Getting Approved for a Mortgage with a Recent Job Change

Considering changing jobs, but curious how that might affect the mortgage approval you’re hoping for? Or, maybe you already have a new job and are wondering what your odds are. The general rule of thumb is that you should have a two-year history at your current job, but this is far from necessary in all cases. However obvious it may seem, the main question you need to ask yourself is: Can I prove that I can afford the expected mortgage payments? A close second question to consider is: Does this job move make sense on paper? Here are three things mortgage lenders take into account:

1. Changes to Income Structure

It’s much easier to show that you can meet expected payments when you’re being paid a guaranteed salary that exceeds the amount of payment needed. Where people often run into trouble is when they are moving to a new job where they will be making the same or less money guaranteed, but counting on bonuses or commissions for the rest .

2. W-2 or 1099?

If you’ll be working for yourself in your new role or working for someone else as a contractor (1099 as opposed to W-2), you will need to show at least 12 months of self-employment income before most lenders will approve your mortgage application.

3. Whether Job is in a New Industry

The gold standard in being approved for a mortgage with a new job is when an applicant works in the same industry for more pay. But what if your new job is in a completely new industry? For example, what if you were working as a bartender, but now you’re going to be employed as a pharmacist? Sometimes, these situations make sense. For example, in careers that require higher level education (think doctor, lawyer, etc.), lenders will expect to see such an abrupt change. If, however, you’re going to be a dog walker after having been a barber, you’re going to have more work to do. If your new job will offer you a written employment contract for at least one year, you’re going to have a much easier time convincing a lender you will be able to meet your expected payment. If it’s unlikely that you’ll be offered such a contract in your new role, you’re better off getting approved for a mortgage first before taking a job in a new industry.

Getting approved for a mortgage with a recent job change is well within your reach, as long as you go about it the right way. When in doubt, hold off on the new job change until you can secure the mortgage that’s right for you.

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How to Buy a Home with Student Loan Debt

In the United States, there is currently about $1.5 trillion dollars’ worth of outstanding student loan debt. By comparison, that’s hundreds of billions of dollars more than outstanding credit card debt! Also, about 20% of those paying off student loans are paying off amounts greater than $100,000.00 and the average monthly student loan payment is $300.00. It’s hard to imagine that you can ever finish paying off this debt, and be able to start the life you imagined when you first decided to go to college. That hopeless feeling is common among anyone who graduated college in the last couple of decades, but not many realize that it’s possible to have this debt AND also buy your dream home. You don’t have to pay off your student loans before buying a house, but it does have a couple of extra factors. Let’s break it down for you

#1 Student Loan Status 

First you need to determine what status your student loans are in. Are they on an income based repayment plan,in forbearance, or currently in deferral? If they are, you should skip down to the 4th tip because you may have a different factor to deal with than if you’re on a standard payment plan. If you’re not sure, then read through all of the steps, and when you’re done, either check your student loans online or give a call to the company who is managing your loans to confirm your status.

#2 Debt to Income Ratio

Everyone who wants to buy a home has to conform with the concept of debt to income ratio. Essentially, that means that a lender will consider the monthly payments for all of the debt that you are responsible for, and then compare it to all of the income that you bring in each month. It then will create a percentage that they use to determine approvals and loan programs that you are eligible for (the number you want to stay around is 43%). Of course, having a monthly debt such as a student loan payment is going to drive that percentage up.

Another consideration is if you plan on having someone else on the loan with you. Something many people don’t realize is that you will have to include their figures for your combined debt to income ratio (yes, if they have debt, it is now considered as part of a combined percentage, which could have a negative effect). There are also benefits, because if they have good income and very little debt, that will help your overall combined debt to income ratio. Keep that in mind when looking into your mortgage options.

