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Understanding Mortgages

Coffee cup on a desktop, with the words 'bank statements'

"You don't judge a book by it's cover" is a particularly relevant phrase when you're in the market to buy a home. Upon reviewing online listings to see what houses are up for sale, the pictures of the interior can make a property look like the quintessential location, with plenty of space, gorgeous cabinetry, hardwood floors and custom ceilings. Yet upon closer inspection - which usually involves actually visiting the house with a real estate agent - there's much more to the story that the pictures didn't fully capture. Flooring that wasn't depicted may be in severe disrepair, the roof may leak and the wooden cabinetry could be shoddily constructed.

Cardboard house with dollar bills next to itIn short, there's just about always more to the story when it comes to a house up for sale that catches your eye. This same reasoning can be applied to bank statements and why mortgage lenders request them when you apply for a mortgage. You may have the necessary assets, gainful employment or income that makes you eligible to buy a home on paper, but your lender needs to get the back story about various factors. What are those factors? That's what we're about to address, along with tips for what you can do to make this chapter of the mortgage application process seamless.

What do mortgage lenders look for on bank statements?

The overarching reason why your mortgage provider requests a copy of a recent banking statement is to ensure that you have sufficient funds for the house that you're looking to purchase. For most people, real estate is the largest purchase they make in their lives. According to the most recent statistics available from the National Association of Realtors, the typical house in the U.S. costs approximately $265,600. And in certain areas of the country, the median is even higher, such as the Northeast and West ($303,500 and $415,900, respectively).

Examining up-to-date financial records enables your lender to determine if you have the means to pay the asking price of a house and the interest from the loan, whether fixed or adjustable, as well as the closing costs associated with the transaction, whether it’s a purchase or refinance.

Although, it goes a bit deeper than that. In addition to finding out what funds are available, they also need to establish from where they derive. Of course, for most people, the money they earn comes from their employer, and are frequently deposited automatically on a weekly or biweekly basis. That's why in addition to the dollar amount that's deposited, bank statements also detail the date of when the deposits occurred. This helps your lender document consistency and a pattern - or lack thereof - as to how much money is coming in on an ongoing basis and how frequently. For instance, some people - such as those in sales - may receive a commission, so the amounts vary from one pay period to the next. Those who are salaried receive a base pay.

Your mortgage lender doesn't have a preference; they just want to ensure everything makes sense as to how you're paid. The bank statement you provide gives them the context they need to make an informed decision regarding loan approval.

Woman holding her hands up in confusionWhat if my lender can't determine where funds derive?

Although you don't hear about it too often in the mainstream media, Americans usually prefer saving to spending. In fact, according to a recent Gallup poll, most people in the U.S. are saving at least a portion of what they earn and 56% consider themselves to be in "excellent" shape in terms of finances.

But say you have $20,000 in the bank and your lender can't adequately determine where that money came from. If this is the case, you might as well not have it at all. In other words, it isn't enough to have a large sum of money stowed away. Your lender needs to authenticate where, when and over how long a time the funds accrued. In some cases, there may be a simple explanation, such as a gift, end-of-year bonus or lottery winnings. In any of these cases, your lender may need to probe further to obtain greater clarity. This is part of the reason why it's a good idea to work in consultation with your loan officer so you can quickly field questions that arise.

What does the term "seasoned" mean in real estate?

In addition to sourcing, your lender will also check to see if the funds you have are seasoned. As the description suggests, seasoned refers to how long assets or funds have been in your bank accounts. Lenders have different definitions as to the precise time frame that makes assets seasoned, but generally speaking, those that are have been in your account for at least a month. Should deposits exist that occurred in fewer than 30 days, they'll likely ask about what the circumstances were. This may be readily identifiable and not require you to elaborate, but it's important to be familiar with your account activity so you have an explanation for newly available funds. 

All that said, what can you do to make this process go smoothly? Here are a few suggestions:

Woman smiling at a cafe tableBe honest

Any relationship is built upon trust, so if you make assertions about what you earn or where money comes from that is untrue, it will likely disqualify you from obtaining a loan. Transparency and honesty are essential.

Know your numbers backwards and forwards

No one knows your financial situation better than you. Familiarize yourself with your bank statement by checking it regularly. Having answers to your lender's questions will help speed things up considerably.

