Frequently Asked Questions About Credit Scores - Credit FAQ

In response to the economic crisis that came to a head in 2008, we recently launched a new blog to answer consumer questions about credit scores (as they relate to mortgages and home buying). Shortly after the blog was announced, the questions came rolling in! Some trends have already emerged, and we would like to present those trends in this list of credit score FAQs.

This is a hot topic among home buyers, but it will become even more popular in 2009 and beyond. See question #3 to find out why.

1. Where do my credit scores come from?

This is a question we get two or three times a week, so I'm happy to answer in this FAQ list. Your credit scores come from Experian, TransUnion and Equifax. These are the three companies who maintain credit data on consumers in the United States. Each company can produce a credit report on you, which is basically a record of your financial history (your debt, your payment history, etc.).

These reports are put through a scoring system to produce your credit score. So you actually have three different scores -- one from each of the reporting companies mentioned above.

With that one answered, let's move on to the next credit question on the FAQ list:

2. Why is credit so important when buying a home?

When you apply for a mortgage loan, the lender will review your finances from every possible angle. They will verify your current income and debt, and they'll also check your credit. Most lenders will either use a merged score that averages the three mentioned above, or they'll just look at two out of three credit scores. This gives the lender some idea of how responsible you've been in the past, from a financial perspective.

So a good / high score will help you get approved for a loan, and it can also help you get the best interest rates (which means a lower monthly payment). This is why it's such a hot topic among home buyers.

Moving right along, let's tackle the next credit score question on the FAQ list:

3. How has the economic crisis affected all of this?

This is a common question about credit in the current economy, and for obvious reasons. As a result of all the foreclosures we saw in 2007 and 2008, a lot of lenders have bad loans on their books. So as we go forward into 2009, they will be less inclined to make new loans until they figure out how to recoup some of their losses and prevent future ones from happening.

In addition, there are new regulations on subprime lending (giving loans to people with bad credit). Because of these and other factors, home buyers will need higher credit scores to get mortgage loans in 2009 than they needed in the past.

This brings us to another popular question about credit that people often ask:

4. What can I do to maintain a good credit score?

In a nutshell, you can keep your score high just by being financial responsible. This means paying your bills on time, managing your debt well, and using credit cards responsibly (i.e., don't have too many cards and don't max them out). Your history of bill payments accounts for about 35% of your score, so if you have a pattern of late payments it can do serious damage to your credit, especially if those accounts are sent to a collection agency.

5. How do I find out what my score is?

Because you have three of them produced by three different companies, you have to request your scores through those companies (Equifax, TransUnion and Experian). In most cases, you will have to pay for the information, but it's not expensive. By law, you can request your credit reports once a year for free ... but there is no such law for your actual scores.

You can also find package deals that include all of this stuff for one price. You'll find some website recommendations on our credit reports page.

Get Answers to Your Credit Questions

Do you have questions about credit reports and scores? If so, check out new Q&A blog over at the Home Buying Institute. It's a free service. Here's the web address:
http://www.homebuyinginstitute.com/help

What Is a Second Mortgage and When Is It a Good Idea?

Article Summary: What is a second mortgage and why do people use them? When is it a good idea to get a second mortgage, and when is it a bad idea? These are the questions we will address in this article.

A second mortgage is an installment loan or line of credit that uses your home as collateral. The amount you are able to borrow against your home is determined by the amount of equity (ownership) you have in your home. For example, your home is currently valued at $300,000 but your mortgage balance is only $200,000. This means you have $100,000 worth of equity, or ownership in the home.

Most lenders will loan you up to 80% of your available equity. They will secure their "interest" in your home by filing a lien behind the lender who loaned you the money for the actual purchase (first mortgage) of the home. This means that later on, when you sell the home, both the first and second mortgage will be paid off. Of course, you can also pay off the second mortgage anytime you are financially able to do so. You could also refinance down the road to roll the second and first mortgages together.

An installment version of the second mortgage is just like your first mortgage -- it is a set amount with a monthly payment until the balance is paid in full. This type of loan is typically used for a specific project, such as a swimming pool or a renovation project. The whole amount of the loan is advanced in chunks as the pool (or other project) is being built. Then, when the project is complete, you will start making payments on the second mortgage loan.

Reasons to Use a Second Mortgage

There are many reasons people take out a second mortgage on their home. They may use it to remodel their kitchen, pay for a new addition, or to put in a pool. Or perhaps they need to pay for college tuition for a child, or for the adoption of a child. They may use the second mortgage to pay for a wedding or a dream vacation.

Many people use the loan or line-of-credit to payoff bills and consolidate their debt. Regardless of the reasons, there are several advantages to using a second mortgage. For one thing, the interest paid on the loan or line-of-credit can be used as a deduction on most people's taxes. In addition, the interest rates on a second mortgage are usually lower than the rates for credit cards, student loans and other types of credit accounts.

In particular, homeowners who live in a strong real estate market with good appreciation can take advantage of their equity through the second mortgage option. This can be a good way to consolidate debt. Also, if you have lived in your home for many years and the value of your home will go up considerably with a kitchen or bathroom remodel, then a second mortgage might be a smart financing idea.

Reasons to Avoid It

With all of this being said, there are certain scenarios where it doesn't make sense to take out a second mortgage on your home.

The recent economic downturn we've seen is a prime example of this. Just before the housing bubble burst, homeowners were taking out second mortgages right and left. The value of their homes increased quickly and dramatically, so they were using their newfound equity to make all sorts of improvements -- additions, pools, remodels, etc. Many were even buying cars and second homes. Then, when the real estate bubble burst, they found themselves with over-improved homes and mortgage balances that were much higher than their home was now worth.