If after all of your efforts, you find that your debt to income ratio is still too high, you don’t have too many options left other than lowering your debt or making more money. If only making more money were easy, right? Some people think getting a second job will help, but if you have a part time job for less than 2 years, you may not be able to include that in your debt to income ratio. Your best bet would be working on getting overtime, bonuses, or asking for a pay increase, even if it is confirmed in a letter from your employer that it won’t be active now, but will be promised at a specified date. You can also consider the possibility of finding a better paying job, but also keep in mind that lenders will want to see you transition to a job that is in a similar line of work, and you want to avoid having an unemployment gap over 30 days. Pay structure is also important, so if you change jobs, you don’t want to switch from a 1099 to a W2 or vice versa. Stick with transitioning from a W2 to a W2 or a 1099 to a 1099.

The other option would be looking at ways to lower your debt. Your ratio will improve if you can eliminate some recurring debts entirely, and that’s always a worthwhile endeavor. Another focus might include reducing the amount of recurring debt you must spend. One way to do this with student loans is to consolidate and/or refinance them (be careful when refinancing student loans and make sure that you understand all repayment terms and what is best for your individual goals). There are many lenders out there willing to refinance even your federal student loans at a lower rate, and it would help lower the amount of your monthly payments if you consolidate to one payment each month.

#3 Know Your Credit Score

Particularly if student loan debt is a concern, you’re going to want to make sure that you have access to the best rates and programs available. In order to do that, you need a decent credit score. Check yours through annualcreditreport.com. If your average score is under 600, you’ll certainly want to do some work to improve your score before shopping for a mortgage.

#4  How to Deal with Forbearance, Income Based Repayment Plans or Deferrals

Is your student loan status one of the following: In Forbearance, on Income-Based Repayment Plans, or In Deferral? Up until recently, having student loans in one of these categories greatly limited the home loans available to would-be homeowners. Things have gotten much better. For some loan programs, lenders must count between 0.5 and 1% of your total outstanding loan balance if it falls under one of these categories. Because of the effect this can have on debt to income ratios, you may find yourself out of luck with some loan programs. This can be particularly troubling for those with student loan balances that are too high to be refinanced comfortably. Don’t worry! Conventional loan programs are much more likely to take only the amount you actually pay monthly into consideration.

There you have it. Having student loan debt does not and should not keep you from achieving the dream of home ownership!

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Is Now a Good Time to Buy a Home?

Over the last two years there’s been a lot of movement in the markets. Stocks went way up, but have more recently backslid. In terms of the American workforce, we’re told that most working-age people are gainfully employed and that businesses are now competing for the best talent. How does all this affect the housing market and what you can afford? Whether you have previous experience in buying a home or are just now considering it for the first time, it can be pretty confusing to tell whether now is a good time to buy a home or not. Let’s take a moment to step back and figure out where we are by briefly reviewing the modern history of mortgages in the United States.

The Early Mortgage

Did you know in the early 1900’s home buyers were typically expected to have a down payment of 50% of a home’s value when applying for mortgages? Beyond that, the typical period to pay off the remaining 50% or so of a mortgage was around 3 to 5 years! The system was far from perfect, and a lot of Americans were left with the dream of home ownership simply out of reach.But things got even worse during the Great Depression when most home mortgage loans stopped being offered altogether. Enter Franklin D. Roosevelt’s New Deal,which aimed at stimulating economic growth in the United States. One major creation of the New Deal was the Federal Housing Administration (FHA), which introduced 15 and 30 year mortgages that offered insurance to lenders who had become fearful of borrowers defaulting because of the Depression. In addition to creating a safer environment for lending, these new mortgages offered the middle class the opportunity to buy a home with lower down payments and more extended terms for repayment.

Booms and Busts

There was likely never a more prosperous time for the average American than in those years following the Second World War. Soldiers were returning home and it seemed that just about everyone could take part in the American dream of home ownership. For decades following, the country’s booming economy fed increasing appetites for more expensive housing.Eventually, the housing market could no longer meet so much demand. As a result,interest rates rose steadily through the 70’s and 80’s and soared to the 20%range. With fewer people to afford this level of interest, the market adjusted again to below the 10% level in the later 90’s. Part of this market adjustment was due to the rise of sub-prime and predatory lending, practices which aim to offer loans to borrowers who lack the ability to afford them. When the jig was up, and owing in part to the record-high number of mortgage defaults that would follow, the country entered a massive economic downturn that would come to be known as the Great Recession in 2007-2008. Following this period, the government responded by increasing regulations to crack down on sub-prime and predatory lending. The government also responded by lowering the cost of credit to historic lows, which allowed for lending institutions to offer mortgages at rates nearly as low as 3%!

