Marriage & Your Credit Score: Q & A
It’s that time of year again. Spring is here, so the annual rush to the altar can not be far behind.
But wait. Have you checked what this marriage will do to your credit score? As a couple you may want to purchase furniture, a car or even a house. For that, you will need good credit. How you handle your credit after marriage can have a big effect on your future plans.
Won’t our credit will automatically merge after marriage?
Most people think that credit is automatically joined as soon as you tie the knot. NOT TRUE. In fact, assuming both parties to the marriage already had credit scores, these will continue to exist separately UNLESS the couple applies for a car loan, say, jointly or a credit card jointly.
My spouse defaulted on a loan. Will my credit score be damaged?
Actually, whatever your spouse has on his or her credit will have no effect on you at all UNLESS you apply for credit jointly. This means if one spouse has good credit and the other bad, it is imperative to keep them separate. That way if the spouse with the good credit can qualify alone, then he or she can buy a car or a house for the couple using his or her good credit alone.
We both have good credit, so we can merge our credit., right?
This is true EXCEPT it is always a good idea for each spouse to keep some credit in his or her name alone. That way if something happens to the other spouse, a job loss, for instance, the entire credit of the couple will not be damaged.
My spouse works and I stay at home. Shouldn’t my spouse have the credit?
Again, NO. Think about it. If your spouse dies or loses his job, then the entire credit of the family could be lost. Always keep at least some credit separate.
Merged Credit After Marriage v. Separate Credit
Merged Credit After Marriage
Think of it this way. Let’s say you and your spouse Bob decide to buy a car. You apply for the loan jointly and start enjoying the car and making the payments. Then, Bob loses his job and the bills pile up. You both realize you really cannot manage that car loan, so you let it go. The car loan goes into collection and eventually the car is repossessed. Now both your and Bob’s credit is ruined and your family has no more access to credit.
Separate Credit After Marriage
Here’s another scenario. Jack and Jill keep their credit separate. Jack buys a new car on his own and makes the payments until he loses his job. Then, the couple sits down and figures out that they can pay their bills for a few months of unemployment, but after that no. So, after a few months they stop paying on Jack’s new car and credit cards and pay only debt in Jill’s name. Jack’s credit is trashed, but Jill’s remains the same. That way at least the couple still has access to credit during their time of need. Of course, they could also decide to pay all the bills in Jack’s name instead of Jill’s name.
The important thing is to keep someone’s good credit. Do that by keeping some credit separate.
Save Big! 15-Year v. 30-Year Mortgage Loan
Thinking about refinancing or getting a new loan?
Check out the infographic, prepared by California Association of Realtors to help those refinancing or contemplating a new mortgage.
It shows how much you can save in life-of-the loan interest charges if you can afford a 15-year rather than a 30-year mortgage.
What Do You Know About FHA?
FHA-the Good Guys
Don’t have much down payment? Credit scores not the best? Have many, many bills? If these apply to you and you still want to buy a house and have enough income, then FHA may be the loan for you. FHA has been providing loans for 80 years and is still going strong. In fact, during this recent recession, FHA has often been the only available source for mortgage funds as other banks hoarded their funds. In the past few years, FHA has provided about half of all new mortgages.
In fact, In 2010, FHA provided 56 % of loans for all first-time home buyers, and 60 percent of all African-American and Hispanic home buyers. In addition, 85% of borrowers obtaining homes at the higher loan limits had incomes below $150,000, and nearly 65% had incomes less than $100,000.
FHA, Federal Housing Authority, was established by the US government in 1934 to help buyers get mortgages so they could purchase homes. FHA does not originate mortgages, but FHA provides a guarantee, backed by the faith and credit of the US government, so that lenders using the program are more inclined to provide the money as the risk to them is much less.
Since FHA has been around for so long, over the years various myths and untruths have circulated among potential buyers and sellers.
1. FHA is Bankrupt-WRONG
Because recently so many buyers are using the FHA program to purchase homes, the idea that FHA must be bankrupt or will go bankrupt has emerged. How can the government underwrite so many loans? What if we have another downturn? Will the government be on the hook for trillions of dollars if can’t pay?