Here's what you should take away from this article. A second mortgage can be a useful financing tool in certain scenarios, because it allows you to leverage your home equity at a favorable interest rate. In other scenarios, however, this type of loan doesn't make sense. The key is to know what type of situation you are in, and decide for or against the second mortgage accordingly.

Your Credit Score in 2009 - What You Should Know About Credit

What credit score will you need in 2009 to qualify for a mortgage loan? It's difficult to say here in the present, because our economy is in turmoil. But one thing is for certain -- home buyers will need better credit scores to qualify for financing in 2009 than they needed in the past.

Bad credit mortgage loans are a thing of the past, and rightfully so. So you must be financially responsible in the present if you hope to buy a home in the future.

Being Credit Smart in 2009

With that scary intro out of the way, let's start your credit-awareness program right away! Here are five more things you should know about your credit score in 2009 and beyond:

1. Your credit score is your key to financing.

When you apply for some kind of consumer loan, the lender will review your financial history to determine your "creditworthiness" (a fancy way to describe the level of risk associated with loaning you money). Much of their review will focus on your credit report and score -- and yes, they are two different things.

Your credit score is a number that usually falls within the range of 300 - 850. Higher is better. When you fall at the upper end of this range, you have a better chance of qualifying for car loans, mortgage loans, etc. When your score is low, however, you could have trouble getting approved for a loan.

2. After the economic crisis, good credit will be more important than ever.

As mentioned above, it has always been important for consumers to maintain a clean credit history and a high score. But in the wake of the economic crisis that came to a head in 2008, good credit will be more important than ever in 2009 and beyond. In the "new economy," lenders will impose stricter criteria on borrowers who seek financing.

I'm not gazing into a crystal ball here. I'm just looking at what's happening right now and projecting it into the future. We are already seeing this kind of trend in the finance world. The bottom line is that consumers with bad credit will face even more obstacles in the near future than they've had to face in the past. It's going to get tougher to obtain the best interest rates on a loan as well. So you need to maintain a good credit score!

3. You need to know what's in your credit reports.

It's not uncommon for errors to show up in a person's credit report. In fact, it happens quite often. It might be a simple typo within your personal data. Or it could be something more serious, like a credit account showing up that's not even yours. This might even suggest identity theft. So there are really two important reasons to know what's in your reports -- (1) to prevent errors from affecting your score, and (2) to spot instances of fraud.

By law, you are entitled to one free credit report per year, from all three of the companies that maintain them. You can learn more and request your information at the website AnnualCreditReport.com (a site that is jointly owned by Experian, TransUnion and Equifax).

4. Bad financial behavior in the present could follow you for years to come.

The financial actions you take now will show up on your credit report for a long time to come, well beyond 2009 for that matter. There are laws that require negative information to be removed after a certain period of time. But that period might be seven to ten years! So, for example, by falling behind on your bill payments here in the present, you could hurt your chances of getting a mortgage loan five or six years down the road. This underscores the importance of being financially responsible.

5. Most credit repair companies are scams -- you can do it yourself.

There are a lot of companies who claim to have the ability to fix all of your credit problems (if you have any). But these companies cannot erase the past. Most of them simply correct errors on their customers' credit reports, and that's something you can do for yourself. In fact, the FTC even warns against these so-called "credit repair" companies, because most of them are scams.

You can learn more about credit scores and how to improve them from this library of article:
http://www.cornettcommunications.com/credit-score.php

Related article: What is a good credit score by 2009 standards?

Mortgage Applications 101 - How to Apply for a Mortgage Loan

Article Summary: This lesson explains how to apply for a mortgage loan and the things you'll need to do when you submit a mortgage application to a lender.

So you've finally decided to make the big leap and buy a house. Perhaps there is already one you have your eye on. Being that the current real estate is favorable to buyers, you probably have plenty of time to apply for a mortgage loan. But why wait? Most real estate agents won't even talk to you unless you've been pre-qualified or pre-approved by a lender. So why risk losing that special house you've had your eye on to another, better prepared buyer?

Before you can even start shopping for a mortgage loan, or filling out an application for one, you need to know what your credit looks like. You can request all of your credit reports and scores from this page. The best mortgage loan rates go to those borrowers with the best credit and highest scores, so it's a good idea to know what you have to deal with. It will also help you find a good lender with a rate that you actually qualify for.

Application Essentials

Now that you've decided on a lender, they will help you choose the loan program that will best suit your budget (i.e., 30-year fixed, 7/1 ARM, etc.), but they are going to need additional information from you. So when you apply for a mortgage loan, it's always best to come to that first appointment armed with the following:

• Paystubs -- 2 most recent for all borrowers
• Tax returns -- past two years
• Bank statements -- most recent
• Statements for retirement accounts, stocks, bonds, investments -- most recent

During the mortgage application process, the lender will also pull credit reports from all three credit reporting agencies (TransUnion, Equifax, Experian) and review the information with you to make sure it is correct. They will also discuss any negative items on your credit.

At this point in the application process, many mortgage loan officers will make a preliminary judgment as to whether or not you will qualify for a loan and be able to afford the payments. They will come up with a set amount they think you will be approved for. This is commonly referred to as "Pre-qualification". Your lender should be able to provide you with this information in the form of a pre-qualification letter.

