Marriage & Your Credit Score: Q & A

wedding credit cardIt’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.

Should I Pay Off My Mortgage?

Recently, the New York Times ran an article discussing the relative merits of  paying down a mortgage. According to the article, one should think long and hard before adding even $25 a month to extra principal.

How have we arrived at such a state? How could paying down or paying off the mortgage ever be considered anything but good? Well, there are many reasons and all of them add up to one thing: our financial system rewards mortgage debt.

That sound crazy, doesn’t it? But, that’s the truth of the matter. Though the article does give admit that having no mortgage does have psychological benefits,  a sense of security, a feeling of real ownership, the author feels  the actual cash benefit seems paltry compared to the  the potential financial pitfalls.

Financial analysts consider  twofold main pitfalls in socking extra cash into the mortgage, one is lost profit on the stock market and the other is lost tax deduction. As for stock market “profits,” in my view, how can financial analysts still be flogging stocks and bonds after the recent Wall Street debacle when the federal government was called upon to prop up our largest corporations and financial institutions which were in danger of “melting down”?  This is not 1929 we’re talking about, but 2007  to 2009 when trillions were wiped out of 401 ks and IRAs. We are still dealing with the aftermath of pension fund investments gone south and even giant funds like California’s PERS have been accused of excessive expensing at the same time that its holdings plummeted.  In the meantime, the NY stock market has been on a wild ride ratcheting up and down with gay abandon in the intervening years.

Is the average person really supposed to consider the “opportunity cost” of lost stock market profit over the real and tangible comfort of paying off the mortgage on his or her own home ?

The next “pitfall” is losing the tax deduction. Let’s take the example of a 30-year fixed rate $400,000 mortgage at 4.25%. Pay an extra $200 per month and you pay it off in 25 years and save almost $60,000 in interest. If you are in the 28% tax bracket, losing the deduction means you really save $42,000 or 3.06%. Is that such a bad thing? At least paying off your mortgage is a sure thing whereas “betting” on the stock market hammers even the so-called experts.

Financial analysts worry that putting all that money into a home mortgage is really putting all your eggs in one basket.They all seem to think the stock market is better and trot out the old stats about how over time the market is really making money. Maybe so, but the average homeowner is really in no position to figure out how to fit himself or herself into those stats which have badly skinned many an amateur, not to mention the professionals.

The bottom line in my view is that of course it is better to pay down your mortgage. If you are heavily indebted to credit cards or any other high-interest payment, pay those down first. But, if you can manage a few extra bucks or even one extra payment a year–Just Do It!!

Money-Saving Tricks, Pt 2

As promised, here’s the next installment [and, most likely, the last] of how to save money in THESE TOUGH TIMES.

Phones

  • Save cellphone minutes and your time by skipping the long-winded voice-mail greetings. Press * for Verizon, 1 for Sprint or # for AT&T and T-Mobile.
  • Need a phone number? Call 1-800-GOOG-411 for the number and then to have it dialed. All FREE.

Travel

  • Looking for a Wi-Fi hotspot? Check jiwire.com. Works in 144 countries.
  • Where can kids eat for free? Check familyfriendlyamerica.com or coupondivas.com
  • Want super-great rates on airfare? Get a group of at least 10 travelers and many carriers, including Southwest, United, American, will give you discounted rates.
  • If you like B&Bs when you travel, consider joining a club and pay $10 or $20 per night with breakfast in the homes of other travelers. In return, you offer your spare room. Evergreen Club at 800-962-2392 or Affordable Travel Club at 253-858-2172.
  • Museums, zoos and science centers offer free admission on the first weekend of each month if you have a BofA ATM, credit or check card. Check it on museums.bankofamerica.com.
  • If you are over 62, Amtrak offers 15% discount and Via Rail Canada offers 10% for over 60.
  • Drive for free by signing up at autodriveaway.com for cars needing to be relocated. You pay $350 refundable deposit, then the first tank of gas is free. Some rental car companies offer similar deals.
  • Free sightseeing excursions with the locals in select areas--globalgreeternetwork.com and the newer europetours.eu offering free walking tours.
  • Birdwatcher? Hook up with a local birder at birdingpal.org
  • If you’re leaving at a godforsaken hour, you might prefer a sleep-and-park package combining a night at the airport hotel, shuttle to the airport and parking at the hotel for 7 to 10 days. These deals often cost the same as parking along. parksleepfly.com , stay123.com, parkingacess.com.
  • Irritated at airlines charging for luggage? Join the club. It might be cheaper to send it Fedex [fedex.com] or UPS [ups.com].

