Do I Really Need a Budget?

Throughout the year, I’m reviewing the top 20 lessons learned from Stan in my book “Your Mortgage Matters” (see last chapter for the list). This week we are on lesson #5. If you don’t have a copy of the book, email me and I’ll send you one.

Lesson #5: Budgeting May be Boring, But it is the Difference Maker

One of John Maxwell’s best quotes ever is “A budget is telling your money where to go instead of wondering where it went.” How many times do you get to the end of the month or year and wonder “where the heck did all the money I made go?” A lack of a budget may be the number one mistake I see my mortgage borrowers make. It is particularly true for the younger crowd, but you’d be shocked at how many middle aged clients I come across that really don’t have a clue how to make their money obey them. It is why people don’t save money, why they run up credit card debt, and too many times, why they wind up behind on payments. And the sad thing is that it is soooo easy! But guess what – it’s also very boring. It’s boring to take time to put pencil to paper to design a budget and it is even more boring living within the constraints of a budget. But for our home buying clients, it is critical.

Surveys have shown that the number one reason that prevents first time homebuyers from being able to buy a home is a lack of money for the down payment. Unless a first time buyer has a nice friend or family member to help them out with a gift, the only way to come up with the down payment is to save. And the only way to save is to get a grip on spending so that saving can take place. How do we do that? We set a budget for every penny we make and we make sure that we only spend money on the things we allocate the money to be spent on – and we make the allocation ahead of time. Getting into that kind of habit before buying can carry over into homeownership. Using the same mindset, we save for things that need to be purchased for the home by budgeting ahead of time versus borrowing to buy.

And it doesn’t have to be boring. Make a game of it. Have contests with friends and family – see who can save more or spend less. Set specific goals of saving for certain things you want to purchase or certain debts you want to pay off. Use Dave Ramsey’s envelope system. Use an on-line tool – especially the ones that you can use on your phone. Or you could even do what I’ve always done, use an Excel spreadsheet. It can be elaborate or simple. Bottom line is that if we want to be successful financially we have to budget. And if we want our home buying clients to be successful as well, we have to encourage them to do the same.

Recent Credit is Critical

It is amazing how much weight the credit scoring models put on recent credit. Let me give you three examples:

1. In the first scenario, an individual who had perfect credit (car, student loans, house, all perfect resulting in a score exceeding 780), had three student loans go bad six months prior to applying for a loan – each had 90 day late payments. There was also a car loan that was late the month before the application. His score had dropped from the high 700’s to low 500’s.

2. Another individual whose score was over 690, dropped to 615 thanks to one 30 day late payment on a car loan two months before buying a home.

3. A third individual had a bankruptcy (chapter 7) from 2 years prior, a short-sale that took place about the time of the bankruptcy, multiple late payments on various accounts leading up to the bankruptcy, and only one new credit item opened since the bankruptcy (a small credit card opened a year before application). Yet her credit score was over 680.

If you compare the first scenario to the third scenario, there is a spread of over 150 points in score. The third individual committed what most would consider a much more egregious action from a credit standpoint – bankruptcy and short sale to go along with multiple late payments. The first individual always had great credit. And the issue causing the score drop was “only” late payments. There was no collection, judgment, foreclosure or bankruptcy. He was just late. The difference – time frame. For the third individual, whose score is over 680, all the derogatory credit issues occurred 2+ years before credit was checked. Yes, they were certainly much worse in the extent of the lack of payment, but because there had been 2 years with no negative issues, the score had moved back up. Same thing goes for the second individual referenced here as the first individual. One minor late payment dropped the score by 75 points, making qualifying nearly impossible. And it was simply because the late payment was so recent.

I give these examples simply to show illustrations of how devastating it can be to a credit score when late payments are recent. Our clients need to be aware that paying bills on time is critical – particularly the closer they get to wanting to buy a home.

Let Compound Interest Work for You

Throughout the year, I’m reviewing the top 20 lessons learned from Stan in my book “Your Mortgage Matters” (see last chapter for the list). This week we are on lesson #4. If you don’t have a copy, email me and I’ll send you one.

