American Housing Month

Housing 101: Terms to Know Before Buying or Renting

Whether you're preparing to buy or rent, Cornerstone Community Bank recommends that you become familiar with the following basic terms:

Before Buying:

APR: Short for annual percentage rate, APR is how much your loan will cost over the course of a year. This figure is almost always higher than the interest rate, because it takes into account the interest charged as well as fees or additional costs associated with the loan. Since all lenders use the same formula, it can be a more effective way of comparing mortgages rather than just the interest rate.

Closing costs/settlement fees: The costs, in addition to the price of the property, that buyers and sellers are charged to complete a real estate transaction. Costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges.

Escrow: An account held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. Escrow accounts are usually required by lenders to cover property taxes and mortgage insurance. After an initial deposit, borrowers pay into the escrow monthly – usually as part of the mortgage payment.

Good Faith Estimate (GFE): An accurate estimate of fees associated with a loan provided to the customer by a mortgage lender or broker. A GFE is required by law under the Real Estate Settlement Procedures Act (RESPA). The estimate must be provided within 3 business days of applying for a loan.

Mortgage broker: An individual or company who connects borrowers and lenders for the purpose of facilitating a mortgage loan. Unlike a mortgage lender, a broker does not make the loan or service the mortgage. A mortgage broker may represent various lenders or may offer loans from one single source.

Points: Borrowers can pay a lender points to reduce the interest rate on the loan, resulting in a lower monthly payment. The cost of one point is equal to 1 percent of the loan amount. Depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of a percent.

Before Renting:

Lease: A legal document detailing the terms under which the lessee (the renter) agrees to rent property from the lessor (the property owner). A lease guarantees use of an asset and guarantees regular payments from the lessee for a specified number of months or years.

Notice to vacate: Notification from the landlord to the tenant ordering the tenant of vacate the property. In most cases, the notification is given because the tenant either broke one of the terms of the lease or is not following through with payment of rent. The tenant is typically given 30 days to vacate the premises. Similarly, a notice to intend to vacate may be required under the lease for the tenant to notify the landlord before vacating the property.

Rental application: Filled out by a prospective tenant, which typically authorizes the landlord to conduct a credit check to determine the suitably of the individual. Often, there can be a non-refundable fee associated with the rental application.

Security deposit: Funds, in addition to rent, that a landlord requires a tenant to pay to be kept separately in a fund for use should the tenant cause damage to the premises or otherwise violate terms of the lease.

7 Tips for Improving Your Credit Score

An important step to finding a home, whether you’re renting or buying, is ensuring that you have a good credit history. Cornerstone Community Bank suggests the following tips to improve your credit score.

  1. Request a copy of your credit score report – and make sure it is correct. Your credit report illustrates your credit performance, and it needs to be accurate so that you can apply for other loans – such as a mortgage. Everyone is entitled to receive a free copy of his or her credit report annually from each of the three credit reporting agencies, but you must go through the Federal Trade Commission’s website at www.annualcreditreport.com, or call 1-877-322-8228.  Note that you may have to pay for the numerical credit score itself.

Set up automatic bill pay.  Payment history makes up 32 percent of your VantageScore credit score and 35 percent of your FICO credit score. The longer you pay your bills on time, the better your score.  Avoid missed payments by setting as many of your bills to automatic pay as possible.

  1. Build credit through renting. VantageScore’s scoring model, created by the three major credit bureaus, will now weigh rent and utility payment records. This will allow it to score as many as 35 million people who previously couldn’t get a credit score.
  1. Keep balances low on credit cards and ‘revolving credit.’ Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. You often can increase your scores by limiting your charges to 30 percent or less of a card's limit.
  1. Apply for and open new credit accounts only as needed. Keep this in mind the next time a retailer offers you 10 percent off if you open an account. However, if you need a new line of credit, don’t jump at the first appealing offer; compare rates and fees offered through mail solicitation, on the Internet or at your local bank.
  1. Don’t close old, paid off accounts. According to FICO, closing accounts can never help your score and can in fact damage it.
  1. Talk to credit counselors if you’re in trouble. Using legitimate, non-profit credit counseling can help you manage your debt and won’t hurt your credit score. For more information on debt management, contact the National Foundation for Consumer Credit (www.nfcc.org).

