number ($1,330 in this example) and subtract your total debt.  The answer is the targeted maximum amount of your new home loan payment.  Keep in mind this number reflects the principal payment, interest payment, taxes and home owners insurance.  If you are not using an escrow account for your taxes and insurance, this targeted amount should be lower.

Here’s another way to look at this.  Let’s calculate just a total monthly payment by taking your total monthly income and multiply by 28% (.28).  This again is an industry average where a range of 25 – 30% is the target. 

Using the same numbers as the example above; $3,500 x .28 = $980.  Again this answer represents a principal payment, interest payment, taxes and home owners insurance.

How about another perspective?  What you qualify for, may not represent what you can realistically afford.  Does either of these amounts you just calculated seem realistic for your budget and comfort level?  Depending on your approach to personal finances, this may seem high.  If you currently have a high debt load, this amount may be surprisingly low.  Nothing could be worse than to have the joy of new home squashed by discovering you are now “home rich” but “cash poor”.  

Qualifying amounts should be used as guidelines and not absolute rules.  Consider other factors that contribute to your monthly budget.  How many kids do you have?  Will any of them need braces, require extra medical care or want to go to college someday?  Do you like to travel, try new restaurants or attend sporting events?  Are you adventurous and want to get the “project” home that becomes truly your own? 

When considering what home to buy, also consider that you are committing to a loan that extends over a lengthy period of time.  Thirty (even fifteen) years are a large portion of your life, during which “life” is going to happen.  Be prepared for those occurrences by not over extending yourself with a mortgage payment that keeps you awake at night.

Our intent is to provide some guidance in helping you determine what monthly payment you can undertake based on your particular budget and needs.  If you would like to take this a step further to determine how much house you can afford with these payments, give us a call.  Our business is based on working for you and your long-term goals.  We also have a number of different calculator options on our website to help you make informed decisions when purchasing or refinancing your home.

Common Homeowner Tax Deductions

March 23, 2010

Owning a home is the American dream and a source of tremendous pride for you and your family.  Another advantage to buying real estate is the ability to shelter a portion of your income from federal taxes.  Following are some of the more common deductions available to home owners.  Along with some basic information on each are links (bold type) to the IRS website where detailed information can be found.    

As always, consult with the IRS or your tax professional for current guidelines and qualifying criteria on tax related matters.  For information about a home loan to meet your needs and goals, contact one of our licensed Loan Officers.

Mortgage Credit Certificate Program  –  The MCC program is a Federal tax credit of up to 20% of the interest you pay on your home loan over a calendar year, and is available in select states.  While this does not reduce your monthly payment, it is a dollar for dollar reduction in the amount of your Federal income tax liability.  In effect, you are lowering your home loan interest rate by a full percent.  The MCC program will remain in effect for as long as your home remains your primary residence and the original home loan remains in place.  Awareness Home Funding is a lender that does help our clients with this program.    

Home Buyer’s Tax Credit  –  Home buyers may be eligible for a tax credit of 10% of the purchase price of their newly acquired home.  First-time buyers may be able to claim up to $8,000; existing home owners may qualify for up to $6,500.  We have provided some information on this program in two separate articles (No Time Like the Present and The Other Side of the Coin).

Mortgage interest  –  Interest, in general, is defined as an amount paid for the use of borrowed money.  In order to deduct interest on your home mortgage loan, you must be legally liable for the debt that is secured by your main or secondary home.  This amount is generally reported to you on Form 1098 by the lender you have made payments to.  This form should also detail any prepaid interest you have paid.   

Points or Discount Points  –  Points refer to specific charges you may pay in order to obtain a lower interest rate for your home mortgage loan.  Fees associated with preparation costs, appraisals, inspections or notaries do not typically qualify as points.   

Mortgage insurance premiums  –  These expenses are paid to allow a buyer to pay a lower down payment than the 20-25% requirement of a Conventional loan and also protect the lender in the unfortunate event of default on the loan.  Qualifying mortgage insurance may be provided by:

  • The Federal Housing Administration in both an upfront and annual fee.
  • The Department of Veterans Affairs as a one time funding fee
  • The Rural Housing Service as a one time guarantee fee

The amount which can be deducted is reported on Form 1098 by the lender you have made payments to.   

Real estate taxes  –  These are taxes charged on real property based on taxable value.  The IRS highlights what specific taxes associated with your property are deductible.  

Home offices  –  If you use a portion of your home for business purposes, you may be able to deduct certain expenses.  Typical items that may be deductible include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance and/or repairs.   

Moving expenses  –  If you moved due to a change in employer or occupation, you may be able to deduct your moving expenses.  The two qualifiers used to determine whether this deduction applies to your situation are distance and duration.   