Avoid overdrawing

Your bank statement is ultimately a "statement" as to how you manage your finances. If you make charges that cause a check to bounce, it may raise a red flag for your lender that suggests you're not a good loan candidate.

Bottom-line: Although your bank statement may be just one page of the mortgage application story, it can serve as a summary that will help your lender come to the right conclusion about loan approval - and the beginning of homeownership


General

Honoring our Veterans

Nov 8
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Category | General

Honoring our veterans

Honoring our Veterans

Veterans’ Day is a time to honor and pay respect to those who have served our country. To all veterans, we thank you for your sacrifice and service. Click here for a list of businesses that are offering discounts and complimentary services to veterans in observance of Veterans’ Day.

American flagA history of Veterans' Day:

Germany and the Allied Nations ceased fighting in World War I on the eleventh hour of the eleventh day of the eleventh month. Because of this, November 11, 1918 was known as “the end of the war to end wars.”

The following year, after the Treaty of Versailles was signed, President Wilson named November 11, “National Armistice Day” to honor those who died in service for their country. By 1938, Armistice Day became an official legal holiday in appreciation for those who fought in World War I.

In 1954, after World War II and the Korean War, Congress amended the holiday to be Veterans’ Day, a day to celebrate all veterans.

Remember to take time today to appreciate and thank those who have served our country, it is because of their sacrifice that we are able to experience freedom.


Understanding Mortgages

What makes VA loans special?

The nation's active duty service members and veterans are a lot of things. Loyal. Patriotic. Courageous. Resilient. Strong-willed. Family-oriented. Important. And that's just a handful of the words that come to mind. 

Here's another term that's highly characteristic of America's best and brightest: homeowners. On the surface, you may not think this word applies, given that those currently serving may be forced to relocate themselves at any given time. But as data from the National Association of Realtors shows, former or current members of the military represent roughly 1 in 5 recent homebuyers. And of those buyers who are on active duty, their median age is 34 - quite young compared to the typical civilian buyer (42 years old).

When current and formerly active members of the United States military are looking to buy, they have many options to do so. And when it comes to their preferred mortgage type, one stands supreme: VA loans. Whether you've long been a member of the armed forces or served for only a brief amount of time, VA loans are a great way to enter the housing market affordably and in a manner that's in keeping with your current situation and circumstances. As their title connotes, VA loans are backed by the United States Department of Veterans Affairs. This basically means that should a borrower default, the VA guarantees the mortgage issuer that the loan will be paid off in full.

But there's much more to VA loans than their being supported by the federal government, a fact which on its own make this product a desirable financing tool. Here are a few other elements of VA loans that can help you decide if this mortgage is the one for you and determine whether you're eligible to apply.

No down payment is required
Perhaps the biggest perk of VA loans is borrowers don't have to put any money down up front. A common misconception when it comes to mortgage is the notion that a down payment of 20% or more is required. Not only is this not true, but the actual percentage homebuyers put down is considerably smaller than that, averaging between 3% and 3.5%, according to the NAR. This makes homeownership much more realistic for families who are on a budget, as a 20% down payment on a median-priced home in the U.S. would cost upwards of $53,120 (the current median for an existing home is $265,600). However, even a down payment of 3.5% - the equivalent of $9,285 - is no drop in the bucket, either.

The ability to forego the down payment is part of what makes VA loans so popular. At 56%, most active duty do not put any money down when they buy a house, based on the latest figures from the NAR. Roughly 41% of veterans take advantage of no money down financing as well.

Length of service required varies to be considered eligible
There are roughly 1.3 million men and women who are now on active duty, according to estimates from the Pew Research Center. That's down from 1.4 million in 2010 and 2 million in 1990. Virtually all of them will receive veteran status should they decide to retire from the military. It raises an interesting question: How long do you have to be in the service to be qualified for a VA loan? The answer to this question isn't always clear cut and largely depends on whether the U.S. is in war or peacetime. For example, if it's wartime - a designation that the VA ultimately determines - service time required for VA loan eligibility is usually 90 days. But if it's during peacetime, it's roughly double that at 181 days.

VA loan eligibility may also be contingent on the branch of the military you are or were in. For example, if you're in the National Guard or Reserves, six full years of service is required.