Today

After so much government stimulus and with the economy continuing to show positive signs of growth, the government is currently responding by raising interest rates on credit. In turn, lenders are offering mortgages at slightly higher rates (today, the average mortgage rate is 4.5%).While it’s impossible to tell what the future holds, there are signs that the government won’t be raising the cost of credit as quickly in the future as it has been recently. This is because the economy and wage growth may not be improving quite as well as traditional indicators suggest. Giving some back bone to that theory, we are starting to see home prices once again drop due to being priced too high to sell. With interest rates still near historic lows and home prices starting to fall, I hope you now agree that now is a great time to buy a home.

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Crefco Dog Days of Christmas Instagram Contest Rules

Enter in a chance to win a $50 Amazon gift card!!! (Just in time for those holiday gifts)

How to enter:

1. Follow our Instagram profile @crefco 

2. Like the post on Instagram

3. Tag a friend in the comments

4. Then share a picture of your festive furry friend with the hashtag #CrefcoDogDaysofChristmas

Giveaway runs from Dec 13th – Midnight Dec 20th.Winner will be selected at random and will be announced on our page no later than 5PM(EST) on Monday Dec 21st

The gift card will be sent via email so a valid email address will be required.

Continental U.S. participants only! Must be 18 years and up to enter

 ***This giveaway is in no way sponsored or endorsed by Instagram or Amazon***

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How to Have a Frugal Holiday Season

The holiday season is an especially risky time for those of us that have goals that involve living a mindful, budgeted lifestyle. Even those of us that hold these goals so dearly most of the year can get sidetracked by the pressure of spending over the holidays. In the consumerist western culture, we’re made to believe that what we spend has something to do with our worth as a good family member or friend. This year, let’s remember the better side of the holidays: the opportunity to share and pass on traditions. Let me recommend that one of those traditions ought to involve practicing frugality. Through frugal practices, we can show wonderful examples of resourcefulness, appreciation, and that sort of be-your-own-person approach to doing things that the holidays can sometimes lack. Here are some ideas to get started on:

 

Start With Setting a Budget

 

If you have your own family, sit down with your partner and discuss what a reasonable budget is for holiday spending this year. Simply having this conversation is worthwhile because of the feelings of accountability that come along with it. But even if you’re only planning for your own budget, the key is to stick to it.  Other helpful budget-setting tools include setting a cap on how much you’ll spend per person or per gift.

 

Redefine the Holidays For Yourself and Your Children

 

Especially if your children are very young, you have an opportunity to make each holiday your very own. For tight budgets, you might employ a secret Santa style gift-giving arrangement where each family member gets only one other family member a gift. You might also consider giving a family gift to a worthwhile charity. Maybe your family spends an entire day each season on a movie-thon. Maybe you cook together or go for walks in the snow. The holidays are about togetherness and tradition, so put your stamp on them.

 

Create and Re-use Holiday Décor

 

You’ll get a double-whammy out of the low-cost fun of creating your own holiday décor while spending time with your loved ones. If you find yourself wanting to purchase something new, it can cost you big unless you find a super bargain. A great alternative is to find used items and repurpose them. You never know what you will find when you go to your local thrift stores. It’s possible you could find a beautiful antique, or you could use your creativity to refurbish something making this season cost effective, but also more sentimental if you put time into redefining an old item.