But we are not done yet. When you apply for a mortgage loan, you will go through a series of evaluation stages, with plenty of paperwork along the way. So let's talk about what happens next.

The next step will be one of two options:

• You can request your lender to "Pre-approve" you for a set amount, which means your application and financial documents will be submitted for underwriting and approval, and you will be provided with a pre-approval letter.
• Or, you can wait to officially submit your mortgage application when you know how much you need to borrow -- i.e., until you find a home you'd like to buy and your offer is accepted by the seller. You may find the pre-approval letter has a little more weight when dealing with sellers and their agents, so if you are certain you'll be purchasing a home in the near future, and you can stick to your budget, you may want to choose this option.

The next steps in the mortgage application and qualification process will be handled by the lender. They will order an appraisal of the home and, in some cases, request you to schedule a termite inspection. They will also perform title searches to make sure there are no liens on the property and that the seller does truly own the home. They will also obtain a flood certification to insure the home in not in a flood zone.

During this time, you must be diligent to make sure your credit remains good, mainly by paying all of your bills on time. You also want to refrain from making any big credit purchases and opening any new credit accounts. This will lower your debt-to-income ratio and affect your credit score, which could raise some red flags since your lender will pull your credit reports again before closing.

It's also a good time to spend as little money as possible to make sure your bank account balances don't fluctuate too much. You will need to submit another set of pay stubs and statements for all of your accounts before closing on the house.

If all goes well with the above, you should be ready to close on your new home within the time stated in your offer contract to the seller. The lender and title company will schedule the closing so all you'll need to do is show up with a cashiers check for your down payment and closing costs.

You will receive a statement (HUD-1) of all the fees and amounts you will be required to pay at closing at least 24 hours prior. It is important to review this statement for accuracy so there is time to make any necessary changes before the scheduled closing. The final piece of the mortgage process puzzle is the most exciting -- when you are handed the keys to your new home!

Remember that when you apply for a mortgage loan, you are taking the first of many steps in the path to qualification and approval. You need to understand how the process works before you even submit your mortgage application to a lender. By understanding the process, you can better prepare for it. This will make it easier to apply for the loan to begin with, and will also expedite the process.

How to Apply Online

These days, you can use the Internet to save yourself a lot of time and energy. By using certain websites, you apply for a mortgage loan online and get offers from multiple lenders just by filling out a single form. This is a fast and easy way to get the ball rolling.

Of course, you have to use caution when you fill out a mortgage application online, because it will ask for sensitive information such as your Social Security Number. That's why we recommend using trusted names and websites. Get an online quote here.

House Buying Questions - 7 Frequently Asked Questions

Through our "sister site" over at HomeBuyingInstitute.com, we have answered hundreds of house buying questions over the years. It's natural to have a lot of questions when you buy a home for the first time. It's a sign that you have a curious mind, and they realize the importance of research and education.

We thought it might be helpful to create a list of the most frequently asked house buying questions we have received over the years. We are also getting some new inquiries as a result of the current economic crisis we are experiencing. We have provided answers for those questions as well.

So without further ado, here are some of the things people want to know when buying a house for the first time:

1. Can I afford to buy a house?

It certainly makes sense to start with this question before you research anything else! To be more specific, you should be asking: "Can I afford to buy the kind of home I want?" To answer this house buying question you will need to examine your finances.

Take a look at your income and your debt. Determine how much of your gross monthly income is left over each month after you have paid all the bills. You can exclude your rent from this equation, because that monthly expense will go away if / when you buy a house. The amount you have left over is the amount you can leverage to make a mortgage payment each month. This is a good starting point for setting your house buying budget.

Next, you should start to familiarize yourself with mortgage calculators. You can find them online, and most of them are free to use. Using a calculator, you can take the price of a house and break it down into estimated monthly mortgage payments (for a 30-year loan, for example). This will give you a ballpark idea of how much house you can afford.

2. How do I start the process?

This is another common house buying question among first-time buyers. I always tell people to start with thorough review of your financial situation. We touched on the budget factor above, but you should also get copies of your credit reports and scores (you have three of each) to see where you stand. Lenders will use your credit score, your debt-to-income ratio and other factors when deciding whether or not to loan you money.

If you find out that your credit score is low, you're going to have a hard time buying a house -- especially in our current troubled economy. So you should focus your time and energy on rebuilding your credit so that you can qualify for a mortgage in the future. You also need to review your credit reports to make sure they don't contain errors, because this can also hurt your chances of buying a house.

Start here: Fico Scores/Reports

3. What if my credit is bad? How do I improve it?

This is a question many people are asking when trying to buy a house today, and it has to do with the economic crisis we are going through. Mortgage lenders are becoming stricter with their qualification criteria, so you really need to focus on maintaining a good credit score. If you find out that it's low (and you will know if you apply for a loan and get turned down), there is plenty you can do to improve it. This article explains some of the things you can do to boost your score quickly.

4. Which type of mortgage loan should I choose?

This is an important house buying question for many reasons. It's also a question you must answer for yourself. There are many different types of mortgage loans, but most of them can be classified in one of two ways -- they either have a fixed or an adjustable rate. There are also hybrid loans that combine certain qualities of both the fixed-rate and adjustable-rate loan. For more information, refer to this article on choosing a mortgage type that matches your house buying situation.

5. Do I need a real estate agent?

If you are buying a house for the first time, of if you're buying in an area you're unfamiliar with, I recommend hiring a professional real estate agent to help you. You probably have a lot of questions about the house buying process already, which is a perfect example of why you need professional guidance. The real estate terminology alone can be confusing enough. A skilled agent can help you navigate the process and avoid costly mistakes along the way.