Lesson #4: Why Compound Interest is so Vital

Stan used the old “double a penny a day” routine when talking to the group of kids in the classroom when he was talking about how compound interest is so valuable. It goes something like this: Which would you rather have, $1,000,000 given to you right now or get a penny right now, but get the benefit of it doubling every day for a month? On the surface, you’d try to quickly do the math and get 14-15 days into it realizing that you were still under $500, give up and just respond that you’d take the $1 million now. But that is where the beauty of compounding becomes relative – the bigger the number that doubles, the bigger the number is that will double again. Granted, it is an unrealistic argument to have an investment doubling every day, but the point gets made. After 30 days, you’d have close to $11 million if you had taken the penny doubling every day.

Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” It’s a lesson that I wish more of us understood at an early age – and certainly one we should be teaching our younger generation. Because the sooner we get it and start saving, the more beneficial it will be to us in the long run. I visited with a young man this past week who was buying his first house. He was really sharp and had his financial house in order. He wanted to do a 15 year fixed rate loan. When I asked him why he wanted the 15 year loan, he responded that he wanted his house paid off by the time he was 45 (he was 30). I told him that I completely respected his wishes and would certainly help him with the 15 year loan if that is what he wanted – I’m all for helping clients get out of debt. But I asked him if he would be willing to let me show him a quick financial analysis. He said I could so I asked him what rate he thought he would earn on the money he currently had invested. He said he expected no less than 7% long term. He was buying a $250,000 house and borrowing $200,000. His principal and interest payment on the 15 year loan was $1,393 per month at 3.125%. A 30 year payment would have been $912 at 3.625%, or a difference of $481 per month. I then showed him that his balance on the 30 year fixed deal would be at $127,000 at the end of 15 years versus 0 if he went with the 15 year deal and had the loan paid off at that point. So he was immediately seeing the benefit of the 15 year loan. But then I showed him that if he invested the $481 every month, earning 7% (that he told me he expected), he would amass over $152,000 by the end of the 15 years – enough to pay the loan off and have $35,000 extra.

My point was not to convince him that doing a 30 year loan was better than the 15. Because of the lower rate, I could always argue that the 15 year loan is a better option – particularly if the payment fits well within a budget. I simply wanted him to understand the power of the money compounding if he chose to continue to be a wise saver. I then showed him that if he went another 15 years on the same route with the 30 year loan (saving $481 per month), his investment would grow to $585,000. If he started saving $1,393 per month in year 16 (the equivalent of the 15 year payment he had been making) and saved that amount every month for the next 15 years, he’d have $441,500 (over $140,000 less than the strategy using the 30 year loan). Obviously it takes a lot of discipline to save the extra money every month and not spend it. But hopefully you see the advantage of making your money work for you and taking advantage of compound interest.

Don't Buy on Impulse

Throughout the year, I’m reviewing the top 20 lessons learned from Stan in my book “Your Mortgage Matters” (see last chapter for the list). This week we are on lesson #3.

Lesson #3: Avoid Impulse Buying – particularly with big ticket items

This might just be one of the biggest traps consumers fall into. Have you ever heard or said:

“With a sale like this, I can’t pass this bargain up.”

“My image would be enhanced by driving that shiny new SUV versus my 10 year old clunker.”

“That purse would look great with this outfit.”

“Sure, I’ll take fries with that”

“Oh, I don’t have to make payments for a year, definitely give me the upgrade.”

I know I’ve said things like this – well, maybe not the one about the purse. But it’s thoughts like these that cause us to buy things that we don’t need – and certainly don’t fit our budget. Often it is the first step down a path of no return. Nothing wrecks a budget like an unplanned and probably more importantly, an unneeded purchase - particularly if it is something that is more of a big ticket item. (We’ll call this anything over a couple hundred dollars). But don’t get me wrong, consistently making little purchases on impulse can add up.

Check out a few statistics about impulse buying:

• 40% of consumer spending is impulse buying (to put a number to that, it represents $4,207,920,000 per year in the U.S. – yeah, that’s $4 trillion)
• Up to 60% of super market purchases are made on impulse
• 88% of impulse purchases are made because the item is on sale
• 90% of people make occasional impulsive purchases and between 30-50% of all purchases were classified by the buyers themselves as impulse purchases
• Most people buy with their emotions and 75% feel happy after an impulse purchase
• Younger consumers with higher incomes have a greater percentage of impulse purchases

When I look at that dollar amount spent on things that the consumer had no intention of buying, it blows my mind. Here are five quick steps to help avoid impulse buying:

1. Shop with a list
2. Practice saying “no” to your children
3. Shop intentionally
4. Limit your shopping time
5. Pay with cash

Bottom line is that for us, and particularly our younger home buying clients, if we want to be able to save money and focus on the bigger picture of being able to make a difference with our finances, we must avoid buying on impulse.