 

Mindful Gift-Giving

 

No matter what your budget may be this year, vow to be a little bit more thoughtful about how you give and how you ask for gifts. If you have children, have them write their wish list the old-fashioned way, with paper and pencil. The problem with online shopping is the unlimited items available with the click of a button, taking away the boundaries usually put up by local accessibility. Instead, have your children write to you about what they would like and why they would like it. Maybe even have them list it from most wanted to least. Encourage charitable habits and keeping tidy at the same time by asking your children to donate some of their older possessions to children who will go without new gifts this year. It’s worth saying; gift-giving does not need to be done cheaply to be done frugally. Buying someone something of quality that costs a bit more, but will last, is much better than feeling like you should buy them a new one next year to make up for it, and it’s a much more thoughtful gift in the long-run. As for receiving, the frugal move may just be to ask for the thing you really need or will buy later in the year anyways so that you can offset whatever costs you do have from holiday spending.

 

Good luck and Happy Holidays!

 

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8 Credit Tips to Improve Your Score This Holiday Season

With the holiday season upon us, you might be wondering where all the time went. Me too. Expenses (both planned and unplanned) are piling up. You may also be wondering how, through the madness, you can maintain your credit score, improve upon it, or, at the very least, keep it from going off a cliff. Maybe you’ve got an upcoming home or car purchase on your mind. Whatever your reason, working on building/maintaining your credit is never a bad idea. Okay holiday credit warriors, listen up. With these 8 credit tips to improve your score, you just may escape this season with a better credit score than ever.

#1 – Take Inventory

Did you know that you’re entitled to one free copy of your credit report every year from each of the three nationwide credit companies? Just head over to annualcreditreport.com.

A good credit score is anything over 700. An average credit score is anything above about a 650. If your score is below that, you have some work do. But don’t worry, there are still plenty of businesses that will work with you, and working on your score is exactly what we’re doing here.

 

#2 – Available Credit

Your credit score is directly related to how much of your available credit you’re using, so be sure to take note.  For example, let’s say you have three credit cards with a maximum balance of $10,000 each, you’ve spent $5,000 total, and you’ve spent roughly $1,500 on each. You’re in great shape in this scenario because you aren’t coming close to your total maximum balance or the maximum balance of any individual card. If you have plenty of room on your cards, there is no cause for concern. If you’re getting close to your maximum on any, you may think about getting a 0% introductory rate credit card for holiday purchases. You will likely need somewhat decent credit to qualify for these cards, but the savings are worth it if you do. Just make sure you will be able to pay it down before the introductory rate expires.

 

#3 – Length of Credit

You may be wondering whether now is a good time to close out those cards you’ve had for a while and don’t really use. The answer to that would be no, especially if you’re thinking about an upcoming purchase requiring good credit.

Some people seem to think that paying down and canceling credit cards will raise their score. This is simply not true. The credit world is mysterious that way. I’m definitely not telling you to keep your cards open forever, but if you need to use your credit in the near future, it’s best to wait on completely paying off and/or closing accounts.

 

#4 – Retail Store Rewards Cards  

Particularly if you cannot qualify for a credit card with a 0% introductory rate, retail store rewards cards can be helpful to take advantage of offered savings while building credit. A word of caution, never open too many cards of any kind at one time. Doing so will hurt your length of credit history, part of what makes up your overall credit score.

 

#5 – Reporting Payments You Already Make to Credit Bureaus

If you’re looking to boost your credit score or add more to your credit report, you might try reporting payments you already make to the major credit bureaus. You can accomplish this by researching apps for recurring payments you make. For example, reporting rent you already pay each month is possible with the help of several apps and programs dedicated to the service.

 

#6 – Use Someone Else’s Credit Card

I’m joking, right? No, I’m not. By becoming an “Authorized User” on someone else’s credit card (someone that trusts you…like, a lot… that also has good credit), you can have access to that card’s funds while building your own credit. The best part, you will remain without legal obligation to make regular payments on the card.

 

#7 – Installment Loans

You have a big present in mind for that special someone, but don’t want to spend all your holiday cash or tank your credit cards. Installment loans can be a great credit builder. And if you’ve already set aside all the money you’ll need to make the payments, this becomes an incredibly nifty little credit trick. Installment loans are commonly used for jewelry purchases. With this tip, you might find yourself building credit while expanding your holiday budget at the same time. Look at the budding credit pro you are becoming already!