Surviving spouses of service members may also be eligible to apply for a VA loan. But here as well, there are various circumstances that determine when you become qualified. The best course of action if you're unsure is to talk to your lender directly and tell them your situation.

Funding fee replaces private mortgage insurance
Another advantage of VA loans is borrowers usually don't have to purchase private mortgage insurance. Normally, when a buyer takes out a loan and puts down less than 20% of the home's purchase price, they have to buy mortgage insurance to ensure the loan is paid off in the event of default. Such a policy is not mandatory for VA loan borrowers. In lieu of private insurance is a basic funding fee, which is typically around 2% of the home's value. This amount is paid to the VA. However, this amount may be lowered to 1.5% with a down payment of 5% or 1.25% by putting 10% down. The VA Funding Fee can also be financed into the loan amount or paid in cash.

The funding fee may be waived entirely, though, in certain circumstances, such as if your spouse died while in the line of duty or from a disability which stemmed from his or her time in the armed forces. Veterans who have a 10% disability and receive disability checks are also exempt.

If you're in the military or are a veteran, you've achieved quite a bit. A VA loan can put you in position to add "homeowner" to your list of accomplishments. Please contact us to learn more.


Helpful Tips

Cyber Security: Strong Passwords

Best practices for strong passwords:

Cybersecurity is critical, both in your personal and professional life, and passwords are the first line of defense against imposters gaining access to your accounts. The Verizon Data Breach Investigations Report found over 70% of employees reuse passwords at work. The report also states 81% of hacking-related breaches leveraged either stolen and/or weak passwords.

Follow the tips below to make sure that you are setting strong passwords to protect your accounts and information online.

Password Do’s:

  • Use a password manager: Password managers are online services that safely store and manage your passwords. Your passwords will be encrypted, so it is a secure way to keep them all in one easy to find place.
  • Change your password regularly: This will make it less likely that your accounts will be compromised.
  • Make your passwords long: Advanced hackers can use computer programs that run through every combination of numbers and letters. The longer and more complex your password is, the harder it is to crack!
  • Mix up symbols and numbers with letters: An example of this technique is using the number 1 in place of a lowercase letter l.
  • Use nonsense sequences of letters and numbers: This will make it more difficult for someone to guess your logins and harder for advanced technology to crack your passwords.

Password Don’ts:

  • Don’t use the same password for everything: If you do, and an imposter gets your password for one account they can use it for all the other services and platforms you have.
  • Don’t keep passwords in areas people can access: Storing logins in your desk or easy to access places in your computer puts you at risk. Instead use a password manager that encrypts your passwords for you.
  • Don’t use common words or phrases: If the letter sequences you use are found in the dictionary, an intruder will be able to crack your passwords easier.
  • Don’t use personal information: Logins that include birthdays, names of loved ones, or streets you grew up on will make it easy for someone to hack your accounts.

Don’t give your password to anyone: Not even coworkers or good friends.


Things to Consider

How to start investing in real estate - image of a toy house on a lawn

Instead of working for your money, wouldn't it be great if your money worked for you?

It can when you start investing.

From precious metals to mutual funds, high-yield savings accounts to treasury securities, there are lots of potential options. Whichever you choose, one overarching rule is key: Invest in what appreciates - it can build net worth.

This is one of the main reasons why a number of financial experts consider buying real estate to be a smart decision. The numbers don't lie. For instance, in July - the most recent month for which complete data is available - the median existing-home price in the U.S. was $269,300, according to the National Association of Realtors. Not only was this total up more than 4% from the previous year, but it represented the 89th consecutive month of year-over-year growth.

Whether it's something done on the side or a potential career pursuit, the amount of time and money you devote to investing in real estate is up to you.

Before we get into the specifics, it's helpful to understand the types of real estate investments that are available. As you might imagine, investment property options are endless.

House icon with the word 'sale' inside it

Homeownership
This is perhaps the most basic launch point for entering the real estate market and something that nearly two-thirds of Americans can stake claim to, according to the most recent figures available from the Census Bureau.

Financial experts often suggest that before buying investment properties, you should start out small by paying off your home. If nothing else, doing so provides a certain sense of comfort, control and security for your family, knowing they will always have a place to call home.

However, should you decide to sell - perhaps when the kids move out or upon retirement - you should be able to make back what you spent; the dollar amount can vary considerably depending on market conditions and supply and demand.