6. How can I buy a foreclosure home?

This is a very common question right now, because there are more foreclosure homes on the market than ever before. Last month alone, more than 80,000 homes were foreclosed upon in the United States. When a bank is forced to foreclose on a house because the homeowner stopped making payments, they will try to sell it off as quickly as possible to avoid further losses. They often do this through a real estate auction process.

In most cases, the bidding at an auction will start below the market value of the home. And unless there's a bidding war that drives the price up, the property could be purchased at a great price. This is what attracts people to buying foreclosures in the first place -- it's a way to save money.

With that being said, I am hesitant to recommend it for a first-time buyer. The regular house buying process can be confusing enough for a "newbie." But when you add in foreclosure laws and all the rest, it can become too much for a novice to handle. On top of that, you would need to pay cash in order to buy a house through an auction, and not many people can afford to do that.

7. What happens at the closing process?

The real estate closing (also referred to as settlement) is when the house if officially transferred from the seller to the buyer. You'll be asked to sign a lot of paperwork, and all of the money that has been held in escrow will be distributed -- the seller will get a check for their proceeds, the real estate agent(s) will be paid, etc.

The important thing to understand about a real estate closing process is that there are certain costs involved. You should get an estimate of these costs in advance, when you get approved for a mortgage loan. This is referred to as the "good faith estimate." Just realize that these initial closing cost estimates are usually low, so you plan on paying more than what the lender tells you up front. A day or two before the actual closing date, you should receive a HUD-1 settlement statement that tells you exactly what you'll owe at closing.

Learn More About the House Buying Process

You probably have additional questions about the house buying process, in addition to those listed above. If so, we recommend perusing the following articles on our website:

• Your No-Nonsense Guide to Buying a Home
• 101 Steps to a Smoother Home Purchase

I hope this tutorial has answered some of your questions about purchasing real estate, and I wish you well on your journey!

How to Sell Your Home Without an Agent

Article Summary: Is it possible to sell your home without an agent in the current economy? Yes, but you'll have to prepare for the process and work hard along the way. Here are some of the steps you'll encounter when selling your home without an agent.

If you are like many people in our country, you have seen a rapid decline in the real estate market and home values in your area. Homeowners who need to sell right now are in a tough position, and many are looking for ways to save money. If you are in that tough position of selling your home in the current declining market, you need to get every penny you can from the sale.

Most real estate agents will ask you to sign a contract allocating 3% of your home's sales price as their commission for guiding you through the process of selling your home. In many states, the seller is also responsible for paying the buyer's agent 3% as well. This means that up to 6% of your sales proceeds could be paid to the real estate agents involved in the transaction. For example, if you sell your home for $250,000, then $15,000 of your "profit" (if you are fortunate to make one) will go into someone else's pocket. Wouldn't it be great to cut that fee in half?

Sell your Home By Owner and Save Thousands!


One way to save a considerable amount of money is by selling your home without an agent and listing it as For Sale By Owner (FSBO). You may not think you have the skills or knowledge to do so, and you may not even know where to start. But it's possible to sell a home without an agent if you do the proper research and take the right steps. Here's how to go about it.

Start this process by asking yourself the following question: "What does a selling agent really do?" For starters, they will help you come up with a realistic sales price for your home by using recent comparable sales in your area. You may think they have exclusive access to certain databases to extract that information, but you'd be surprised. You may have a friend or relative in the mortgage or finance business who can help you access that information. Or, you can pay a nominal fee (in the range of $200 -$500) to hire a certified appraiser to prepare a full appraisal of your home including those comparable sales.

Once you come up with a fair and competitive sales price, the next step is to get your home included on the Multiple Listing Service or MLS -- same as that selling agent would do. There are many FSBO services out there that will do this for you for a reasonable fee. Many of these services will also provide you with yard signs, a lockbox, copies of contracts and other legal documents and advice when needed.

Our recommendation: Sell your Home By Owner and Save!


It is at this point you may want to consider staging your home so the photos on the MLS will be appealing to a wide range of buyers. Clean away all of the clutter. Freshen up the paint where needed. Arrange furniture so it increases the feeling of space. Make sure you have some good curb appeal out front.

Now that your home is valued and listed, it's time to start marketing it. Start by putting some highly visible "For Sale" signs in your yard, as well as house flyers with color photos and contact information (in case the buyer wants to schedule a visit to see the inside). You may also want to list your home on websites such as Craigslist.com, or in the local newspaper classifieds section.

Now that your home is listed and you are actively marketing it to potential buyers, it's important to keep it staged, tidy and clean. When you choose to sell your own home without an agent you basically become the selling agent. This means that when a buyer or buyer's agent wishes to see your home, they will contact you to schedule a showing. Often, they will do this with very little notice. It's important to make a positive and lasting impression, because it may be your only chance to show off all the great things about your home to that particular buyer.

The next several stages of the process are usually handled by the buyer's agent. These include making the offer, preparing the sales contract, scheduling the termite and/or home inspection, etc.

If the buyers have included any items they would like you to address in their offer, such as repairs or replacements, you will need to accept them or negotiate the offer, and then follow through on those repairs as needed. You may also want to have your FSBO service or local real estate attorney review the sales contract if you are not comfortable with the language and terminology.

In the final steps of this process, you will have to show up for appointments, inspections and the final closing process, as instructed by the buyer's agent. Lesson learned … do your research when trying to sell your home without an agent (you can find plenty of information online). Educate yourself about the entire selling process, and consult your FSBO service as needed.