I Wish Someone Had Told Me This When I Was Twenty

Throughout the next year, I’m going to review the top 20 lessons learned from Stan in my book “Your Mortgage Matters” (see last chapter for the list). This week we are on lesson #2.

Lesson #2: Spending is Fun, but saving is the key to long term financial success.

Here is a simple fact: The geometric average return of the S&P 500 from 1928 – 2014 was 9.6%. If someone coming out of college saves $500 per month for retirement from the time he is 22 until he is 40, then never pays another penny into his retirement account, while still earning 8%, he will have amassed $1.6 million by the time he is 65. If his friend doesn’t start saving for retirement until she is 40, she will have to save $1,735 per month from the time she is 40 until she turns 65 to amass the same $1.6 million. He put in $108,000 while she put in $520,500. As Albert Einstein quoted, “The eighth wonder of the world is compound interest” – or something like that. The earlier in life we grasp this concept the more rewarding it will be for us.

I realize that the older most people get, the more money we make, and therefore it should be easier to save as we get older. But I would argue that the older someone gets, the more expensive life becomes. Anyone with children would agree with me on that. I also understand the argument exists for someone getting started in life that they have many purchases in front of them (car, clothes, furniture, appliances, etc...) and it is easy to burn through income “getting established”. These arguments are valid. After all, for someone in his early twenties, retirement is so far down the road, it seems irrelevant.

But there is more to think about than just retirement. That is not the only big ticket item that will consume cash. Car purchases, weddings, college and vacations are just a few of the things that “surprise” us when the time comes to pay for them. The only away to avoid going into debt for these things is to save for them ahead of time. I don’t have enough room in this update to mathematically show the damage borrowing for these types of purchases does for someone’s savings efforts. Saving for things ahead of time may mean making some difficult decisions and take some “fun” out of our routine. It may mean something simple like taking the family for a picnic versus taking them to Chili’s. Heck, it might mean taking your lunch to work. And heaven forbid, it might mean driving a car past 100,000 miles. I think I make my point, well, the numbers make the point for me, that having an attitude that puts savings ahead of spending, painful as it can be at times, will allow us to come out ahead financially in the long run.

20 Lessons in 2015

hroughout the next year, I’m going to review the top 20 lessons learned from Stan in my book “Your Mortgage Matters” (see last chapter for the list). As relevant news comes up, like Fannie’s new policy on appraisals going into effect on January 26, I’ll make sure to cover those and push the lessons from Stan back a week. Just wanted to give you a little heads up as to what is coming throughout the first half of 2015.

Lesson #1: You Must Have a Plan for Your Money

We’ve all heard the old adage “if you fail to plan, you plan to fail”. Well, I’m not trying to beat a dead horse here, but that statement could not be more true as it relates to personal finance. Starting off a new year, there is probably no better time for us to help our home buying clients get their finances in order. It's also a great time for us to do that individually as well. Whether we are talking about big ticket items that need to be purchased or saved for (house, car, college, wedding, retirement, etc...), or simply breaking down a monthly budget to align our priorities, unless we become the boss of our money, it will always tell us what to do.

I had a great conversation this past week with a group of college kids. I love their enthusiasm for life in general, but I’m concerned about how naïve they are as it relates to the financial world. I’m not going to go down the “student loan debacle” rabbit hole that I’ve gone down before. I believe that is a looming crisis and I’ll leave it at that. But that crisis is symptomatic of our young people today – those that will soon be our first time-homebuyers. Most don’t even have a clue what a budget is, let alone how to create one. They are graduating from college and immediately becoming a servant to money. I’m amazed at the potential first-time homebuyers that I talk to whose lives are spent on the month to month merry-go-round of bringing just enough money in so that it can go right back out to cover their life’s expenses – with nothing left over. They never had a plan for their money and never made savings a priority. So their expenses dictate their behavior.