Cars

  • Find cheaper gas at gasbuddy.com, gaspricewatch.com or autos.msn.com/everyday/gasstations.aspx. For alternative fuels, check altfuelprices.com.
  • Pay your car insurance annually instead of in installments and save up to 8%.
  • Check AAA’s car buying service or ask the dealer’s internet sales department for their “best quote.”
  • Facing car repairs? First visit repairpal.com to find out what the job should cost. The site gives free quotes based on surveys of thousands of shops.
  • Save $20 an hour and pay less for parts by going to an independent mechanic. Service by a qualified independent is unlikely to invalidate your car’s warranty. But read it carefully, follow the maker’s maintenance recommendations and keep records of service.

Now, I’m looking for more tips on how to save money. If you’ve got one, share it with the rest of us.

Here’s one from me:

In the past few years, I’ve discovered that the vast array of household cleaning supplied that we all buy–one for the floor, one for the sink, one for the laundry, etc. is really just a marketing ploy to sell more “stuff” and make more money.

I’ve substituted VINEGAR for all of the above. I mix it with water and use to clean windows, to get rid of hard water buildup on faucets and shower doors, to wipe down the counters, to mop the floors. I also use one cup with every wash load to take the place of  bleach, borax, softeners or whatever else we’ve been bamboozled into “needing.” Vinegar also saves a lot of time outside. Pour it full force into the grass growing in the cracks of your sidewalk or driveway. Bam! Grass is gone. Its uses seem almost endless. Plus, the smell goes away immediately.

Short Sale Aftershocks: Cleaning Up the Credit

Experiencing a Short Sale or Foreclosure

Home owners have increasingly determined that staying in their homes may no longer be worth the enormous payments  because they owe far more than their homes are worth. In the past two years homes in Southern California have decreased from 20% to 80% of value depending on the locality. Though in some areas, prices seem to have stabilized, many homeowners have become disillusioned by the loan mods offered by their lenders.

What to do? For many, the option is a short sale, either standard or strategic. By taking this option, the homeowner and the bank agree to sell the home for less than is owed. Yes, the homeowner does lose the home, but is now out from under the immense burden of an underwater mortgage.

What is the downside? Besides losing the home, the downside is a strong ding to the homeowner’s credit from mortgage lates and the short sale itself.

Cleaning Up the Credit

Can anything be done to salvage the bad effects of a short sale? The answer is yes and yes. If the homeowner is still making payments while requesting a short sale from the bank, today it is possible for that homeowner to simultaneously purchase another property and close escrows at the same time! This is terrific news. Now, the homeowner can purchase a similar home for sometimes half the price!

What about the more common situation where the homeowner is not making the payments before a short sale? Good news there as well since sometimes that homeowner’s credit can be “cleaned” and the short sale or foreclosure eliminated. This is possible particularly for those who have maintained their other payments, but stopped making only their mortgage payments. Of course, sometimes it’s even possible to help those with stronger dings on their credit as well.

Cleaning up credit after a short sale or foreclosure is not an easy process, but it can be done. Typically, the client must wait for several months after the short sale or foreclosure has occurred and then start the procedure by requesting a copy of the damaged credit report from myannualcreditreport.com. Notice also that if the client has been rejected for credit after a short sale or foreclosure and that is almost a foregone conclusion, he has the right to request a free credit report for up to 60 days after the credit has been refused.

In fact, what can one expect after a short sale or foreclosure? Credit card companies will most likely notice after a month or two and start sending out letters. If the credit card holder has a balance he is paying off, especially a high balance, the credit card company may lower the credit limit to the balance owed. Or, the credit card issuer may summarily close the account with an accompanying letter stating that due to accounts unpaid with other creditors the account is being closed. Again, the card holder has the right to a free credit report.

Now the  credit report, free or otherwise, in hand, the borrower knows the extent of the damage and can start the repair process.

Thinking of doing a short sale? Be sure to call me at 626-641-0346. Or, email me at drdbroker@yahoo.com. I specialize in short sales.

Paperwork and the Short Sale

It’s pretty clear that banks are much better off financially with short sales as opposed to foreclosures. Then, why on earth are these crazy banks making them so complicated?

Typically, banks require reams of paperwork for homeowners who wish to do a short sale on their properties instead of heading directly into foreclosure. Primary among the tax returns, financial statements, bank statements, pay stubs, W2s,   and such is the hardship letter, delineating reasons why the homeowner can no longer make the payments and so is requesting that the mortgage holder accept less than what is owed on the property and call it good.