 

#8 – Credit Card Reward Points

Instead of racking up new debt, spend some time reviewing rewards already available to you on the cards in your wallet. You can use travel points to offset holiday visits to relatives, use retail or flexible points to buy gift cards and make purchases that otherwise would have blown your budget. The better you know your rewards programs, the more creative you can get this holiday spending season.

 

Hopefully these 8 credit tips will help you not just survive the holiday season, but help you improve your credit score. With Tax Return season around the corner, you may now find yourself in a great position to make that big purchase that previously seemed like a dream. Happy Holidays and happy shopping!!

 

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3 Tips to Get Your Dream Home and Survive The Holidays

Whether you’re an experienced homeowner or looking to buy your very first home, the process can feel overwhelming. Throw the holidays into the mix and forget it, right? Wrong! Believe it or not, you can have it all. You can give presents that light up your loved ones faces, eat your yearly quota of pie in a single day, practice that special sort of holiday patience that comes from being around distant relatives for too long, and get a little closer to that next home all at the same time. These tips can help:

1. Set a Realistic Budget

You do not have to keep up with the Joneses, and the holidays are no time to forget it! Set a realistic gift budget. Talk with your family and loved ones about setting a limit on how much you will spend per gift for each other this year. If you’re already dealing with some debt, you know this is a no-brainer. But sticking to it can be a different story. Again, make these limits known to everyone well before gifts are exchanged so that you can hold each other accountable.

Now May Not be the Time for a Vacation

Traveling is expensive. Aunt Emily doesn’t have to host Thanksgiving every year. Plane tickets, gas, groceries, kids, entertainment, it all adds up. If traveling isn’t in your budget (see above), let your loved ones know this year. Maybe they come to you this year. You’re saving for your dream home, they’ll understand.

2. About Those Pesky Credit Cards

If you’re using your savings to finance your holidays this year, kudos. By far, this is the best method to make sure the holidays don’t derail your efforts at saving for a new home. If not, that’s ok too. But please, tread lightly.

It May be a Good Time to Cash in Those Rewards Points

Instead of putting more on cards, why not cash in those reward points? There are all sorts of reward programs, and countless reward credit goes unclaimed each year. What better time to use your points?!

Do You Know Which of Your Credit Cards Have the Lowest Interest Rates?

Well, do you? Find out, then do yourself a favor and use those cards! This makes it easier to pay back the balance without negatively affecting your overall score.

It’s the Most Wonderful Time of the Year… To Build Your Credit Score:

The Holidays are the perfect time to build up your credit score. Yes, you heard that right!

Did you know that your credit score is determined in part according to the amount of credit you spend vs. the amount of overall credit you have? To put it another way: if a main concern is overall credit score, it can sometimes make sense to open another credit card so that your overall credit expenditure and score stays the same or improves!

Research the stores this Holiday Season that are offering low interest or extended no interest periods. These are the perfect ways to buy presents for your loved ones this year while also building your credit score.

Use caution here, though, and never over-extend yourself if you’re not able to make timely payments. Also be sure to pick these stores wisely because you don’t want to have too many inquiries on your credit report. Find the credit cards that work for you, and be sensible on the amount you spend so you can pay it down in time for your new home purchase!

Alternative Down Payment Ideas

Your Retirement Savings Plan

The truth is it’s difficult to save for everything we know we should. Sometimes, we have to make choices about what we should be saving more for right now. Many retirement savings plans offer “penalty-free withdrawals” for “qualified expenses” or “lifetime events,” including a down payment on a home. Every plan varies, and it’s important to weigh costs and benefits. Some plans offer withdrawal in exchange for increased future contributions to make up for the loss in savings.

Down Payment Costs Vary by Home Loan Program

Did you know that the USDA offers a zero down payment home loan for rural homebuyers? How about that many counties offer Down Payment Assistance (DPA) programs to help borrowers with down payment funds?

