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Articles in this section:
Need Financing? Get Down to Business.
Navigating the New Mortgage Environment
Credit Union Resources - Borrowing Money
Despite fluctuating prices, it’s still a good time to buy a home. It can provide you with long-term security and piece of mind.
Although the majority of Americans — about 69 percent — own their own homes, according to the U.S. census, a good chunk of the U.S. population refuses to give up renting or buy a new home. High prices, higher interest rates, rising inventories and skittish buyers have driven speculators from the marketplace.
What most housing experts have found this past year is that real estate is inherently a local market, and national numbers are notorious for not offering an accurate snapshot of what is happening in a particular market. So, while prices in Southern California and parts of Florida may be down significantly, other markets may still be enjoying healthy price gains.
Single women, especially, are leaping into real estate. In 2006, they accounted for 21 percent of homebuyers, up from 14 percent in 1995, and well ahead of single men, who made up only 9 percent, according to research by the National Association of Realtors.
Real estate agents agree that the time is right for serious buyers to invest in a home of their own. Real estate will always be a valuable asset. If you do your homework and shop wisely for a mortgage that suits your circumstance, buying a home can be the investment of a lifetime.
Can You Afford a Mortgage?
If you’re thinking about home buying, it’s a good idea to plan, calculate and strategize. Many experts recommend the Rule of 25, which holds that your monthly mortgage payment should not exceed 25 percent of your monthly income. You can try a simple test to determine if you can afford a mortgage payment that’s higher than your current rent.
Let’s say that 25 percent of your monthly income is $1,500, and you’re now paying $1,000 a month for an apartment. For six months, pay your rent and set aside an additional $500 – the difference between your rent and a projected mortgage payment. If you make it to the end of the six-month period without feeling financially strapped, odds are that the Rule of 25 will work for you. If your additional expenses are so high that you’re struggling to make ends meet, you might need to employ the Rule of 20 or 15.
In the hit song “Hard Habit to Break” from the mid-80s, Chicago said it best: “You don't know what you've got until it's gone.”
Responsible consumers don’t always recognize the benefits of a good credit score. For others who have allowed their score to drop, it can be painfully obvious how critical this number is. The three main credit agencies — Equifax, Experian and Transunion — use different scores, usually ranging between 300 and 850, based on factors such as on-time payments, the ratio of credit balances to total credit limits, and length of credit history.
A senior loan officer we interviewed defines a good credit score as “a valuable tool that enables a person to have a better lifestyle.” Consumers with scores in the 750-850 range usually have little trouble securing what she calls the “crème de la crème” — the best interest rates and the best terms.
But for those with little credit history or others who have allowed credit scores to drop below 600, it can be a struggle to find anyone willing to extend credit, let alone find decent rates and terms.
For a younger consumer just starting out, the loan officer suggests the following to help build a strong credit score: Have parents co-sign for a credit card or apply for a secured credit card with a cash deposit to secure the credit line. Use the card for a few monthly expenses, and pay off the entire balance every month on time.
Most lenders want to see at least three trade lines (such as a car loan and a couple credit cards) with responsible activity for at least 24 months.
For those trying to repair a credit score, here are several suggestions: If you have to choose, pay installment debt such as home or auto loans before revolving debt such as credit cards
To lower debt, you must use some combination of cutting expenses and/or increasing income, and set up a strict spending budget. Use the roll-down method for systematically paying off credit card balances. Choose the card with either the highest interest rate or the shortest term and when that card is paid off, roll the payment amount into the next credit card balance, and so on.
Ultimately, a good credit rating can enrich life. Money can be a cruel taskmaster but also a valuable servant. The loan officer interviewed sees at least two areas where good credit can improve quality of life: “Good credit opens doors for investment opportunities. It takes money to make money.The stress of bad credit and excessive debt creates a less healthy lifestyle. You have a lot less stress when money is on your side.”
Need Financing? Get Down to Business
Whether you’re running your own business or thinking of starting one, chances are good you’re going to need financing. Finding the capital necessary to fund a startup, fuel business growth, and navigate the ups and downs of irregular cash flow is key to success, yet gaining access to money remains one of the biggest challenges facing entrepreneurs.
Delayed Start
If access to funds is so critical, then how are so many entrepreneurs functioning without it? Rather than mastering the ABC’s of financing up front, many small-business owners launch their companies without the aid of formal outside financing. That is, plenty of small businesses are started using credit cards, personal savings, or informal “investments” from family and friends.
There’s nothing fundamentally wrong with this technique: It allows entrepreneurs to bypass some of the obstacles to startup funding — primarily the difficulty of securing money without the benefit of an established track record. Eventually, though, having access to financing may be critical to the growth or survival of a business. At that point, a crash course in business lending is in order.
Wealth of Options
Business loans do not fall into one broad category or type: A wealth of options is available. Among the most common:
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Lines of credit, useful for covering gaps in your cash flow. These are generally short term and are activated only as needed.
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Working Capital or Operating Loans assist in the growth and operation of your business.
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Real Estate Loans to acquire property used in the operation of your business.
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Equipment Loans to fund new equipment or to expand operations.
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Vehicle Loans for business vehicles.
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SBA Loans, guaranteed in part by the United States Small Business Administration. The SBA does not lend directly to business owners; they work in tandem with financial institutions, including your credit union, to offer low interest, fixed rate loans to qualified small businesses. For more information, visit www.sba.gov.
Down to Business
Ready to go? Here are basic steps you can take to make your business lending-friendly:
Start now. Better yet—start yesterday. Though establishing a good relationship with your financial institution doesn’t guarantee a future loan, it’s an excellent starting point. If you already enjoy a productive business banking relationship, congratulations! If your business banking relationship leaves something to be desired, do some comparison shopping.