Energy improvements  –  Occasionally, government supported programs allow specific home improvements to qualify for a federal tax credit or a partial rebate of the sales price to the homeowner.  These items are usually of an energy efficient nature for products such as appliances, windows or insulation for the home.   

Health related improvements  –  Home improvements made as a result of a health issue are expenses that may be deducted for the tax year they were paid.  The IRS considers these as Capital expenses and explains what may be included and how to claim these items. 

As always, consult with the IRS or your tax professional for all the current guidelines and qualifying criteria in order to take advantage of these tax deductions.  For information about a home loan to meet your needs and goals, contact one of our licensed Loan Officers.

Paying It Forward

March 5, 2010

You may recall the 2000 movie, “Pay it Forward” directed by Mimi Leder.  It starred Kevin Spacey, Helen Hunt and Haley Joel Osment and was based on the book by the same name written by Catherine Ryan Hyde.  The storyline is that a young boy was inspired to make the world a better place after his teacher challenged his class to come up with an idea that would improve mankind.  The student came up with the idea to ‘pay it forward’.  The concept was to do a good deed for three people who then in turn did good deeds for three other people creating a ripple effect of good will and generosity.

While this movie may have pushed the idea into the limelight, the concept of helping someone else is as old as time.  Helping someone else not only benefits the recipient, but also benefits the giver.  Think about the feeling you had the last time you did something for someone else for no other reason that to just be helpful.  That feeling is empowering.  Most often the deed done for another is something very simple.  The thought counts here and it’s because you put someone else’s needs before your own.

Examples of genuine kindness and compassion are all around us.  Like a soccer game some years back between Australia and China.  Two Australian players had collided leaving one lying motionless on the ground.  As soon as China noticed the injury they kicked the ball out of play, so the trainers could tend to the injured player.  When the ball was put back in play, Australia threw the ball to a Chinese player. 

What about something very current like the reality show, Extreme Makeover Home Edition.  Every week residential construction companies rally huge teams of contractors to build a brand new home for a family facing hardship.  Families are selected because they still try to help others in the midst of their own struggles.

Okay, too big?  What about stories of average kids raising money with lemonade stands to support victims of natural disasters?  What about someone in the drive thru lane paying the bill for the car behind them?  What about a child ‘filling’ a box with blown kisses for a parent before they leave on a business trip?

The point of paying it forward and random acts of kindness isn’t about how big or noteworthy.  The point is that we have all been blessed in a multitude of ways and can use those blessings to help someone else.  You may not be blessed with money, but are you blessed with love and support that you could brighten someone else’s day with a kind word?  Occasionally you need to ‘empty your hands’ of what you have been given so that you can receive more.

Our company has taken this approach with our program, ‘Awareness Works 4 U’ It’s really very simple.  When you give us the opportunity to help you with a home loan, we ‘pay it forward’ with a donation to a charity of your choice when your loan closes.  The charity uses this money to continue their efforts to support the people they reach.  Those involved with the charity live, work and interact in their communities knowing they have a full circle of support.  And on the ripples of support go on. 

We would appreciate your help in letting others know about our efforts.  Alone, acts of kindness are often just single events.  Working together we can create a wave of generosity that betters mankind.  What organization would you like help supporting?  We’d love to help pay it forward.

Physical and Financial Fitness – Who is Responsible?

February 9, 2010

We recently found a blog post by Philosophy Professor Nina Rosenstand from San Diego Mesa College where she raised the question of whether or not staying slim was a moral responsibility.  She implicitly asked who should ultimately be responsible for our own physical health, and whether or not an employer could assume this task.  While the focus of her article was on physical fitness, it got us thinking.  Who is ultimately responsible for your financial fitness? 

In the same way our weight is used as one indicator of physical health, a person’s credit score is used to portray a person’s financial fitness.  Your credit score measures your fiscal responsibility from the past up to the present.  Like your weight, this too is only one indicator of your overall financial health.   A credit score doesn’t account for factors outside of your control like a company closing leaving you without a job and therefore no income, that potentially leads to foreclosure.  Your credit score doesn’t explain a divorce that suddenly cuts your income in half. 

However, do the occurrences of life totally void us of all responsibility when it comes to our finances?  Are “we the people” to some degree responsible for this messed up economy due to our collective lack of financial accountability?  Can we be allowed to wash our hands of financial integrity just because “life” happens?  Shouldn’t we expect the unexpected to happen?   

Being financially sound (i.e.: strong credit scores, emergency savings, balanced budgets, living within our means) has many benefits such as lower health and auto insurance rates, better interest rates, and even job offers.  Should we push the blame of financial blunders onto someone else?  At what point do we say this is my life, my finances, my responsibility?  Along with teaching our children about living healthy, we need to also teach them financial responsibility.  Perhaps we might find that sound financial health can lead to better physical health.