The key to financial success can be found by simply mapping out an exact plan for every penny earned – before it is earned and certainly before it is spent. Call it a state of mind from a big picture perspective or call it budgeting from a rubber meets the road standpoint. The bottom line is that we need to lead by example by having our own plan for our money and help our clients do the same. They’ll be better homebuyers as a result – now and in the future.

What Do You Want Your Payment to Be?

Invariably when I get a call, and the first thing the customer tells me is that they are calling to see how much they qualify for, my immediate response is to ask them, “how much do you want your monthly payment to be?”

I ask this for a couple of reasons. Number one is that I want to know if they have done some budgeting analysis to determine what they believe their budget will allow them to pay each month. And number two, I’m curious to know if they are just “window shopping”, wanting to see if they can buy in the price range that they are looking. Sometimes the two go hand in hand, but many times they don’t. I will always explain to them how the qualifying works and ultimately let them know how much they can qualify to buy. But, I strongly encourage them to stay within the number they believe best fits their budget – even if they qualify for more.

I know that may go against the grain for what many lenders and Realtors may do. I get it – we are in a commission world, so the bigger the sale, the bigger the paycheck. So it would make sense to help them buy as much as they can qualify to buy. But I’ve found through experience that when we do what is really best for our clients, the result is better for everyone. They have a great home and a payment that fits comfortably in their budget – they are much happier than someone who is maxed out in his budget, resulting from buying too much home.

We’ve all heard the term ‘house poor’ and it is not a good place to be. I really believe that we should advise our customers, both from a lending perspective and a buying perspective, to consider the payment first. It isn’t fair for them to get excited about a home priced over what the ultimate payment will need to be to make their budget work. By helping them keep their budget manageable, they will be in a better place. And those customers are the ones that become lifetime clients, coming back to us again and again for their future home buying and selling needs – oh yeah, they also refer their friends!

Real Estate is a Commodity - Let's Not Forget That

I love my home and I love helping others get their own home. For most of us, it is not only the place we live and raise our families, it is our largest asset. So before we get too far removed from the nightmare that took place with the drop in real estate values starting in 2006, let’s remember what real estate is and treat it accordingly – at least from a valuation standpoint. Over time, home values have consistently risen – a quick look at the numbers below (taken from the National Census Bureau) shows that the beginning of every decade going back to 1940 reflects values have risen to a figure higher than the decade before. Sometimes the increase in value from a percentage basis is impressive and sometimes not so impressive.

Something I found interesting, particular from the information below, is how drops tend to follow spikes or vice versa – even when viewed decade over decade.   Today, we are still sitting well above the average trend line of appreciation going back to 1970. Click the link and you will see what I’m talking about: http://www.jparsons.net/housingbubble

In other words, there is room for values to drop from current levels and still maintain a consistent increase going back over the last 4 decades. I’m not saying they will, but I would also argue that it isn’t catastrophic if they do. Following the huge run-up in prices from 2000 to 2010 (and that even includes the significant drop from 2006-2010), it would make sense that the decade of 2010-2020, would see much more moderate appreciation numbers.

The point is this: Real Estate is a commodity - tread cautiously, remembering that values have always risen over the long term, but that doesn’t mean they always rise. There are spikes (an update I did not too long ago trumpeted the gains we’ve seen here in Nashville since the beginning of 2012), and there are drops (2006 – 2011). Right now we are on a run and values have been rising at a good clip. But the world is not coming to an end if that slows down. Honestly, it might be a good thing.

Average Home Values in the U.S.:

1940 - $30,600
1950 - $44,600
1960 - $58,600
1970 - $65,300
1980 - $93,400
1990 - $101,100
2000 - $119,600
2010 - $180,000
Today - $213,000

Percent increase decade over decade:

1940 to 1950:  4.6% annualized
1950 to 1960:  3.1% annualized
1960 to 1970:  1.1% annualized
1970 to 1980:  4.3% annualized
1980 to 1990:   .8% annualized
1990 to 2000:  1.8% annualized
2000 to 2010:  5.0% annualized
2010 to 2014:  4.5% annualized