Why It's Hard to Refinance Your Mortgage in Today's Market

Article Summary: A lot of people who are pursuing a mortgage refinance in the current economy are coming to the same conclusion. It's hard to refinance a home loan right now. This article explains why it's hard and what you might be able to do about it.

Find out if you can refinance. Get a free online quote:

It's a sad but true fact: the United States economy has hit a very rough patch. A few years back, lenders were making risky mortgage loans to people who did not qualify under normal circumstances. They were offering interest-only payment loans or loans at a very low rate for a set period in order to qualify those risky borrowers.

Flash forward to early 2008 and those "risky" homeowners could not make the payments on those loans when they adjusted to the full principal and interest payment. The banks who purchased those risky loans (commonly referred to as subprime loans) were foreclosing and taking huge losses. Next thing you know the banks themselves were in financial trouble, which meant less credit available to homeowners, consumers and businesses across the country. That leads up to where we are right now, and it's part of the reason it's so hard to refinance a mortgage loan right now.

Why It's Hard to Refinance

So what does all this have to do with you wanting to refinance your home? For one thing, banks have less money available to lend, so their lending requirements have gone back to the pre-housing boom levels. Today, many lenders will only refinance mortgages for the highest qualified homeowners with plenty of steady income, low debt-to-income ratios and (most importantly) lots of available equity.

You may fit most of those requirements, or so you think. If you purchased a home for top dollar in a real estate market that has seen a steady decline in home values, you may have some trouble getting your current mortgage financed.

For example, lets assume that I purchased a home five years ago for $550,000 with a down payment of 5% percent (or $27,500). Back then, lenders would have been happy to finance 95% of my purchase price, which would have given me a mortgage of $522,500 ($550,000 minus my down payment). I probably would have been offered an interest rate higher than I'd like, due to the fact that I only put 5% down.

So let's just say my current mortgage interest rate is 8.75%. I've seen a lot of information on television and in the newspaper that rates are at an all-time low, so I decide that now is the time to refinance my mortgage! After all, my credit is good, my income is solid, and my debt is very low. So no problem. I should be able to refinance with ease. Right? Wrong...

My bank sends out an appraiser to come up with the value of my home in today's market and the news is not so good. Based on comparable sales in my neighborhood, they appraiser determines that my home is currently valued at $450,000. Even if the new lender was willing to finance 95% of my homes' value, this would mean a new mortgage of $427,500 -- hardly enough to pay off the balance of my current mortgage (which is in the neighborhood of $518,000).

Keep in mind, this is a generous scenario. Most lenders will now only finance up to 80% of the value of the home. In the scenario above, that would only equate to $360,000 worth of financing, for a shortfall of almost $160,000. This means no refinance is in the cards for me at this time.

Of course, I used the word "hard" in the title of this blog post for a reason. While it may be hard to refinance in the current market, it's certainly possible in the right situations. There's only one way to find out. You have to get a refinance quote from multiple lenders and see what they're willing to offer.

Related articles:

• Mortgage Refinancing Explained
  
• Should I Refinance My Home Now?
• FHA Refinance Loans to the Rescue

Does Your Homeowners Insurance Policy Reflect Your Home's Value?

Article Summary: Did you know you can save money on your homeowners insurance policy by reducing the coverage to reflect the true value of your home? If you've seen your home value drop lately, this is something to consider!

Is it just me or does everything cost more lately? Every time I go to the grocery store, gas station or retail shop, it seems I am paying a bit more for the same goods and services than I did just a few months ago. If you're like me, your income has not adjusted to help cover these increases, so you are looking for ways to cut costs.

In light of the current housing market it might be worth taking a look at your homeowners insurance policy to see if you can reduce your coverage amount (thereby reducing your premium at the same time).

In most cases, homeowners need to review and adjust their coverage annually to include the increase in the value of their homes. But lately, home values have decreased all across the United States, and in some places they have decreased a lot. The question is, has your policy coverage changed in correlation to the value?

Here's an example. Let's say a homeowner purchased and insured his home for $750,000 three years ago. In today's market, he may only need a policy to replace the home for $500,000 (if the value has dropped that much). That adjustment in coverage may mean enough of a savings to to make it worth the time and effort of getting a few current quotes. These days, you can even get quotes online, which is a real time-saver.

You should also consider the type of coverage you have. If your coverage includes replacement cost (i.e., it covers rebuilding or replacement of covered items at current cost) instead of cash value (i.e., replacement minus deduction for depreciation), then you may be paying 10% more for your policy. This may be another area where a struggling homeowner can make an adjustment to help save money.

Also, if you've been insured by the same company for a few years, it's still a good idea to get quotes from different insurance companies. There may be one or more out there who will offer you the same coverage for less money. Start here to find out

Selling a House in Tough Economic Times - Home Seller Crisis Guide

Times are tough for home sellers right now. In a general sense, I know this just by watching the news. In a more specific way, I know this by talking to a couple of my neighbors who are trying to sell their houses right now.

I can't change the fact that we are in an economic crisis that makes home selling tough. But I can offer some tips on how to sell your house in touch economic times such as these.

How the Economic Crisis Affects Home Selling

In most areas of the country, people who are trying to sell a house right now will encounter three primary obstacles -- all a result of the current economic crisis we find ourselves in:

1. Home values dropping in most places
2. Record numbers of foreclosure homes available
3. A shortage of buyers due to the credit crunch

The first problem for sellers is that home values have dropped in most markets, and in some places they have dropped significantly. So the first thing you must do is determine what your home is truly worth in the current market -- not what it was worth when you bought it, and not what you think it should be worth. This is more of a problem in some areas than others, but it's still a problem for sellers nationwide.