 

Bottom line, get creative.

Don’t let anything stand in between you and your dream home. Not even the holidays.

 

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First Time Home Buyer’s Guide: Profit and Loss Statements and Balance Sheets

An Introduction to Profit and Loss Statements and Balance Sheets

For this blog update, we’ll be going into detail about Profit and Loss Statements, Balance Sheets, the differences between them, and when the first time home buyer will  be needing them for the home buying process. Profit and Loss Statements as well as Balance Sheets are only a part of the mortgage lending process if the borrower has a business that they own.

Balance Sheets and Profit and Loss Statements are only needed if the Borrower owns their own business

Profit And Loss Statements: Explained

Profit and Loss Statements are financial statements that may also be called an income statement. Profit and Loss statements shows the revenue, the cost, and the expenditures during a specific period of time. A profit and loss statement is usually an annual statement, but it can also be semi-annual, or even quarterly statements. For a first time home buyer who is interested in a home loan, most lenders will require the most recent annual statement.  The underwriter looks at the profit and loss statement for a first time home buyer to see the “economical feasibility” of a company. This includes information about a company’s ability to generate income, as well as giving the underwriter an idea of the expenditures of a company. If a profit and loss statement for 2017 is asked for, for example, that information needs to match the information on a Tax Return for that same year. The first time home buyer, if they do not receive W-2 forms from an employer, will need to have the profit and loss statement be checked to make sure that it matches the tax returns. This way, the underwriter can see if any taxes are owed, check if they have the tax payment plan or confirmation, or ask the first time borrower for that tax documentation.

Balance Sheets are Summaries of the Assets and Liabilities of a business.

Balance Sheets: How Are They Different?

Balance Sheets are very similar to Profit and Loss statements. Balance Sheets report a company’s assets and resources. For bigger companies that have shareholders that invest in the equity of the company, this information would also be on this balance sheet. The Balance sheet is a current year-to-date summary or snapshot of a company’s current financial capabilities. This information is current, so there’s nothing to really compare this information to, besides the bank statements showing the flow of money. If the first time home buyer has a specific bank statement for his or her business, this statement would need to be sent in. Any deposits that are from this account going into the first time home buyer’s regular bank account will only need to be explained.

The Balance Sheet and current Profit and Loss Statements can both be asked for by the underwriter. As a reminder, the Profit and Loss Statement can also be year-to-date, as long as it shows all of the expenditures, income, and costs of a business in that current year. If a borrower has a very basic company that they own, without any investors and equity from shareholders, they can usually just submit the Profit and Loss Statement, along with the most recent two years of Tax Returns to show self-employment income to the underwriter.

 

For the next blog update, we will be talking about Tax Returns, and why a first time home buyer will need to submit them for the home loan program. 

 

 

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First Time Home Buyer’s Guide – Recommended Tips Before Applying A Loan: Part 3

For the third and final part of this blog, we’ll be discussing some more documents as well as giving additional tips that may help the first time home buyer speed up the mortgage-lending process. In the last blog update, we talked a bit about some additional income documentation that will be needed if the first time home buyer has pay stubs and W-2 forms, as well as sources from third parties like Social Security Administration income, or Pensions. We also spoke about the opposite, when there are garnishments or liens against the borrower. This section will be about other items that will be needed to be resolved, or documented prior to closing.

 

A Driver’s License and Social Security Card is needed for each borrower.

Identification Documents: What’s Needed?

The first time buyer can be required to send in quite a few documents for submission.  These documents include a copy of the first time home buyer’s Driver’s License, Social Security Card, verification of rent, verification of employment, and Consumer Explanation Letters. 

