I lost an email from someone asking me about a $50,000 home equity line of credit, also known as a HELOC. I hope she reads this.
In general, I am against home owners taking out a HELOC. It wasn’t that long ago that thousands of home owners who had spent their precious equity on a HELOC found themselves in foreclosure. And consequently, with severely damaged credit.
Now that home values have risen, it is not the time to make that same mistake all over again.
Of course, that doesn’t stop the greedy banks from pushing this product.
I will allow that there is the rare valid reason to take out a HELOC, such as when you want to increase your wealth in real estate by purchasing another home.
On the other hand, using your property as a piggy bank is a bad idea.
Reasons NOT to Take Out a HELOC
I am opposed to increasing the debt on your primary residence for the following purposes.
1) Home improvements: If you can’t afford it, wait until you save the cash. Why? Because a $50,000 remodel does not increase your home value by $50,000. You come out behind financially.
On top of that, you pay back more than $50,000 due to the high interest rates.
2) Consolidating debt: This is a big no! You never roll plastic (credit card debt) into your precious real estate. This is one of the worst financial mistakes home owners made in the past. Don’t repeat it.
If you get your credit card shut down, it’s no big deal. If you get kicked out of your house, it’s a very big deal.
3) Education: Take out a student loan if needed. Never pay for school with your house. That goes double for your kids’ education!
4) Vacation: To the loan officer who suggests this, you reply, “No, I am not stupid.”
5) Open for a Safety Net: A HELOC does not make a good safety net. It is quite the opposite. A bank can reduce or shut down a HELOC at any time. The interest rate can go up, often with a lifetime cap of 19%. This does not provide you with financial safety. Create a savings account for safety. Find a secondary source of income for safety.
A Little-Known Fact and a Warning
Most home owners don’t know that if they have a HELOC (or any type of second mortgage that was opened after purchasing the home) and then want to refinance, that HELOC will put them into a higher credit risk category — even if they have perfect credit and a 800 score.
That’s right, you will pay a higher interest rate simply for having a HELOC when you refinance.
We live in an age of instant gratification and entitlement. Listen folks: you do not “need” granite counter tops or a bathroom makeover. Sure, those things are wonderful to have, but exercise patience and save your money until you can actually afford to purchase them.
Assume you rent an apartment and drive an old car, and you would like to upgrade your life style.
Question #1: If you have to choose between buying a house or a truck, which do you choose?
Question #2: Assuming you can afford to buy both a house and a truck, which one do you buy first?
Before we look at the answers…
A True Story: A young gentleman finished his credit repair work and raised his credit score to 640. This qualified him for the FHA Elite loan for home buyers.
He felt great! He was excited.
So he ran straight to the auto dealership and bought himself a brand new 2018 Chevy Tahoe. (MSRP $47,500)
Then he drove home and called his mortgage loan officer. “I’d like to get approved to buy my first home,” he announced.
So the loan officer took the application and ordered his credit report–and bam!–he got declined.
“Why?” he asked, totally stunned.
His new truck purchase dropped his score from 640 to 565. Too low for any of the first-time home buyer programs! Too low for the FHA 3.5% down payment program!
Not only that, but with a hefty new payment, he no longer qualified for the purchase price he needed anyway.
Maybe the Tahoe is so luxurious, he’ll be happy living in it. (Bad joke, sorry.)
Let’s See How You Did on the Quiz
Answer #1: Buy the house. Real estate is going up in value. You can increase your personal wealth by owning a home. A vehicle goes down in value the moment it become “used.”
Answer #2: Buy the house first, always, even if your credit score is 800. A higher score and a lower debt ratio will qualify you for better, cheaper financing.
The house is more important than the truck. Buy your most important item first (not the easiest to get).
I welcome your comments. Thank you for sharing this with others and on social media. Too many people are shooting themselves in the financial foot by purchasing a vehicle before the home.
“Chase not only removed all my late payments but also refunded over $350 in fees!” ~~ Sarah S., Florida
Sarah had moved several times and in the process, she’d unintentionally forgotten about the Chase account. Easy to do when no billing statement comes! By the time she checked her credit report, late payments had already posted and her score had been docked.