One of the reasons property values have dropped is the vast number of foreclosed homes currently on the market. As we know, this is the result of the mortgage crisis that cost so many subprime borrowers their homes. So when you try to sell a home in the current economy, you may find that you're competing with foreclosure properties that are priced below market value (even below the depressed market value).

The third reason it's hard to sell a home during this economic crisis -- and probably the biggest challenge of all -- has to do with a shortage of buyers. A lot of people are having trouble getting mortgage loans right now, and for obvious reasons. Lending standards have gone up considerably (credit score criteria, debt-to-income ratios, etc.), and a lot of banks are afraid for their very existence right now. So unless you have nearly perfect credit, you're going to have a hard time getting a mortgage.

This is the problem my neighbor his having up the street. Her house has been on the market for about three weeks now, but she's only had a couple of potential buyers walk through. Other agents have told her listings agent that their clients can't get mortgage loans, so there's no point in bringing them by the home.

Through our other website at HomeBuyingInstitute.com, I was contacted by a person from NBC Nightly News. They wanted me to help them find people to interview for a story they were doing. The segment was about this very issue -- people who are having trouble getting mortgages because of the economic crisis (even people with good credit scores).

Tips for Selling in Hard Times

Times are certainly tough for sellers right now. And you probably won't sell your house for the amount you would like. If you can stay put and wait out the crisis for a while, that's probably the best strategy for now. But if you simply have to sell (for a job transfer, financial reasons, or whatever the case), there are some things you can do to expedite the process.

The following tips will help you sell your house in the tough economic times we find ourselves in:

• I've said it before, but it bears repeating. Proper pricing is critical when selling a home in this kind of market. On top of that, the value of your house has probably changed since you bought it. So you need to find out what comparable homes are selling for you in your area at the current time. If you hire an agent, this is one of the key steps he or she will help you with.
• Staging your home effectively is also extremely important. Sellers need every edge they can get in this economy, and presentation goes a long way in this regard. In many cases, the difference between a properly staged home and one where the sellers made no effort is the difference between an offer and no offer.
  
• Because there's a shortage of qualified home buyers right now, you need to do everything you can to market your home effectively. You need to reach the largest possible audience to increase your chances of finding the right buyers. If you have an agent, they will handle much of this for you. If you don't have an agent, you can still get national real estate listing without the commissions
  
  

Selling a home during this financial crisis is certainly a challenge. But it's not impossible. You may have to reduce your asking price, and you should definitely spend the time needed to stage and promote your house properly. But it can still be done.

FHA Refinance Program - H4H Hope for Homeowners

The Federal Housing Administration is doing its part to help alleviate the housing crisis in this country. The Hope for Homeowners (H4H) program offers FHA refinancing options to homeowners with adjustable-rate mortgage (ARM) loans. By helping people refinance into fixed-rate loans with lower interest rates, the FHA hopes to reduce the foreclosure rate in this country.

Find out if you are qualified for this program:

This refinancing program was launched in October of 2008 and will continue until September 2011. Every since the FHA introduced this option, people have been asking us questions about it. So here is everything we know about the FHA refinance program.

How the Refinancing Program Works

First, you would need to contact your current lender to see if you are qualified for the FHA refinance program. They have certain criteria in place (covered below), so you need to find out if you meet these criteria for the program. You could also contact a new lender to see if you are qualified.

The basic criteria for FHA refinancing include the following:

• Your current mortgage loan was originated (started) on or before 1/1/08.
• Your monthly mortgage payments are greater than 31% of your gross monthly income (as of 3/1/08).
  
• You did not intentionally fall behind on your payments.
  
• You have not been convicted of fraud in the past.
  
• You do not own other residential real estate (aside from the home you are in).
  
• You did not falsify your mortgage application in order to get the loan.
  

These are the minimum criteria for eligibility in the FHA refinance / H4H program. There may be other stipulations based on your current financial situation, your lender, etc.

FAQs About the H4H Refinance Loans

Here are some of the most commonly asked questions about FHA refinancing through the Hope for Homeowners program:

What is the purpose of this program?

The primary goal of the H4H program is to help at-risk homeowners (who may be facing foreclosure) to refinance their ARM loans into a more affordable fixed-rate mortgage loan. This will reduce the size of monthly payments for those who participate in the FHA refinancing program.

Are there any costs involved for people who want to apply?

As with any other type of loan, you will have to pay closing costs on your refinance loan through the FHA program. It's possible to roll these costs into the loan, as opposed to paying for them out of pocket. This is a question for your lender, because they will be the ones who determine your closing costs. Get an estimate of these costs up front.

How do I apply?

Talk to your lender about the paperwork they need. It varies from one lender to the next. Among other things, you will need to provide proof of income (such as pay stubs and W-2 forms), in addition to your current mortgage paperwork.

Will I get an adjustable (ARM) loan or a fixed-rate loan?

One of the objectives of the FHA refinance program / Hope for Homeowners is to help people transition from unpredictable ARM loans to fixed-rate loans with a lower interest rate. All of the loans offered through this refinancing option are fixed-rate mortgages with a 30-year term. They are also insured by the Federal Housing Administration (FHA).