This is a complete myth. It’s especially ridiculous because at this very moment FHA’s current cash reserves total $33.7 billion – a $400 million increase from a year ago. These reserves are fully capitalized to pay 30 years’ worth of expected claims and losses. By comparison, the Financial Accounting Standards Board only requires private financial institutions to hold reserves for losses over the next 12 months. FHA has 30 times that amount in their cash reserves, plus another $2.55 billion in the excess capital reserves.
So, adios to that idea. FHA is totally solvent.
2. FHA Was Hit Hard By Foreclosures-WRONG
Many, if not most, banks were hit hard by the current recession, so FHA must have suffered more than most. This is a companion myth to the FHA is bankrupt.
Here’s the real skinny. Yes, FHA was hit by foreclosures; it did have to guarantee some bad home loans. But, the reality is that most of those loans were the older ones, written pre-2006. These loans represent less than 25% of FHA’s portfolio. Realty is 75% of FHA loans were written after 2009 and have superbly good rates of payment.
Loans originated in 2010 & 2011 have the best performance in the 13 year history of the Neighborhood Watch data system with a seriously delinquent rate of 1.85%. Loans originated in last two years now comprise only 7% of the seriously delinquent loans in FHA’s portfolio.
3. New Higher Loan Limits Are Much Riskier-WRONG
As prices on properties began to rise, especially in states like California and New York, many would-be FHA buyers were shut out as loan limits were very low for those areas. So, Congress approved higher loan limits for selected areas. As usual, naysayers grew frightened, reasoning that higher loan amounts put FHA at higher risk.
Here’s the problem with that reasoning. Actually, higher loan amount on the more expensive homes tend to perform better than on the lower-priced homes. This makes sense as you realize that buyers had to qualify for these homes and so have higher incomes and most likely more assets and savings in cash of difficulty.
4. FHA Buyers Are Poor Risks-WRONG
FHA borrowers in FY 2011 have an average credit score above 700. This is the first time the average credit score for FHA borrowers broke the 700 mark. FHA credit quality has improved steadily since 2007, 4th quarter. Over 50% of FHA loans made in every quarter since 2009 (2nd quarter) had credit scores above 680. In 2006 and 2007, only about 20% of the FHA loans insured in 2006-2007 had credit scores above 680.
That’s all well and good, but the great thing about FHA is that those with lower credit scores, but decent income can also qualify as FHA programs are very flexible. And, yes, the down payment required is still 3.5% of the purchase price, though with various FHA fees that amount to more like 7%, still the lowest around. Viva FHA!
Fiscal Cliff Approval and Real Estate
Real Estate Tax Provisos for 2013
Finally, “fiscal cliff” debate is over! For months now, it’s been impossible to turn on the TV or radio without getting an earful of breathless and mostly unwanted information. Even though most of us now regard Congress as on a par with cockroaches, what happens there does have an impact on our lives. All the more reason for members of Congress to act like grownups, but that’s another topic…
Real Estate Tax Deductions
Rushed through at the last minute, the “fiscal cliff” legislation contains a number of important provisions and none more important than those that relate to real estate. Here are a few of the most salient.
- Short sale taxation relief extended for another year until January 1, 2014
- Deduction of mortgage insurance premium is retroactive to 2012 and extended to 2013 for incomes under $110,000
- 10% tax credit [up to $500] for energy-saving home improvements retroactive to 2012 and through 2013.
- Capital gains tax stays at 15% except for those earning over $400,000 [single filer] or $450,000 [joint] and then it’s 20%.
- $250,000/$500,000 [single/married] exclusion on capital gain from sale of principal residence remains unchanged.
- Estate taxes on first $5 million for individual and $10 million for family estates are ZERO. Above those amounts, the rates are 35% and 40% respectively.
Effect of Real Estate Provisos of 2013
Given these provisos, it’s clear that real estate remains in a privileged position as far as federal taxes go. Not only do homeowners get a tax deduction for the interest in their mortgage payments, which is unheard of in other developed countries, such as Australia and Canada, but we can deduct mortgage insurance premiums which are only applied if the equity in the home is less than 20%. By extending this tax deduction, Congress is implicitly encouraging home ownership among those who do not have the traditional 20% down payment. Is this a good thing? Considering the recent mortgage meltdown, maybe not. It does help lenders and real estate professionals, though.