Time to spring into action! Sarah picked up a copy of Repair Your Credit Like the Pros: How credit attorneys and certified consultants legally delete bad credit and restore your good name. See here.
After reading Chapter 15, she called Chase and asked to speak with a supervisor in charge. She opened the line of communication in a professional manner. She explained that her credit is very important to her, and she would not have missed a payment had she received a bill. She told the truth. By the end of the conversation, the supervisor said:
“I have determined that you were not receiving your statements”; and therefore, you “couldn’t have known you had a bill.”
As a result, both the late payment record and the late fees were removed.
In a follow-up email, Sarah wrote (and gave me permission to use on my blog):
I wanted to write to you with a heart of gratitude! Thank you so much for writing your credit repair book. Within two
months of starting the credit repair process and sending out first letters, my husband and I have raised our score over 100 points! We are pre-approved to buy our first home. God is good.
Thank you again,
Were there bad times and bad credit in your past? Are you looking to make a fresh start and buy a home? Here are the guidelines for buying a home with the Fresh Start Loan Program.
* No waiting period after a bankruptcy (BK), short sale, deed-in-lieu, or foreclosure.
* However, the short sale or foreclosure must be completed, not pending, at the time of application.
* Chapter 7 BK must be discharged.
* Chapter 13 BK must be filed, but it can be open with payments being made on time. The court needs to approve the purchase.
* Property can be a detached house, a warrantable condominium, or a one-unit cooperative. (Not a manufactured home.)
* Debt-to-income ratio up to 50% DTI. (55 DTI with compensating factors, but I don’t recommend it.)
What’s the catch?
With such generous approval guidelines, is there a catch? Yes, you must have a good down payment to show that you are willing to take a risk on yourself. What does that mean?
If you aren’t willing to put money into the deal, then the lender feels like it’s too easy for you to walk away and leave them taking on the expense of reselling the property. They don’t want that! They want a home owner who is back on track financially and will make all their payments on time.
The silver lining is that the down payment can be gift money from family. Or, if you have 5% of your own money, the remainder can be a gift.
Here are the Down Payment Requirements
640 credit score = 15% down payment required
620 credit score = 20% down
580 credit score = 25% down
The credit score is the middle score out of three scores from Equifax, Experian, and TransUnion. The lowest score is ignored. The credit report is pulled by the lender.
How to Get a Loan with Fresh Start
Your mortgage broker can get the Fresh Start loan program for you through their wholesale channel. This is not a program you get at a bank or credit union. You get it through a broker. If you’re in California or Washington (and soon Oregon), then I can be your broker. For other states, find a broker in your area.
There are other non-prime loan programs available, but I wanted to highlight this program today, because of its generosity with no waiting period after a major derogatory credit event.
As always, thank you for reading my blog and passing it on to anyone who might benefit from the information.
Is 2018 your time to buy a home? If so, here is a Short List to help you reach your goal.
SHORT LIST TO HOME OWNERSHIP
1) Check your credit.
- Have or establish clean credit for 12 months so the lender can see you are on track financially. One late payment can be excused with a good explanation.
- To qualify for the best interest rate, you want the following credit score:
- FHA with 3.5% down payment: 620 to 640
- Conventional with 3% down payment: 640
- Conventional with down payment assistance: 640
- VA with zero down: 580 to 620
- USDA with zero down: 640
2) Save enough money for your down payment and closing costs.
Now is the time to cut spending and save money. The sacrifice is worth the reward.
3) Avoid opening new accounts.
Do not open a new credit card, line of credit, take out an auto loan, or acquire any other type of financing for the six months prior to buying a home, because doing so could hurt your credit score and/or your debt ratio for qualifying.
“Buy the house first. Buy the car later.”
4) Leave your bank accounts as they are.
Don’t move money around during the three months prior to or during your loan application, because doing so will complicate your loan file and require you to submit more documentation and letters of explanation.
5) Get the cash out of your home!
If you have money stashed in a home safe or hiding under the mattress, get that money into a bank account immediately. Cash is “poison money” and cannot be used for a home loan. The funds must be seasoned in your bank account for three months prior to loan approval.