Some banks have already recognized the futility, stupidity, hypocrisy, call it what you will, of this method and are no longer requiring mountains of paperwork and are, in effect, streamlining the whole process. Wachovia, now defunct,  but operated by Wells Fargo Bank,  announced quite some time ago that it would no longer require any paperwork other than the listing from the homeowner  wishing to do a short sale  along with a  buyer’s offer.  Most marvelous of all, Wachovia actually makes a decision and accepts or rejects the offer within 5 business days or tries to. Contrast this with Bank of America’s [aka Countrywide] 3 to 4 months.

Wachovia’s way makes sense, doesn’t it? It recognized that homeowners who are underwater to the tune of 50% or hundreds of thousands of dollars are not going to make the payments whether they are able to or not. They would need to be financial morons to stay in that situation. So, why force  or punish the poor homeowner who is nevertheless giving up his home or his investment and require all this useless paperwork?

Let’s just face it. With about 24% of loans nationwide underwater, millions of homeowners, clogging up the system with all this useless and unnecessary pasperwork looks more like punishment for the homeowner than anything really needed to make the transaction happen. Listen up, big banks, let’s hear it for Wachovia!

Can’t Get a Loan? Here’s Some Help

These days getting a loan is much tougher than in the “good old days”  before September 2007. In fact, if you are self-employed, it’s very difficult. Or, if you are an investor, it’s next to impossible unless you have already made a bundle and can put 40% down on that bargain you spotted driving around your neighborhood or scrutinizing the repo lists.

From adversity comes opportunity as the saying goes. From the Great Crash of 2007 is springing an entire new industry–peer-to-peer lending where individuals can borrow at better rates and less paperwork from other individuals who are able to make much better-than normal rates on any spare cash they may have.

What do you do if you want to jump on a great deal but don’t have the cash readily available?  Enter peer-to-peer or personal lending. Essentially, this type of lending is for any money need, not just real estate.  It’s become popular partly because of that ubiquitous Internet which is putting people together in  hitherto unimaginable ways.

peer to peer

Let’s say your daughter wants to buy a condo, and you want to lend her the money, but want to make it business-like. Go to Virgin Money . Yes, this is the same Richard Branson company with the airline and the record stores. This company specializes in loans among family members or at least among people who already know each other, so-called social loans. That is, it facilitates the process and puts everything on a business-like footing by supplying loan documents, processing, and third-party collecting.  The company also does small business loans and this year added wholesale mortgage loans.  This way, you can set up the loan to your daughter as though you were a regular bank and expect repayment in the same way. Fees vary from $99 to $2000 depending on complexity.

Then, if you prefer to borrow from strangers or have no relatives with extra cash, you can always go to Prosper where you can get a loan based on your credit score for up to $25000 to pay for school, credit card debt or whatever else you may need the money for. Don’t worry about privacy. If you are a borrower, your identity is not revealed so no potential lender will  contact you personally or even know who you are. And, once lenders have committed, they are not allowed to back out, so borrowers have some security.

Another site worth considering is Lending Club. This peer-to-peer site purports to  offer investors higher returns and borrowers lower-cost loans through its online financial network eliminating the high cost of traditional banks.

Borrowers with good credit can get 3-year-term personal loans from $1,000 to $25,000 at fixed rates that are often significantly better than rates from conventional sources. Investors can an earn higher returns: the average net annualized return has been over 9.5% since 2007. Money invested goes to the Lending Club borrowers chosen by the individual investors who generally spread their investment across tens or hundreds of qualified borrowers.

These are just a few of the many sites which are doing these kinds of loans. To find more, check out this video

Mortgage Aid Event in L.A.

Subprime Crisis No Barrier to Affordable Housing
Image by woodleywonderworks via Flickr

Some 30% of all California mortgages appear to be underwater, so loan modification is a term many have come to know. We’ve also come to realize that the process is long, complicated, and in many cases, expensive. The end result is usually not as good as hoped, despite the apochrophal stories we’ve all heard about balance reductions and interest rates of 2%. If true–very rare…

But now–help is at hand–and it’s not going to cost a penny. A five day mortgage aid event, running September 24th through Monday September 28th, brings counselors from Boston-based Neighborhood Assistance Corp of America [NACA] comes to Los Angeles. The $1 million cost of the event is funded by federal grants.