Suzie Agrees with Me

I mentioned in an update several months ago how crippling student loans are becoming for first time home buyers. Suzie Orman stated in an article on CNBC this past week “If one were to ask me what I think is the most dangerous threat to our economy, the answer is very simple: student loans.” Here are some statistics to consider (according to Transunion):

• Current amount of student loan debt in the United States: $1,200,000,000,000 (that’s $1.2 trillion)
• Total student loan debt has grown more than 150% since 2005
• Costs have “only” grown 22% in that same time period – so inflation is not the culprit to the loan epidemic
• In 2005, student loans accounted for less than 13% of the total debt load for adults age 20-29. Today, student loans account for nearly 37% of that group’s outstanding debt.
• The average loan balance for that group has risen from $15,900 in 2005 to $25,500 in 2014.
• Mortgage debt represented 63% of total debt for this group in 2005 and now is less than 43%

It’s pretty easy for me to see what is happening. I’ve felt it for several years, but when I see these statistics, it confirms what I’ve been thinking. Student loan debt is a significant detriment to a young person’s ability to buy a home. What I’m recognizing as a huge obstacle for homebuyers, Suzie sees as an even bigger threat – to our economy as a whole. She added, “When students of the greatest nation on Earth are buried with student loans, their ability to buy a home, to have disposable income, to be a vital participant of the economy, is greatly reduced.”

We have to encourage our kids, our grandkids, and even our neighbor’s kids, that there is a better way. Postponing college, going to junior college for a couple of years (a great option in Tennessee now), working a job or two through college, living at home if necessary, and seeking out every grant and scholarship possible are just the ones that come to mind. We also need to encourage parents to help as much as possible – and plan for it! Believe me, with five kids, this is something that is regularly discussed at my house. Sending the future homebuyers of America into the world with an average of $25,000+ in student loan debt is not the way they should begin adulthood. If this trend continues, we will continue to see the age of our first time homebuyers get older and older.

Net Worth - The Key Ingredient to Home Ownership

The link below is a great blog from NAR with a great reminder to give your clients on why owning a home versus renting is so important. Sure there are the common reasons for why people should buy versus rent (here are 5 good ones):

1. They have to live somewhere anyway, so they might as well get ownership rights and have something they can call their own.

2. They want a hedge against inflation. In other words, rents historically go up. However, once a mortgage is in place, particularly a fixed rate mortgage, the payment for principal and interest stays the same.

3. They want the tax benefit of being able to deduct the mortgage interest.

4. They want the forced savings that paying a mortgage provides. Every payment provides a principal component that steadily pays the loan down, building up equity.

5. They realize that buying a home is a leveraged investment if they have a loan. The house goes up in value the same regardless of whether there is a loan or not. The leverage of a loan allows a higher return because the increase in value provides a greater return due to less invested initially.

But stated more simply, as the link below shows graphically, people who own their home historically have a much larger net worth than those that don’t. There are always those situations that justify renting over buying. But the argument can certainly be made, and the stats back it up, that those who own their homes generally have more money (net worth) than those that don’t.

http://economistsoutlook.blogs.realtor.org/2014/09/08/net-worth-of-homeowners-vs-renters/

How to Get a Top Credit Score and Keep It!

I read a great article this week with some really helpful information you can pass along to your clients on how they can get the best credit score possible and keep it there. This is a little longer update than usual, but the information is fantastic. Have a great week!!

There's no doubt about it ‒ when you're applying for a mortgage loan, a high credit score helps you lock in a better interest rate, which can save you thousands of dollars over the life of the loan.

But, on a scale of 300 to 850, only less than 1% of the population has an 850 credit score. While it may seem impossible to achieve a "perfect" credit score, it's good to know that you'll be rewarded with the best interest rates when your credit score is 760 or higher.

It takes consistently responsible financial behavior to maintain a top tier score of 760 - 850. Let's take a look at some of the common traits of high credit score achievers.

Conservative Spending Habits
Never max out your credit cards! People with high credit scores use only 30% or less of their available credit, and those with scores over 800 are using 10% or less. According to a recent survey by Fair Isaac Corporation (the creators of the FICO® Score), people with top level credit scores have an average of four credit cards with balances. So, using your credit cards does help you to build a solid credit history, but it's important to maintain conservative spending habits and keep your balance owed as low as possible.