5 Important Questions When Choosing Your First Home

Moving into your own place can be exciting and frightening at the same time. Cornerstone Community Bank suggests considering the following questions when choosing your own home.

  1. How much money do you have saved up?

Start with an evaluation of your financial health. Figure out how much money you have for a down payment or deposit on a rental. Down payments are typically 5 to 20 percent of the price of the home. Security deposits on rentals are usually about one month of rent and more if you have a pet. But be sure to keep enough in savings for an emergency fund. It’s a good idea to have three to six months of living expenses to cover unexpected costs.

  1. How much debt do you have?

Consider all of your current and expected financial obligations like your car payment and insurance, credit card debt and student loans. Make sure you will be able to make all the payments in addition to the cost of your new home. Aim to keep total rent or mortgage payments plus utilities to less than 25 to 30 percent of your gross monthly income. Recent regulatory changes limit debt to income (DTI) ratio on most loans to 43 percent.

  1. What is your credit score?

A high credit score indicates strong creditworthiness. Both renters and homebuyers can expect to have their credit history examined. A low credit score can keep you from qualifying for the rental you want or a low interest rate on your mortgage loan. If your credit score is low, you may want to delay moving into a new home and take steps to raise your score. For tips on improving your credit score, visit aba.com/consumers.

  1. Have you factored in all the costs? Create a hypothetical budget for your new home. Find the average cost of utilities in your area, factor in gas, electricity, water and cable. Find out if you will have to pay for parking or trash pickup. Consider the cost of yard maintenance and other basic maintenance costs like replacing the air filter every three months. If you are planning to buy a home, factor in real estate taxes, mortgage insurance and possibly a home owner association fee. Renters should consider the cost of rental insurance.
  1. How long will you stay?

Generally, the longer you plan to live someplace, the more it makes sense to buy. Over time, you can build equity in your home. On the other hand, renters have greater flexibility to move and fewer maintenance costs. Carefully consider your current life and work situation and think about how long you want to stay in your new home.

6 Tips for Saving for Your Down Payment

Before you can make the transition from renting your home to owning your home, you will need to have a substantial down payment, typically 5 to 20 percent of the home’s value. Cornerstone Community Bank suggests the following tips to help save for it:

  1. Develop a budget & timeline. Start by determining how much you’ll need for a down payment. Create a budget and calculate how much you can realistically save each month – that will help you gauge when you’ll be ready to transition from renter to homeowner. 
  1. Establish a separate savings account. Set up a separate savings account exclusively for your down payment and make your monthly contributions automatic. By keeping this money separate, you’ll be less likely to tap into it when you’re tight on cash.  
  1. Shop around to reduce major monthly expenses. It’s a good idea to check rates for your car insurance, renter’s insurance, health insurance, cable, Internet or cell phone plan. There may be deals or promotions available that allow you to save hundreds of dollars by adjusting your contracts.
  1. Monitor your spending. With online banking, keeping an eye on your spending is easier than ever. Track where most of your discretionary income is going. Identify areas where you could cut back (e.g. nice meals out, vacations, etc.) and instead put that money into savings.
  1. Look into state and local home-buying programs. Many states, counties and local governments operate programs for first-time homebuyers. Some programs offer housing discounts, while others provide down payment loans or grants.
  1. Celebrate savings milestones. Saving enough for a down payment can be daunting. To avoid getting discouraged, break it up into smaller goals and reward yourself when you reach each one. If you need to save $30,000 total, consider treating yourself to a nice meal every $5,000 saved. This will help you stay motivated throughout the process.