Additional Resources

You can find plenty of information online about this Hope for Homeowners program. Here are a couple of websites to start with:

• Overview of FHA home loans
• Lenders participating in the refinance program

Home Mortgage With Bad Credit - Highly Unlikely

About once a week, I get an email from somebody who is trying to get a home mortgage loan with a bad credit score. They ask for advice on how they should proceed. I get this question so often, in fact, that I thought it was time to answer it here on the blog. That way, anyone else who is wondering how to get a home mortgage with bad credit can benefit from the response.

Here's my take on the matter:

In light of recent economic events, I can only think of one scenario where it makes sense to pursue a home loan with poor credit ... a life-or-death situation. Anything short of that, and it just doesn't make any financial sense. There are several reasons why advise against this, but let's stick with the two biggest reasons:

1. Bad Credit Mortgage Loans Are History

If you've been watching the news lately, you'll know that subprime loans are one of the primary factors that have wrecked our economy. These are home mortgage loans made to people with bad credit scores. From the mid 1990s until 2007, they were given out like candy. That's because the lenders who gave out these subprime loans could turn around and sell them on the secondary mortgage market. Obviously, this is no longer the case.

But when these subprime borrowers started going into foreclosure in record numbers, the government finally stepped up its regulation on this bad credit lending practice. Too little too late, I'm afraid. The damage was already done. The mortgage crisis became a full-scale economic crisis, the likes of which we have not seen since the Great Depression.

As a result of all this, it's virtually impossible to get a home mortgage with bad credit these days. And whether you care to hear it or not, this is actually a good thing. Point #2 explains why.

2. It's a Recipe for Disaster

Even if you could get a mortgage loan with a bad credit score -- which, as we have discussed, is nearly impossible -- it's not a smart thing to do. When you apply for a loan, the lender will examine all aspects of your finances (past and present) to determine what kind of risk you are. If you have bad credit, this sends up a red flag. It tells the mortgage lender that you have had trouble managing your finances in the past. In other words, they will see you as a higher risk.

When this is the case, one of two things will happen. They will either decline your application entirely, or they'll give you a home mortgage loan with a higher interest rate -- a higher rate than a person with good credit would have to pay. This translates into a higher mortgage payment each month, because interest is one of the things that make up that monthly payment.

If you're not careful, this is the kind of scenario that can lead to debt problems or possibly even a home foreclosure. We are seeing this exact scenario happen all across the country right now, with alarming frequency.

So my advice is to forget the idea of getting a home mortgage loan with bad credit and focus, instead, on rebuilding your credit score. If you do that, you'll have an easier time getting a loan, and you'll get a lower rate at the same time. A double win!

5 Steps to Rebuilding Your Credit Score

by Brandon Cornett

In 2009, there will be a lot people rebuilding their credit due to foreclosures, bankruptcy and other factors. The housing crisis and other factors have caused problems for a lot of folks, and these problems usually culminate in the form of a bad credit score.

So if you're one of many Americans who will be rebuilding your credit over the coming year, you're not alone. The question is, how do you go about it? What steps are needed to rebuild a credit rating over time, and which steps should you focus on first? These are the questions we will tackle in this lesson.

Rebuild Your Credit Score With These Steps

Here are five of the most important things you can do as you venture forth in your quest for better credit.

1. Identify the Problem

Before you do anything of the other things on this list, you need to try and figure out why your credit score is bad to begin with. If this answer is obvious (like a bankruptcy filing or a long history of missing bill payments), then you can probably move on to the next step in the list. The key to rebuilding credit is to identify the bad financial behavior that caused the problem, and then to correct the behavior.

2. Correct Errors on Your Credit Report

If you've haven't ordered a copy of your credit reports in the last year, you should do it as soon as possible. It's not uncommon to find errors within your credit history. They may be data mix-ups, or they may be signs of fraud. Either way, they can drag your credit score down even lower.

I put this step high up on the list for a good reason. Fixing these errors can be a time-consuming process, so you should start right away. Start by ordering all three of your credit reports and reviewing them for mistakes. If you find a problem, you'll need to contact the company that produced that particular report (either TransUnion, Experian or Equifax). Remember, the rebuilding process begins by reviewing your current situation.

3. Reduce Credit Card Balances

Most financial experts agree that this is one of the fastest ways to improve a credit score -- if it's not the fastest. This is also one of the best things you can for debt reduction in general. Credit cards usually have a much higher interest rate than other forms of debt (such as student loans and mortgages). So when you pay these balances down, it helps improve your debt-to-income ratio at the same time you're rebuilding your credit score. You can see why this is such an important step in the process.

Right about now, you might be saying "easier said than done." It takes extra money to pay down these balances, instead of just paying the minimum balance each month. So where does the money come from? Well, you'll have to reduce your spending (see item #5) and work out a payment plan to whittle away at those credit card balances. It will take some discipline, but it's a crucial step needed to rebuild your credit rating.

If you need some professional help from a debt expert, check out the free debt counseling service available from Credit.com.

4. Pay All Bills on Time

Getting behind on bill payments (for auto loans, credit cards, etc.) is one of the key reasons why people get into bad-credit situations in the first place. In the first step above, I asked you to identify the source of the problem. If missing payments is part of the problem, you need to correct.

One of the best things you can do is to handle a bill as soon as you get it out of the mailbox. Putting it into a stack somewhere will increase the likelihood that it doesn't get paid. You can also set up online auto-pay to make your life easier -- just about everyone offers it these days.