Homeowners also get to purchase equipment for their homes and then deduct some of the cost–just so long as it saves energy and fits the criteria. Naturally, no one can argue that energy-saving is bad, but here the government supports homeowners and no one else.
Additionally, estate taxes on the first $5 or $10 million, depending, amount to nothing. This also supports homeowners since a large proportion of most estates of this size is made up of real estate holdings, both principal residence and investment properties. Again, the tax code is supporting home ownership and investment in property.
Last, but not least, the tax code encourages home ownership by not taxing any capital gain up to $250,000 or $500,000 respectively. This means that home owners can sell their homes frequently, pocket the gain or purchase a more expensive home, without worrying at all about taxes. This has been part of the tax code several decades, though the amounts have increased, and does encourage home ownership. In fact, it encourages or at least does not discourage serial home ownership. Of course, this benefits those who change jobs and must change jobs, but it also benefits lenders and real estate professionals.
Extending the tax relief to those who short sale their homes is in a different category. So long as underwater homeowners face no tax penalties for short selling their homes, they will usually prefer it to the foreclosure alternative. At the same time, short sales are a much faster way of dealing with an inability or unwillingness to pay the mortgage in underwater homes. Short sales help to clear the vast inventory of underwater property which has been clogging the system for the past few years making it difficult for the real estate industry to recover.
2012 in review
The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.
Here’s an excerpt:
4,329 films were submitted to the 2012 Cannes Film Festival. This blog had 17,000 views in 2012. If each view were a film, this blog would power 4 Film Festivals
Creative Tips Around The House
A friend sent me these tips which are oldies, but goldies. With all the hard water around here, I especially appreciate the shower head idea. And I HATE those blister packs so many items come in…
Tell you what Friend, some great tipshere and we do use a few of them. Thought you’d like to know!
What Is The Best Investment Property? Part 2
Besides the considerations of Part 1 in the previous post, price , tenants and condition, the investor has to investigate thoroughly before purchasing anything. In fact, the main job of the investor is not getting the money together, which, admittedly, can be very tough, or running around looking at various deals, which does takes time and shoe leather. No, the most important job for the investor is doing the due diligence.
We often hear that expression, “You’ve got to do your homework” or do the due diligence. For real estate, what does due diligence entail exactly? As might be expected with such a vague term, it’s complicated. To me, though, it can be simplified by dividing your due diligence into pre-purchase and during-purchase due diligence. Whatever happens, you don’t want your due diligence to happen post-purchase.
Location, Location, Location
Of course, that’s the most basic mantra of real estate and it certainly should be part of any investor’s pre-purchase due diligence. The location of the property will determine the rents and the quality of the tenants, so it is of utmost importance.
What is a desirable rental location?
Many would-be investors think that a newer building in their own suburb is an ideal investment. This may or may not be true. If the suburb is filled with homeowners, it’s likely that it’s not an ideal place for renters. Here are few questions to ask when considering location?
- where do most residents work?
- is public transportation handy?
- is there adequate parking?
- what is the area vacancy rate?
If most locals commute to the city, then renters will, too. That means most renters will seek housing closer to their work. Many renters do not have cars, so proximity to public transportation is a must. Whether tenants have cars or not, for most areas the building must have adequate parking. This means at least one space and preferably two per unit plus one or two extra for guests. Failing that, overnight street parking must be available. Make sure the vacancy rate is not above 5% as nothing costs a landlord more than vacancies, especially multiple vacancies.
Sometimes areas near a military base or adjacent to colleges and universities offer wonderful rental opportunities which are, nevertheless, different from “normal” rentals. Frequently, in such areas rentals are for six months or two semesters or a summer and then over and out. This might entail more work prepping the units more often, but the rents are actually higher. Usually, too, students and soldiers are not particularly fussy about their short-term digs.
Often, would-be investors start out looking for the “best” properties. That is usually a mistake. The best rental properties are usually in moderate to low-moderate areas which are not only more likely to attract renters, but which also offer what every investor should be seeking-immediate cash flow. Cash flow is the name of the game and more expensive properties in the best areas rarely offer it. Also, those moderate renters are more likely to stay put than the higher-paying renters with plenty of options. Remember: vacancies are a landlord’s bane.
