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According to a September 2020 study by Yelp, the U.S. has witnessed small businesses closing at a rate of 800 per day. The U.S. has seen some of the highest unemployment rates since the Great Depression. And yet the real estate market is booming.
Home sales continue to rise as the new work-from-home economy makes moving to the big city or tiny village of your dreams more feasible than ever. Mortgage applications jumped 26 percent in 2020. How can that be, you might ask, and how does that affect me as a homebuyer, home seller or homeowner?
Let’s take a look at some of the forces at work in the real estate market right now and find out.
Money is cheap for homebuyers
If you listen to the radio or have a friend in the real estate business, you’ve probably heard by now that it’s a great time to buy a house because mortgage interest rates have dipped to record lows. The second part of that statement is objectively true. In the early 1980s, the average interest rate on a 30-year fixed mortgage topped 18 percent. Compare that to June of 2020, when Freddie Mac reported an average rate of just 3.61 percent.
And that’s just the average. Borrowers with excellent credit were able to secure even better mortgage rates. If you’re thinking of buying a home, bear in mind that even a quarter-point drop in interest can save you many thousands of dollars over the lifetime of your loan. That means, among other things, that you may be able to afford more home now than you could last year.
But not so fast.
The second side of the story
As interest rates have plummeted, the demand for homes has climbed sharply. In many parts of the country, there’s a shortage of houses on the market. And that has sent home prices soaring, too. Comparing December 2020 to December 2019, home prices jumped nationally by over 10 percent.
The trend is most pronounced where you might not expect it to be: in small- to medium-sized Midwestern cities. Historically, the price of real estate in large cities drives national averages up. While predictions of a COVID-driven mass exodus from urban centers were never born out, in a few cities, including San Francisco and New York City, more people are seeking to move out than to move in.
Home prices are declining. If you’ve been hankering for a high-rise on the Hudson, now might be a good time to make a move.
But as recent experience confirms, real estate markets are fluid. What comes up might come down. The point is, no matter where you’re moving, your living expenses will ultimately be influenced by multiple factors. And it’s important not to get swept up in the moment. Keep your long-term income outlook and your personal goals in mind as you consider buying a home.
And if you’re thinking of selling your home to take advantage of rising home prices in your neighborhood, remember that you’re going to have to move somewhere.
The chapter everyone has to read
Sure, some of us are lucky enough to be able to pay cash when buying a home. But many of us need a mortgage to purchase a home. And that’s why having a strong credit profile is essential.
Keeping track of your credit score is an important habit to get into. If you’ve never paid much attention to it before, you’re not alone. It’s not something most parents teach their kids to do—many parents don’t talk to their kids about money at all.
A recent survey found that more than 35 percent of U.S. adults don’t know what their credit score is. And at least as many people don’t know how high a score they’ll need before lenders will give them a mortgage or car loan, for example.
Are you on top of your credit score? Before you even begin hunting for a house, it’s time to get a clear picture of where you stand. You can start by downloading a free copy of your credit report from each of the three major credit reporting bureaus: Transunion, Equifax and Experian. Your credit score is the highlight, of course. But it’s important not to fixate on a single number. When it comes to credit, the devil is in the details.
How credit scores are determined
The single most important factor credit bureaus consider when assigning you a score is your payment history. Missed credit card or loan payments take the biggest bite out of your score, and if there’s one piece of advice you remember after reading this article, let it be this: keep on top of your bill due dates and make them on time—religiously.
If you want to improve your credit score before you apply for a mortgage, one of the best things you can do is bring all your accounts up to date. But guess what? Creditors make mistakes. If you discover late payment notations on your credit report, be sure to reconcile them with your own payment records. Having credit reporting mistakes corrected can bring your score up considerably.
Next, review all of the accounts listed on your report. Having too many open accounts can drag your score down. Just make sure you’re considering how closing a particular account will affect your overall credit age and total available credit—you don’t want to close cards that are actually helping you.
Credit bureaus also take your credit utilization ratio into account when determining your credit score: that is, how much of the credit available to you are you actually using? Experts say that 30 percent is the absolute high-water mark and you’ll do much better in the credit market if yours is much lower.
One way to reduce your credit utilization ratio is simply to request an increase in your credit limit on one or more of the credit cards you have in your wallet. Pick one with a low or zero balance to increase your chances of getting approved for a higher limit. Then avoid using the card. You don’t want more debt, just more available credit.
Is it time to call in the experts?
It’s easy to get into credit trouble and, sadly, during the economic crisis precipitated by COVID-19, more and more Americans did. But getting out of trouble is more difficult. It takes time and patience, and there’s a fair amount of drudgery involved.
Some people who are struggling with bad credit enlist the services of a credit repair professional. Many credit repair companies use a combination of human expertise and artificial intelligence to develop and execute a comprehensive credit repair plan for their clients.
They’re trained to detect errors, as well as credit card fraud, which is on the rise and can be devastating to your credit. Some companies offer ongoing credit monitoring along with credit repair. Remember how we said monitoring your credit is a good habit to get into? You can also farm out the job.
Increase the odds of getting a great mortgage rate
While technically not a factor in your credit score, mortgage lenders will take your debt-to-income ratio into account when deciding whether to offer you a loan and at what rate. Most lenders require a DTI ratio of 36 percent or lower. Your credit report will list all your debts, and you already know your income.
You can use a DTI calculator to crunch the numbers. If your ratio is higher than 36 percent, you may want to take some time to pay off your existing debt before applying for a mortgage. With mortgage rates so low right now, why wait? Because buying a home is a life-altering decision on many accounts. Your home may be the single largest purchase you ever make. And at the outset, your mortgage may be your greatest financial liability.
But over time, your home may become your greatest financial asset—if you make well-considered decisions, like securing the best mortgage deal you possibly can. Getting your financial affairs in order before you buy a homeis an investment in time that’s likely to pay off in real dollars down the road.
This article was contributed by Money.com, an online editorial that provides up-to-date news, educational resources, and tools to help everyday people create meaningful investments and lasting returns.
Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?
While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.
Users Who Are Authorized
An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.
If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.
Joint Credit Cards Have an Impact on Your Credit Score
Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.
Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.
While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.
Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.
Should you pay down debt or save for retirement?
While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.
Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.
If you have high-interest debt, pay it down
When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).
In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.
High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.
To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.
If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.
Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.
If you’re nearing retirement, start to save
The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).
Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.
Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.
Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.
Aim for both goals by improving income
As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.
The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.
If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.
For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.
While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).
How does a loan default affect my credit?
Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.
Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.
30 days late
Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.
The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.
More than 30 days late
Payments that are more than 30 days past due can trigger increasingly serious consequences:
- The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
- You may receive phone calls and letters from creditors demanding payment.
- If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.
Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.
Other ways a default can hurt you
Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:
- If you default on a car loan, the creditor can repossess your car.
- If you default on a mortgage, you could be forced to foreclose on your home.
- In some cases, you could be sued for payment and have a court judgment entered against you.
- You could face bankruptcy.
Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.
How to avoid a loan default
Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:
- For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
- For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.
Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.
Clean up your credit
The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.
Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.
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