Here, counselors will scan homeowners’ mortgage documentation and send the files to nearly 2,000 on-site servicers and lenders, including representatives from Wells Fargo, Chase and B of A, who will be there to negotiate more affordable loans.

If you are in trouble with our mortgage, what have you got to lose? No more run-around from bank servicers. They will be right there. The Save the Dream Tour, launched in Cleveland, will continue on to Chicago, St Louis as well as Phoenix, la Vegas and San Francisco.

You can register for an appointment as http://www.naca.com or toll-free at 888-499-6222.

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Will the Stimulus Save Me Money?

Have you paid you're income tax this month ?
Image by Walt Jabsco via Flickr

We’ve heard enough about bank bailout and auto bailouts. We’re all wondering: what about us? When do we get bailed out?

Well the answer is that we do get a bailout–Hey, it’s not so much, but it’s better than nothing and even better than last year. We all know that Obama has promised repeatedly to lower taxes for 90% of the population. Hey, he’s actually done it and, since he didn’t repeal Bush’s tax cuts for the rich, actually more like 97% of the population will be getting some relief in the form of lower taxes.

Here’s an easy way to see who gets what. It’s from CNN Money, my new favorite place to find info.

tax-savingsRoughly 97% of American households could see tax savings as a result of the American Recovery and Reinvestment Act, according to a new analysis by a nonpartisan research group.

The Tax Policy Center crunched the numbers and concluded that the average savings would be $1,179. But how much a household actually gets depends on income, marital status and whether a filer has children. The savings range from a few hundred dollars to several thousand.

The law, which President Obama signed, contains a range of tax breaks for individuals. Those likely to affect the greatest number of households are the new Making Work Pay credit worth up to $400 ($800 for joint filers); a patch to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax; and expansions of the earned income tax credit and the child tax credit for low-income families.

There are also breaks that address specific situations: a new credit for first-time home buyers, a sales tax deduction for car buyers and a new credit to help pay for college tuition. For people receiving unemployment benefits, the first $2,400 will be tax free.

Obama said the government had already taken action on the broadest of the law’s cuts — the Making Work Pay.

The Treasury Department has told employers to reduce the amount of taxes withheld from paychecks by April 1. Treasury estimates that a typical family will begin taking home about $65 more per month, according to Obama. So, we’re getting the dough in small increments instead of all at once as we did under Bush’s plan. Remember the $300 per person last year? Apparently too many of us spent that paying down debt. The government wants us to spend it and they think giving it in the  paycheck will have that effect. Maybe they’re right.

Or, each of us could allocate that small amount to a special savings account and use it to pay off the inordinate amount of debt we all seem to have accumulated. My own view, contrary to Obama’s and his government’s, is that we should all be striving to get rid of debt, especially credit card debt.

“Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans,” Obama said in his weekly video and radio address.

In addition, the economic recovery plan contains a host of tax breaks for small businesses.

The Tax Policy Center used a representative sampling of all tax filers and non-filers, including information on their income, their spending and their demographics. And then they applied the various tax provisions for which those in the sample pool qualify.

Some tax-saving scenarios

A single person with no children making between $20,000 and $30,000 would see a 12.5% reduction in his or her tax liability for an annual savings of $453. The same person making between $50,000 and $75,000 would see a 4.6% drop, or $626.

At the upper income ranges, someone with income between $100,000 and $200,000 would see a 2.1% drop, which translates into $706.

With or without kids, a married couple filing jointly making between $50,000 and $75,000 could see a 10.5% drop for a savings of $991. Those making between $75,000 and $100,000 would see their tax liability go down 9.1%, or $1,457.

Couples with very high incomes — between $200,000 to $500,000 — could see a 7.5% decline in their tax bill, or $5,645.

Households with children, regardless of the parent’s marital status, would see savings on their tax bill averaging 9.7% of their tax liability, or $1,975.

When you’ll see savings

The first tax credit filers will enjoy is the Making Work Pay credit, which will show up in increments in people’s paychecks starting in April.

In many cases, a household won’t see some of their stimulus savings until they file their 2009 returns, which they can’t do until 2010.

Of course what filers save on their federal taxes under stimulus may be muted by the fact that their cities and states — facing steep budget shortfalls that will be lessened but not eliminated by stimulus funding — may end up raising taxes and fees. This has already happened in California. April 1st we felt the first Big Bite in L.A. County with the New 10% Sales Tax. Ouch! That applies to auto sales as well.