What Is The Best Investment Property? Part 1
With the low mortgage rates and super-low housing prices, many investors who have fled the crazy stock market would like to invest in real estate. Most of us think we know something about real estate and, really, we do. After all, everyone lives in real estate of one kind or another. Owning your own home and owning a rental-producing asset are two different things, however. Let’s assume you are looking to purchase rental property for the first time. Let’s also assume that you will have the 30% or 20% down to invest and want to leverage your money to best possible advantage. What would be the best use of your money?
Single-Family or Multi-Family?
Many first-time investors automatically gravitate towards single-family homes. That’s what most people know best, so it makes sense. But, is that the best use of the available money? I would say no. On the same amount of land and often for the same price, it’s possible to purchase a duplex, a triplex or a quadruplex. That means for the same money, you will get double, triple or quadruple the rent. It also means that if one renter does not pay, you still are receiving half the rent, two-thirds or three-quarters. This will make quite a difference because you have to pay the mortgage and the expenses of the property every month whether you have tenants or not.
Therefore, all things being equal, which they never are exactly, my preference is to purchase a multi-family dwelling instead of a single family one. A fourplex is probably the most units a first-timer can handle. Beyond the fourplex also more complicated loans apply. An investor can even purchase up to a four-unit building with an FHA loan which requires only about 3.5% down plus another 3 to 4% in closing costs. Using such a loan puts the investor at a significant advantage due to the gain in leverage from the smaller down payment. 
Fixer or Repaired?
Many first-time investors naturally tend to look at fixer properties because they are cheaper than properties in good condition. If the investor is an experienced rehabber or in the construction business, then it might make sense to buy a fixer. As long as the buyer has experience, knows the cost of the needed materials, and can either do the work himself or can get it done at a reasonable price, integrated into the purchase price, then a fixer can be an ideal asset.
For everyone else, though, it’s really not a good idea. During the rehab, the investor is paying the mortgage but receiving no rent. Sometimes repairs take longer than anticipated. As a rule of thumb, rehabbing a property always costs more than anticipated. Besides the loss of rent, the investor should take into consideration the wear and tear on his personal psyche. Searching out reliable contractors and overseeing their work can be exhausting. For someone with a full-time job, the time lost to the new property can never be recovered.
Fully-Occupied or Vacant?
Another issue that investors have to consider is whether they want a fully-occupied or a fully- or partially-vacant building. Often, sellers are trying to get rid of properties which they have saddled with bad tenants or tenants not paying market rents. Asking for the rent roll and checking it carefully will show if the existing tenants are paying or not. A smart investor also has a good idea what the rents for the proposed purchase property ought to be. The purchase price should usually be a multiple of the yearly rents. Thus, if the yearly gross rents amount to $26,000, then the purchase price should be about 10-12 times the rent, or $260,000- $312000, depending on the market. In some markets investors will find properties for significantly less.
In the MLS listings, frequently the would-be investor will encounter “pro-forma” rents alongside the actual rents of the property. This means the seller has failed to keep his rents at market, so the potential or “pro-forma” market rents are included. That’s fine as long as the price of the property is calibrated on the actual, not the pro-forma, rents. Of course, usually sellers want to base their price on the pro-forma rents.
But, think about it. The new investor will have to approach the existing tenants with a hefty rent increase as a first introduction, not a good start. Some of the tenants will leave rather than pay more. Others will have to be evicted. Whatever happens, it will cost time and money for the new investor. Reasonably, then, the investor should not pay pro-forma prices.
If the investor feels confident that the current renters are paying close to market rents and have a good history of on-time payment, that is the ideal situation. On the other hand, there are good reasons to purchase a vacant property as well. The new owner will be able to thoroughly investigate each and every unit, which is usually not possible with tenant-occupied, making any repairs or cosmetic updates required. Plus, the new owner will set the deposit amount, the rent amount and the qualifications for the renter. Don’t want dogs? Want to check credit and do a background check? Want to limit smokers? Any of these are possible with a vacant building.