5. Get Your Spending Under Control

When you spend more than you earn (as so many Americans do these days), you will inevitably build up a lot of debt. This is often in the form of credit card debt -- the worst kind to have! This is where discipline comes into the picture again.

Sit down and create a budget to see how much money you spend every month, and what you're spending it on. Now look for items that can be eliminated. Going out to dinner, going to the movies, buying luxury items you don't really need ... these are all things that can be scaled back or eliminated entirely. Rebuilding a bad credit score is all about awareness. You need to be aware of what you're making each month (after taxes), what you're spending each month, and how it's affecting your overall financial picture.

Which Mortgage Type is Right for Me?

Which mortgage should I choose, based on my home buying situation? This is a common question among home buyers, and with good reason. The type of mortgage you choose will have a long-lasting financial impact on you. After all, you will be making payments on the loan for many years to come (unless you sell the home or refinance the mortgage).

Before we go any further with this lesson, let me say that only you can decide which mortgage is right for you. I'm happy to offer you my input on the subject, but I don't want you to make any financial decision based on this article alone. These are just my own personal and professional views on this topic.

Which Type of Mortgage - Fixed vs. Adjustable

There are many different types of home mortgage loans available today. But nearly all of them all into one of two main categories -- they are either fixed-rate or adjustable-rate mortgage. Which one you choose has a lot to do with your future plans. We will talk about which mortgage is best for different situation in a moment. But first, let me explain how these two types of home loans work:

• With an adjustable-rate mortgage, or ARM, the interest on the loan will change at predetermined intervals (such as every three years, every five years, etc.). In most cases, this means an increase in the rate -- and a larger mortgage payment as a result. These loans get their name because of the period in which they adjust or "reset" to a different rate.
• With a fixed-rate mortgage, the interest rate stays the same for the entire life of the loan. For example, if you got a 30-year fixed-rate loan at 7% interest, it would have that same 7% interest rate after the first year, after the tenth year, at year 20, etc.

There's another popular mortgage option that's actually a combination of these two variations. It is appropriately referred to as a "hybrid" mortgage -- or, to be more specific, a hybrid ARM loan. This loan starts out with a fixed rate for an initial period, and then it adjusts at predetermined intervals after that introductory period. In other words, it combines certain aspects of both the fixed and adjustable mortgages (hence the term hybrid).

A common example of the hybrid ARM loan is the 5/1 option. It's common to see hybrid loans expressed in this way. The first number pertains to the number of years during the initial fixed-rate period. The second number tells you how often the mortgage rate will adjust after that period. So for a 5/1 ARM, you will have a fixed-rate for the first five years, but after that the rate will adjust every year. There are also 3/1 ARM loans, 7/1 and 10/1 options. Those are the most common.

Choosing the Right Mortgage

Now we get back to the question we started this article with -- which mortgage option is right for me, given my home buying scenario? Keeping in mind the disclaimer I made earlier, let me say this...

• If you plan to stay in the home (and therefore keep the mortgage loan) for many years, you should strongly consider the fixed-rate mortgage. It offers predictability in terms of the interest rate, and that can be a good thing to have over the long haul.
• If you only plan to be in the home for a few years, then a hybrid ARM loan might be a good way to save money during those years. You see, during the initial fixed-rate period of a hybrid ARM, you can usually get a lower interest rate than you could get on a traditional fixed-rate loan. Of course, after the ARM adjusts the rate will go up. But if you sell the house before then, it won't matter.

Let me give you a good example from my own past. When I was near the end of my military career, the wife and I moved to Maryland for my last two-year tour of duty. We were pretty sure we weren't going to live there permanently, and would likely move after the two years were up. This knowledge helped us decide which mortgage option to choose.

Long story short, we got a hybrid ARM loan that had a low fixed rate for the first five years. Had we chosen a traditional fixed-rate mortgage instead, we would have paid more in interest. We sold the home after two and a half years ... long before the adjustment period. So we saved money without exposing ourselves to any extra risk.

So when trying to figure out which type of mortgage is right for you, you'll benefit from this kind of long-term thinking. Ask yourself how long you plan to stay in the home. If you plan to stay there for a long time, you have to consider the risks of an ARM loan. You don't fully know how the interest rate will adjust. If it goes up a lot, you might even find that you can no longer afford your monthly mortgage payment. This was a big contributing factor to the housing crisis we are now facing. So choose wisely!

What Is a Good Credit Score in 2009

What is a good credit score and how do I get one? These are going to be common questions among home buyers in 2009, and with good reason. The definition of "good credit score" has changed over the last couple of years, as a result of the housing crisis that spread through our economy as a whole.

It's hard to put an exact number on this without first defining what a good credit score is. For example, is is the score at which you can qualify for a mortgage loan? Or is it the score that allows you to get the best interest rate on that loan? These are two different levels, so you can see why it's hard to define it precisely.

The Definition of Good Credit Has Risen

One thing we can say with certainty, however, is that the definition of what's considered to be a good credit score has gone up over the last few years. For example, consider the following:

I was recently watching a financial expert on television, and she was explaining what it takes to get the best rates on a mortgage loan these days. Back in 2006, a borrower would need a credit score of 620 or above to qualify for the best interest rates. But in May of 2008, just two years later, that same buyer would need a score above 750 to get those same rates.

Given the current state of the economy, lenders are simply refusing to loan money to people with bad credit. It's too much of a risk for them, given what has happened over the last few months. So here's one thing we should all be able to agree on. While the definition of good credit will vary depending on who you ask, the vast majority of consumers in this country can benefit from improving their credit scores as much as possible.