House icon with an upward arrow inside

Rental properties
To rent or to buy? Whether freshly out of college or in between jobs, renting is a living option that millions of people choose because it makes the most sense for them financially. This fact is one of the main reasons why many real estate investors choose rental properties. Instead of renting property for themselves to live in, they purchase the investment property to rent out to other individuals or families.

There are several different roles rental property owners can assume. Perhaps the most basic is landlord.

Renters pay the monthly rate and in return receive shelter. But a landlord's role typically goes above and beyond providing tenants with a place to stay. They often also take care of the ongoing maintenance and repair needs that may develop, such as a leaky faucet, broken window or clogged drain. They may also pay for certain utilities as part of the rental agreement with the landlord. In short, the amount of time rental investment property owners devote to this type of real estate can be considerable and may not be the best choice for those looking for a short-term investment vehicle.

High rise building icon with an upward arrow pointing to a dollar sign

Office buildings
Much like a homeowner or renter, businesses need a place to reside and they often find them in office buildings. Commercial real estate is geared toward entrepreneurs or general companies that rent out space for business purposes. Office buildings are typically found in major metropolitan areas, but they can also be located in suburban or rural communities.

Similar to residential landlords, office building property owners are charged with addressing various maintenance and incidentals that companies may run into from time to time, whether they're relatively simple or complicated and costly.

Because office units tend to be larger than residential apartment units, the rental prices are generally higher. And with more space typically comes more responsibility. Furthermore, if you own an office in a high-rise development where other businesses are located, you may be required to abide by certain policies dictated by the state or whomever owns the building itself.

Two house icons with arrows moving between them

House flipping

If you ever watch the DIY Channel or HGTV, then you probably have a good idea of what house flipping is all about. These types of investment properties may be in a state of disrepair when they're first purchased. The buyer commits to renovating the place and then "flips" it to another buyer who may want to use it to live in or as a vacation property. The goal of house flipping is to turn a profit by creating more value than what was spent on the initial purchase and renovations.

Home flipping is quite popular nowadays. According to the most recent figures available from ATTOM Data Solutions, an estimated 59,876 single-family units and condominiums were flipped between April and June. That's an increase of 12.4% from the first quarter. On a percentage basis, this means that of all the homes sold during this period in the U.S., close to 6% were flips.

Those who rehabbed them wound up making a profit, grossing an average $62,700, ATTOM Data Solutions found.

That said, it's important to understand that those who flip houses don't always make money. The cost of renovation may be more than originally estimated or market fluctuations may cause the price of the house to drop below what was spent to buy it in its original form. Financial experts as a result may not point to house flipping as a vehicle for investing in real estate.  

Icon of a group of people watching a presentation of a house with a dollar sign

REITs
Short for real estate investment trusts, REITs are structured arrangements, wherein a company or companies pool their money to buy properties and then sell off some of their assets as shares. Similar to mutual funds, investors who buy in typically receive a portion of the money that REITs earn, the amount of which typically depends on their stake or how many shares they purchase.

Investment advisors questioned about how to start investing in real estate may point to REITs as a good launching point, because it enables people to work with those who are already in the real estate market.  Additionally REITs may come tax free, provided the income earned goes to shareholders as dividends, as noted by Bankrate.com.

As with virtually all investments, there are some risks with REITs. Their value may decline depending on economic and real estate market forces. Additionally, you may not have authority to make further investment decisions with the property, especially if it is privately held (as opposed to publicly traded). 

Icon of a person with three houses

House hacking
Here's a term you may not be too familiar with, though it is pretty straightforward. It basically means that you live in one of the investment properties you buy, typically multi-family units (e.g. apartments, condominiums, etc.). However, instead of the traditional arrangement, where you pay off the cost of living there, your tenants do it for you.

This may be a sound investment strategy for those who are looking to invest on a short-term basis or are skilled in house flipping. As noted by Auction.com, the benefits of house hacking include improving cash flow and building your investment portfolio, meaning that it can be a smart area to get your feet wet.

Icon of a small shop

Retail
Online shopping has revolutionized how Americans buy products and services. With just a few keystrokes and button clicks, goods are shipped straight to consumers' doors. However, brick-and-mortar shopping remains the most common form, which is why retail remains a popular real estate investment. From convenience stores to outdoor strip malls to big-box department facilities, there are over 1 million retail establishments in the U.S. at the present time, according to the National Retail Federation. And of the 50 top-selling online retailers, close to 100% of them have brick-and-mortar locations.