Obama’s Plan: Help for Small Investors

Sign for Barney's Loans, corner of Second Ave ...
Image via Wikipedia

Yes you read that right. Obama’s plan will also help you refinance if you have rental properties. Last week Fannie Mae and Freddie Mac announced they would refinance rental and second homes as part of the Obama administration’s housing relief effort.  That is a relief! It seems that finally these lending giants have realized that helping small investors will also help renters and if nothing else provide homes for the foreclosed upon.

Here’s the skinny. First, the loans must be owned by Fannie or Freddie. If you don’t know, call your servicer to find out or go to Fannie and Freddie websites. If your loan is with another entity or a private lender, you will not be eligible.

Just as with owner-occupied properties, the loan to value ratio cannot exceed 105% and that is up to $729,750 loan amount.  Let’s say you bought a duplex or a fourplex a few years back for $500,000 with a first mortgage of $400,000 at 7.5% and that loan has now been acquired by Fannie Mae. You may well be able to refinance into todays 5% and 6% rates, thereby greatly increasing your cash flow. Even if the value of your property has dropped in the intervening few years, as long as the current market value is at least $420,000, you can do it.

Of course, you do have to be a good prospect for a refi. Your payment history on the loan should be close to perfect–no 30 day lates in the past 12 months. Even if you’ve had other financial woes which may have tanked your credit score, it’s still possible because Fannie and Freddie have agreed to waive their usual minimum score requirement and you won’t have to pay for new mortgage insurance [pmi].

You will have to show income to qualify–often investment income from the building is enough–and there will be the usual closing costs which will increase your loan balance.

All in all, though, this is a great deal!

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All About Refis

Since loan rates are now dropping, for some refinances or refis are popular ideas again.  In short, you can refi your mortgage or mortgages to get only one mortgage, for instance, to eliminate PMI, to get out of an ugly option ARM or any of a host of other reasons. Right now, banks are offering great deals on refis.

Should you refi?

This is a good question, especially for those whose mortgage is only a year to a few years old or whose interest rate isn’t that bad. How do you know when it’s a good idea to refi?

Essentially, you will be looking for the break-even point. Calculate your break-even point to figure out if it’s worth it to you in your present position and with your present plans. It sounds hard, but it’s easy. Here’s how you do it.

The break-even point is the time it takes to make up in monthly savings what you paid in fees. You calculate it by dividing the mortgage fees by the monthly savings. For example, let’s say you would save $100 a month by refinancing, and the closing costs would be $3,000. Your break-even point is 30 months from now:the $3,000 in fees divided by the $100 a month in savings.

Are you planning to stay in your house for more than 3 years–let’s say 5 years. Then, it might be worth it. Of course, you don’t need to have cash to refi, the closing costs will be added to your loan balance. Some banks even do the refis for no closing costs, usually with slightly higher rates. As for everything else, you need to shop around.

You can figure your monthly savings by checking with a loan officer and requesting an estimate of the new loan you could get and comparing that figure to the amount you are paying now for principal and interest. If you have an impound account, you do need to separate out the taxes and insurance amount which will not change.

mortgage11

Should you change the loan term?

When interest rates are low, as today, many people opt for an acceleerated payoff plan by refinancing a 30-year mortgage into a 15-year mortgage.  The interest rate will  probably be at least  half a percent lower, but the payment will be considerably higher.  On a $300,000 loan, for instance, payment on a 30-year loan at 5.75% would be $1750 per month. On a 15-year mortgage at 5.25% the payment would be $2411.

In the long run, you will save thousands in interest payments by choosing 15 over 30 years. In the short run, though, you must be sure that you will have the money necessary to make the increased payment.  In case you are insecure in your income, another option is to make 13 payments a year on the 30-year loan instead of 12. This will shave about 7 years off your 30-year term and save you a bundle.

Can you refi when you’re upside down?

Plenty of homeowners would like to refi into the new lower rates, but run into a gigantic stumbling block: their homes value has fallen dramatically in the past year. Homeowners tend to mentally inflate the value of their own homes, thinking of all the upgrades they’ve added and the money they’ve spent in maintenance. Real estate values, though, are implacable. Your home almost assuredly is not worth more than your neighbor’s home which just sold at less than what you paid for yours.

In fact, before even considering a refi, if you suspect you may have no equity, consult a real estate agent and ask him or her to “run the comps” and give you a ball-park idea of your homes value.  If you have less than 10% equity, asking for a refi could trigger PMI. So, check first.