We are not so ignorant (nor arrogant) to think that hiccups are not going to occur along the path of life.  They do.  And if you have not experienced one, odds are you will at some point.  As a company we are bound by industry and legal regulations to enforce set standards of acceptable financial health.  However, we also want to help our clients improve and maintain optimal financial health.  We cannot fix a client’s struggling credit any more than we can do sit-ups for you, but like a personal trainer we can offer guidance, suggestions and helpful ideas. 

What are your thoughts?

What exactly is a Credit Score? (part 4)

January 29, 2010

This is the last post from this series on your credit score.  To review, we discussed what information was on your credit report, contributing factors to your score, and how to build and maintain a strong credit score.  This post will highlight ways to repair a damaged credit score.

Part 4 – How can I repair a low credit score?

There are a couple points I must make at the outset.  First, there are no easy fix, fast track methods to repairing and rebuilding poor credit.  It… just… takes… time.  Remember your credit score (and report) reveal your track record of managing payments.  If your score is a consequence of your actions, time is how your score will be repaired.  You didn’t drop to a low score overnight, even if “life” did happen (job loss, health problems, divorce, etc.).  This situation took time.  Don’t expect to bounce back to a 780 score overnight.  You need time to prove your ability to manage your finances and to pay expenses responsibly. 

The second point is to avoid unscrupulous credit repair service companies.  These companies often prey upon unsuspecting consumers promising to “fix” someone’s credit and to remove unfavorable information for “3 easy payments of $49.95”.  Nothing could be farther from the truth.  While errors are not uncommon on reports (we’ll discuss this in a moment) truthful information, no matter how unsavory, cannot be removed from your report.  (For information on fraudulent credit repair services, what to avoid and how to report illegal activity visit our website for more information.)  If a bankruptcy or foreclosure happened, it will be reported and will be there for some time.  If you have a credit score, you are an adult.  Let’s not whine about a low score, let’s be proactive and start on a better path. 

Okay, so you are behaving.  Your bills are paid as promised, have a very low debt to income ratio, manage your money well and stick to your budget, and learn your credit score is not where you expected it to be.  Now what??

Start by reading your credit report.  Are the creditors listed, those you actually have or have had accounts with?  Are your name and aliases correct?  Are your date of birth, social security number and address(es) correct?  Many times a keystroke error is all it takes to suddenly combine someone else’s credit history to yours and negatively affect your score.  If you are a “Jr.” or “Sr.” you can certainly understand this scenario.  Other times it may be that a debt has been fully paid and the creditor has stopped reporting the information to the credit bureaus so that a remaining balance still shows.  Surprising as it may sound, even with all the computer systems in the world, credit reports are ultimately managed by people capable of making mistakes.  (No really.)

If you believe your credit report contains an error you have the right to contact the credit bureau that reported it and dispute the information.  There is no cost to dispute this information and it isn’t complicated.  The best way to communicate with any credit bureau is in writing (go old school here) with the letter sent by registered mail with a return receipt to confirm they now have your letter.  (Our website contains a sample dispute letter you can use.)  Provide your complete name and address, clearly identify the item(s) in question, explain why the item is being disputed, and your request to have this corrected or removed.  Include a copy (never the original) of the documentation you have supporting your claim.  (For example, if you paid off that credit card, include a copy of the final statement showing a $0 balance.)  Also include a copy of your credit report with the items in question circled.  Keep a separate copy of everything you are sending to the bureau along with a diary of any activity, conversations and contacts. 

The reporting credit bureau has 30 days to investigate the disputed information and provide you with a written report of the findings.  The bureau is also required to send you a copy of your updated credit report if the disputed item has been changed as a result.

In general with time, a solid financial plan, and some perseverance you can repair, build and maintain your own credit standing.

What exactly is a Credit Score? (part 3)

January 26, 2010

In part 1, we covered what information was included in your credit report.  Part 2 revealed the components of your credit score and how much each one contributed to your overall score.  Part 3, covers how to manage your credit.

Part 3 – How do I build good credit?

Your buying, and more importantly payment habits, have a direct impact on your credit rating.  Your rating, or credit score, is based on payment history.  The better you are at paying your debt obligations as agreed and when agreed, the higher score you will receive.  Here are 10 tips to establishing and maintaining good credit.

1.  Apply for a credit card.  Creditors want to know you can not only handle debt, but also different types of debt obligations.  This is not a free pass to open an account with every retailer in the mall however.  Limit yourself to no more than 2-4 cards and make your payments on time and for at least the minimum amount each month.  Your credit cards are to be used to maintain or to build credit, not as a way to live beyond your income level.