Much like apartment unit or office building landlords, they also serve in retail property capacities and are charged with the same maintenance-related responsibilities, although the nature or frequency of these tasks may be different. For example, because retail locations host potentially tens of thousands of people in a given week - and millions in a year - repair issues may be more common than at an office building that sees the same number of people from week to week.

Another difference may be in how retail property investment owners are compensated by the companies renting them out. As The Balance noted, in addition to a base rent, they may also be paid on a percentage-of-sales basis, as the retailer may have the added advantage of the property being highly visible or in a busy part of the city or town. In some cases, greater customer traffic may lead to better sales compared to a location that's hidden or out of view. 

Believe it or not, that's just the beginning when real estate investment opportunities, as warehouses, mixed-use, industrial and vacation properties are a few others. So when you're considering how to start investing in real estate, your first task is determining which one to choose. No one can answer that question but you, although you may want to talk with a trusted financial advisor for further guidance.

 

Here are some additional pointers for how to start investing in real estate and what's important to keep in mind:

Infographic on how to start investing. Each point can be found below.Get a handle on your finances
As previously stated, every investment contains some level of risk. The key is to reduce as much of it as possible so surprises aren't too jarring.

The best way to ensure that is by smart money management. According to data compiled by The Wall Street Journal, consumer debt reached over $4 trillion in 2019, which doesn't include mortgages. There's nothing necessarily wrong with having debt, but before investing in something as big as real estate, you should  know how you'll pay debt off. Whether that's by refinancing interest rates, saving more or increasing cash flow by working a second job, being financially stable is key to smart real estate investing.

Self-reflect
Reflect on why you want to invest in real estate to begin with. Is it to generate some additional cash flow as a second job? Is it to raise money to help put your soon-to-be high school graduate through college? Or is this something that you see yourself doing for the long term because you've always had an interest in it? Whatever it is, be as specific as possible about what you'd like to get out of buying real estate. It can help you determine how much time and money you'd like to put in.

Start out small
A common mistake that many people make upon entering the real estate market is biting off more than they can chew. This is a potentially highly lucrative investment when you get it right, so it can be really exciting to begin big. It's best, however, to take it slow by first paying off your house. Once you've done that, talk to friends, co-workers or loved ones who have real estate investments. You're almost guaranteed to find that they too started out slowly by first buying a share in a REIT or a single apartment unit. As you build income and experience, you can then decide if you want to take things a bit further.

Read, read and read some more
There are hundreds and hundreds of resources on real estate investing, so many that you may have a hard time deciding which ones to choose. In this case, the more you read, the better off and more informed you're likely to be. If you're not sure where to begin, consider speaking with a real estate agent or a real estate investor. They should be able to list off some books that were helpful for them.

Do your homework

Although this may sound similar to the tip about reading as much as you can, doing your research is slightly different. Real estate is a highly fluid medium. What may be the norm in one geographical region may be different in another, particularly with prices. As mentioned earlier, the goal in real estate investing is to place your money in properties that appreciate. This may be a function of where you live. In July 2019, for example, the median price for an existing home in the Northeast was $305,800 - well above the national median, according to NAR data. In the Midwest during the same month, the price was $226,300.

The price difference is partially attributable to the amount of people that live in these respective parts of the country as well as availability of houses to sell. Regardless of where you live, do your research into price trends for single-family or multi-family units, which you should be able to find at websites like the National Association of Realtors or the National Association of Home Builders. It can give you some added confidence and understanding of the direction of prices and in what types of houses (e.g. condominiums, townhouses, single-family, multi-family, etc.).

Run the numbers
In addition to the purchase price of the property itself, there are other costs, such as property taxes, homeowners insurance, mortgage insurance (if you're putting less than 20% down as a down payment) and maintenance-related expenses, which can be unpredictable. Make out a list of the costs involved. Then, pair it with what you'd earn monthly from tenants' monthly rent payments. If the profit outweighs your costs, you're golden.

When you do it right and you come prepared, investing in real estate may be the smartest move you'll ever make. And it can be quite rewarding to boot. If you feel like you're ready to get started, then jump on in - the water's fine.


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