Home Ownership is both emotionally and financially rewarding. Doing the work to get there is worth the effort.
Happy 2018, Everyone!
Jesus Is Born
2 At that time the Emperor Augustus ordered a census of the Roman Empire. 2 This was the first census taken while Quirinius was governor of Syria. 3 All the people went to register in the cities where their ancestors had lived.
4 So Joseph went from Nazareth, a city in Galilee, to a Judean city called Bethlehem. Joseph, a descendant of King David, went to Bethlehem because David had been born there. 5 Joseph went there to register with Mary. She had been promised to him in marriage and was pregnant.
6 While they were in Bethlehem, the time came for Mary to have her child. 7 She gave birth to her firstborn son. She wrapped him in strips of cloth and laid him in a manger because there wasn’t any room for them in the inn.
Angels Announce the Birth of Jesus
8 Shepherds were in the fields near Bethlehem. They were taking turns watching their flock during the night. 9 An angel from the Lord suddenly appeared to them. The glory of the Lord filled the area with light, and they were terrified. 10 The angel said to them, “Don’t be afraid! I have good news for you, a message that will fill everyone with joy. 11 Today your Savior, Christ the Lord, was born in David’s city. 12 This is how you will recognize him: You will find an infant wrapped in strips of cloth and lying in a manger.”
13 Suddenly, a large army of angels appeared with the angel. They were praising God by saying,
14 “Glory to God in the highest heaven,
and on earth peace to those who have his good will!”
15 The angels left them and went back to heaven. The shepherds said to each other, “Let’s go to Bethlehem and see what the Lord has told us about.”
16 They went quickly and found Mary and Joseph with the baby, who was lying in a manger. 17 When they saw the child, they repeated what they had been told about him. 18 Everyone who heard the shepherds’ story was amazed.
19 Mary treasured all these things in her heart and always thought about them.
20 As the shepherds returned to their flock, they glorified and praised God for everything they had seen and heard. Everything happened the way the angel had told them.
Help is coming for people who are drowning in collections and debt. And for people working on fixing their credit.
The Consumer Financial Protection Bureau (CFPB) is going through certain proposals to overhaul the debt collection industry. The idea is to stop abuse and make sure collectors are following proper protocol. But in this overhaul, there is good news for folks who are suffering from charge offs or collections on their credit.
First, the CFPB is going to put a new limit on how often the collector can contact the person owing money. They want to stop the harassment that sometimes happens.
Second, they will be required to disclose more details, which will make it easier for people to dispute inaccuracies.
Third — and this is a big one — collectors will not be able to pursue collecting money during the dispute process without providing sufficient evidence.
Furthermore, these rules also apply if the account is sold or transferred to another collection company.
As I said, this is all being reviewed by the CFPB now. Stay tuned for more information as it becomes available by subscribing to this blog (on the right side). And please pass on this information to others who are struggling with debt, imperfect credit, or who are professionals in the mortgage or real estate industry.
Many thanks to photographer Ian Espinosa for the free use of his photo.
“Buy low, sell high.” We’ve all heard that stock market advice. So how does it apply to buying a home?
During the holidays, fewer home buyers are out there looking. People set aside this time for shopping, parties, travel, and celebration with family. They postpone their dream of becoming a home owner until after the New Year. Thus, December is the perfect time for YOU to make an offer on a home.
With less competition, you have a better chance of getting a Purchase Agreement at the seller’s best price.
My advice is to go for the home purchase now. You can set your closing date after Christmas when it is a convenient time for you to move.
First step: Get pre-approved for financing and obtain your pre-approval letter.
Second step: Contact your local real estate agent for help in locating a home and presenting the offer.
Best wishes and Merry Christmas!
Both Fannie Mae and Freddie Mac announced today that they are raising the loan amount for conventional loans for 2018. This means home buyers can borrow more money without having to take a jumbo loan (with a higher interest rate and tougher approval requirements).
For most of the U.S., the new loan limit is $453,100. For 2017, it is $424,100.
For “high cost areas” the new loan limit is $670,650. (These are areas in which 115 percent of the local median home value exceeds the baseline conforming loan limit. The calculation is 150% of $453,100.)
For a map showing the loan limits by county, click here.
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