For the identification items, a clear copy of the first time home buyer’s Driver’s License and Social Security Card will be needed. Keep in mind that a copy of each identification card will be needed for all borrowers on the loan. The underwriter mainly checks the Driver’s License of the first time home buyer to make sure it’s not expired, but also confirms the name, as well as address listed on the Driver’s License. If the first time home buyer has a different last name than what was put on the loan application, this may prompt the underwriter to ask for confirmation. This confirmation can be a letter of explanation from the first time home buyer, and a copy of the divorce decree, birth certificate, or other proof of name change documentation. These will need to be submitted with the file so the underwriter can confirm that the identification used and the first time home buyer on the loan application are one and the same. Consequently, if the first time home buyer’s driver’s license has a different address than what is listed as their current on the loan application, a letter of explanation will need to be sent to the underwriter as just explaining why there is a difference.

Payment shock is when the potential first time home buyer goes from living rent free to having a mortgage.

More Documents: Verification Needed

The first time home buyer will need to provide verification of rent and verification of employment. For verification of rent, this is usually for first time home buyer’s who are currently renting from a landlord, either private or through a leasing company. This verification of rent is to confirm that the first time home buyer does not have any late payments in paying rent. If there are difficulties with getting the verification of rent front the landlord, the borrower can provide a copy of the leasing agreement and copies of the last 12 months of rent checks. If the first time home buyer is not currently paying rent, the underwriter will be looking for something called a Rent Free Letter. This letter basically indicates that the first time home buyer is currently living rent free. The underwriter may need to request an additional letter that indicates that the borrower will be fine with “payment shock,” or the introduction of a mortgage into the monthly budget.

 

For the next section we will be talking about a few more documents, closing out the series. 

 

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First Time Home Buyer’s Guide: What is Escrow?

For this blog update, we will be discussing the mortgage term “escrow,” and what it means for the first time home buyer’s mortgage lending process. Escrow in the mortgage lending process is essentially an account that is created during the lending process that holds items such as the Earnest Money Deposit and Due Diligence checks. This account is created by a third party, such as an agent, attorney, closing escrow officer, or title company escrow officer, to hold documents such as Earnest Money Deposit and Due Diligence checks and other contract items until closing. The escrow officer makes sure that the Earnest Money Deposit and Due Diligence checks as well as other documents exchange hands in a smoothly and timely manner at the closing table. 

What is eligible to go into an Escrow Account?

An escrow account will usually contain items that depend on the Purchase Contract. For example, a Due Diligence check isn’t required for every loan, but if it’s on the Purchase Contract it will be placed into the Escrow Account. Another item that may not be on every Purchase Contract is a home inspection. The cost for a home inspection, required home repairs, termite inspection, or water tests may also be added to the Escrow account, depending on how the Purchase Contract is executed. When these are completed, the Escrow officer keeps these items in the escrow account as the loan progresses. 

Escrow and Tax Prorations

Another purpose for an escrow account that lenders will also take advantage of is paying off the tax prorations owned on the property at closing, as well as paying for the first year of homeowner’s insurance for the first time home buyer. Property Tax Proration is essentially the splitting or allocating of property taxes for closing costs. The tax proration costs can go to the seller, the first time home buyer, or both seller and buyer, with the costs split. This allocation is based on how far into the year the sale is happening compared to the the tax due dates and the tax amounts. Whether the taxes are due or have been paid for the current year also determine the allocation of the tax prorations. The tax prorations for the first time home buyer will be reflected on the final closing disclosure form drawn up at closing. 

Escrow Accounts and Homeowner’s Insurance

As mentioned before, the homeowner’s insurance in most cases will be paid by the lender. The lender will use the escrow account to cover the first annual payment for Homeowner’s Insurance to insure that the home is insured. The first time home borrower is not at all required to keep home owner’s insurance on homes, however it is highly recommended as repairs for a home can quickly add up in cost. These costs can skyrocket, especially during times of natural disasters such as flood, hurricanes, tornadoes, and earthquakes. The first time home buyer should keep in mind that flood insurance, if it is required by the lender before closing, is paid out of pocket by the first time home buyer, not out of the escrow account. The underwriter, before a loan is issued a clear to close, must have an active flood insurance policy with a paid invoice to prove it.

 

 

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