2.  Make all your payments on time.  As mentioned above, the due date is when your payment must be received, not postmarked.  If this is a challenge for you, consider automatic bill payment.  This is now offered by most creditors, utility companies and banks at no additional cost.

 3.  Avoid late fees.  Late fees are a key indicator that your money is controlling you, not the other way around.  Be advised though, that just because you are not being charged a late fee, does not mean your creditor does not consider your payment late.  Watch your due dates.  (Can you tell timeliness is rather crucial?)

 4.  Stay current.  If you have had a problem and are behind in payments, get current and stay current.  Call your creditor and talk to them.  They are willing to work with you, but they are not mind readers.  They cannot help if they don’t know what is going on.  Most creditors these days would rather receive some payment than nothing at all.  Communication is key, along with a willingness to make an attempt at repayment.  This step can often avoid an account going into collections.

5.  Keep your credit balances at less than 50% of the limit.  This is crucial!  A little known secret here, whether or not you pay off the balance of your card each month, keeping your balance to nothing higher than 50% of the credit limit shows you have available credit.  Available credit means you are most likely not overextended, and that can mean low credit risk.

6.  Do not open new cards as a means to increase available credit.  It is far better to manage a few accounts successfully, than to have several accounts with little to no activity.  Remember the idea is to prove you can manage your finances, not that you can open accounts.

7.  Review your credit annually.  Knowing what your creditors are reporting helps you avoid surprises or potential problems.  It is not uncommon to find errors on your credit report. 

8.  Establish a budget.  Despite how some may feel, ‘budget’ is not a four-letter word.  It is a plan for you to control your money so that it does not control you. Non-mortgage debt should not be more than 20 – 30% of your gross monthly income.

9.   Ask for help if you need it. No one is perfect or has all the answers.  If creating a realistic, working financial plan seems out of reach, ask for help.  Consider contacting a reputable credit counseling organization with trained advisors in this area.  Do not be confused with a Credit Repair Company though.  Many offer claims to remove information from your credit report.  You cannot remove truthful information.  Time is your ally for credit mistakes. 

10.  Start now.  Just because your credit has been a problem does not mean that all hope is lost.  You can have great credit again – just start.  Pay all your bills on time, every time, as agreed.

The Rules are Changing

January 25, 2010

Over the past couple of years requirements for obtaining a mortgage loan have become tougher to say the least.  For example, no longer can you simply just tell your lender what you earn – you need to prove it.  Your credit scores also need to be very good or excellent to be approved.  Just having a pulse no longer works either.

The plus side of tighter regulations is that consumers are more prepared to purchase a home.  They have worked to maintain a strong credit score; they have money to not only use as a down payment, but also funds available in reserve for after the sale.  Lenders themselves are also doing their homework.  They are paying much more attention to what is in the best interest of the borrower, and not just the bottom line.   Lenders that have not are no longer in business.

So what changes are being proposed this time?  The most significant changes are an increase in the minimum credit score, an increase in the upfront mortgage insurance premium, and a decrease in the amount a seller can contribute to a buyer’s costs. 

For most borrowers, the increase in the minimum credit score has already happened in effect because of what individual lenders will allow.  According to FHA policies, borrowers are required to have a minimum FICO credit score of 580 to qualify for the minimum down payment requirement of 3.5%.  Most lenders however, have a much higher requirement, most at a 620 score or better in order to qualify for a loan.  If you find a lender that will still accept the lower minimum score, be prepared to pay higher fees or accept a higher interest rate.

The increase in the upfront mortgage insurance premium is a significant change.  Until now, when a borrower has less than 20% invested into the home, mortgage insurance is required.  This insurance is to protect the lender in the event of a foreclosure.  FHA is a self-funded government agency that has been able to support itself from the monies raised from these premiums.  However, with the recent increase in foreclosures, the agency has had its reserves fall below the minimum level set by Congress.  FHA hopes that increasing the premium from 1.75% to 2.25% of the total loan amount will resolve this problem.  Unfortunately this means that the borrower of a $100,000 house will have the upfront premium increase from $1,750 to $2,250, or $500 more.  This change will become effective sometime this spring and for now only affects the upfront premium, not the monthly mortgage insurance premium.

The final change is a decrease in what a seller can contribute toward the buyer in a purchase transaction.  Until now, a seller could pay for up to 6% of the buyers closing costs.  This will now decrease to a 3% maximum.  This too will affect the amount of money a buyer will need to invest into a purchase transaction.  This change is expected to be effective in the early summer.

All this means that if you have been thinking about purchasing a home, ‘now’ is becoming a better and better time to do so.  Especially when you consider the extended home buyers credit that offers up to $8,000 for first-time buyers and up to $6,500 for other buyers who meet the qualifications.  If you need to wait though, don’t panic.  Simply be prepared to be more prepared when buying that home you have your eye on.