As banks merge and become increasingly impersonal, a growing number of entrepreneurs are finding the personal attention and advocacy they need at their credit unions. Even when securing capital isn’t on the immediate priority list, credit unions provide a wealth of services, including convenient account access, favorable rates on money, and easy access to credit card processing services.
Be meticulous. Since many entrepreneurs use personal credit to fund their startups, there is a temptation to continue mixing personal credit with business. But it’s advantageous to establish good business credit as soon as your business is up and running. Get a separate Tax ID number from the IRS and use it. Business credit reporting bureaus will track your payment history and establish a credit rating for your company. When you’re ready to request a loan, this rating will help make the case for your credit worthiness.
Know what you need. If capital is the one thing standing between you and the growth you desire, ask for it--and don’t be shy about getting the amount you need. On the other hand, since any debt is a drag on your business, make sure that every dollar you request will result in a direct return on your investment. Example: A real estate loan that will enable your stable company to normalize office expenses for the long haul while building an asset is a good investment. A real estate loan that ties up all the capital in your company and makes you into an involuntary property manager when you are already strapped for talent is probably not with
Do your homework. In addition to checking out your business credit rating, a lender will also want to see financials for your company and a business plan. Take time to prepare credible documents. If you need help, get it. Great business plan information is available at http://www.sba.gov/hotlist/businessplans.html. For help preparing financials, consider asking your credit union contact for a referral. Your information may seem more trustworthy if it’s been prepared with help from someone your lender knows.
Maintain your relationship. Wherever you are in the funding process—contemplating, ready to strike, or cashing in—maintaining a good relationship with your lending contact is smart business. This is true whether you win financing or don’t: Following up with your contact in the event of a denial may help you understand how to be successful in your next try. Send a quick email to your contact every few months to update him or her on your progress. Having an ally in the lending process—now or whenever you need it—can be as good as gold.
Navigating the New Mortgage Environment
While typical banks may foreclose on a home after two or three missed payments, credit unions have more flexibility to work with members to avoid default situations.
In case you haven’t heard, the United States is currently experiencing a mortgage meltdown accompanied by record mortgage loan defaults and foreclosures of epidemic proportions. As a result, most traditional banks have tightened credit, making it more difficult for the average person to borrow money, especially to purchase a home.
Although several factors contributed to the current crisis in the mortgage lending industry, one thing is clear — assembly-line loan processing makes the lending industry much more vulnerable to housing bubbles. In fact, current lending practices may have even contributed to creating and then bursting the most recent housing bubble.
Easy credit and low interest rates fueled a housing boom, which led to inflation in the housing market. When housing became less affordable, people could no longer afford the mortgage payments, so mortgage lenders began rolling out subprime mortgages with low introductory interest rates to make monthly mortgage payments more affordable, at least temporarily.
Eventually, however, the housing bubble burst. Property values took a dive while interest rates on adjustable rate subprime mortgages rose. Once again, homeowners could no longer afford their monthly mortgage payments, and because they owed more on their homes than the homes were worth, they couldn’t refinance. Many defaulted on their mortgage loans and ended up in foreclosure.
Although credit unions are certainly not immune to failure from making bad loans, they generally are much less vulnerable. While mortgage lenders were rolling out risky adjustable rate mortgages with low teaser rates, credit unions took a more conservative approach. They didn’t feel the need to process more mortgage loans in order to earn higher commissions. Nor did they feel any pressure from stockholders to sell more mortgage loans. Instead, they functioned more like traditional banks, dedicated to serving members and preserving their savings.
Credit unions loan money to members they know and trust — they don’t rely on mortgage brokers to drum up business or allow just anyone to apply for a loan. Credit unions also lend money directly; they take on the risk instead of selling their mortgages to investors. Because of this, they are much less prone to approving risky loans, and if borrowers have trouble making their payments, credit unions are in a better position to work out solutions. While typical banks may foreclose on a home after two or three missed payments, credit unions have more flexibility to work with members to avoid default situations.
If you are having trouble obtaining a mortgage loan, check out one of the credit unions near you in the Credit Union Locator (top left corner.) Credit unions have felt much less heat from the current mortgage meltdown and offer easier access to mortgage loans at competitive rates for members.
In today's market, diving into homeownership is a huge financial leap. However, 90 percent of homeowners say that owning their homes contributes greatly to their sense of security. Why?
Read on.
No question about it: Buying a home today is an expensive proposition. Then again, consider the benefits: A home almost always increases in value over time-so much so, in fact, that a Harvard University study found that two-thirds of Americans say their homes constitute the greatest part of their wealth. Each mortgage payment strengthens your financial foundation and usually provides hefty tax advantages as well.
Homeownership builds credit history. Making on-time payments tells prospective lenders you're a good risk, which helps when you want to buy a car or move up to a bigger home as your family grows.
There are intangible values that go beyond what can be measured by housing prices and equity. Owning a home gives people a stake in their communities and encourages them to become involved. It's good for the community's economics as well - a large percentage of homeowners in a neighborhood encourages business growth and diversity.
In addition, statistics show that children of homeowners are more likely to attain higher education levels and own homes than children of renters.
Homeowners enjoy more options at retirement. For example, many retirees stay where they are and enjoy the luxury of living without house payments. Some choose to supplement their incomes with reverse mortgages. Others sell their homes and downsize or move out of the area. Travel lovers may opt to rent out their homes for a year or more while they see the world.
While homeownership may represent a large investment, the payoffs are equally grand. Save regularly, buy wisely, and your home will provide security, shelter, and a wealth of financial options for years to come.