Make Payments on Time
Did you know? Late payments on your credit report can cost you up to 110 points on your credit score. Ninety-six percent of the people with top credit scores have no late payments on their credit reports.

Have a Well-Established Credit History
FICO® states that the top tier credit scorers have an average credit account of 11 years old, with the oldest credit account averaging 25 years old.

This might be frustrating to hear if you're just starting to establish or re-establish credit. If you're in this position, find out if your bank offers a secured credit card.

With this type of card, you provide a security deposit, which could be a percentage of your spending limit or the actual spending limit. Over time ‒ providing you are making payments and showing responsible financial behavior ‒ the bank may upgrade you to an unsecured card. Before entering into a secured credit card agreement, make sure your monthly payments will be reported to the credit bureaus, and the card will not be flagged as "secured" on your credit reports.

Have a Limited Number of Credit Inquiries
On average, the newest credit account is 28 months old for the top credit scorers. Remember, too many credit inquiries in a short period of time can have a damaging affect on your credit score.

So, don't apply for every credit card that is offered to you in the mail or at the mall. Too many recent inquiries from applications for revolving accounts in the last 12 months represent a greater risk when it comes time to apply for your mortgage.

Make Regular Payments on Installment Debt
If you're making payments on a student loan or a car payment, make your regular payments on time.

Do not try to pay it off early! That won't increase your credit scores. However, if you make the regular payments on time, then you're proving that you have the ability to fulfill a financial commitment.

Don't Cut Up Old Credit Cards
If you have a stagnant credit card with a zero balance, make a small purchase and pay it off quickly. Or, use the old card to make automatic payments on a regular monthly expense, such as a utility bill. This doesn't change your monthly budget, it only changes who you're paying the money to. This can raise the Credit History portion of your scores, based on how long you've had the credit card!

Make Sure Your Credit Reports are Accurate
Last, but definitely not least, go through your credit reports carefully (you should have one each from Experian, Equifax and TransUnion) and look for errors.

• Make sure the items listed on your card are yours. If you find charges you didn't make, you may be a victim of identity theft, or someone else's data is being reported to the wrong file.
• Make sure "on time" payments are not listed as "late".
• Make sure any collections that you've paid off have been removed.
• Make sure all creditors you are faithfully making payments to are being recorded.
• Look for negative comments that are older than seven years. You can ask to have these removed.
• Look for bankruptcies older than 10 years, or accounts associated with the bankruptcy that are still showing up. You can ask to have these removed.

Credit Alert! - Deposit Accounts

Last month we had a dilemma arise, but learned a great lesson that we want to pass along. We had a client that we were working with to help him get his credit score improved. We ran an analysis and determined that if he paid a credit card down, we could get the improvement we needed in the score. When he actually paid the card down and we re-ran the credit, the score did not improve as much as we had anticipated. The issue was that the week before, he had opened a deposit account with a local credit union and they pulled his credit when they opened the account. He had no clue they were going to do this so he had not told us about it either. The additional inquiry on his report resulted in the new score being 10 points lower than what our analysis reflected it would be. We wound up having to pay more down to get his score where it needed to be.

When you tell your clients not to do anything credit related when they are in the purchase process (we have talked before about the need to counsel them on not opening any new debts and not even having credit checked during the mortgage process), you may also want to let them know that even opening a deposit account, where all they are doing is putting money in the account, could result in a credit inquiry. Fortunately in our case, we had time and the client had the extra money needed to pay another debt down and get his credit score where it needed to be. But that might not always be the case.

Always remind your borrowing clients that they need to intentionally avoid anything that would result in a new credit item or a new inquiry during their mortgage process. It can cause delays, additional documents needed, and in some cases could negatively impact the score and affect the ability to obtain financing.

A Personal Dilemma

For the last few years, I’ve struggled with a fundamental flaw in my business. I sell service. I provide a phenomenal process for my clients. We communicate incredibly well with all parties involved. I have 24+ years of experience that I use to counsel homeowners and homebuyers on the best way to use their resources to finance their homes and try to help them do that in a manner that meets their lives’ overall financial goals. My referral partners know this and know that we navigate the process in a manner that gets our clients to closing efficiently.

But, in the end, my borrowing clients are ultimately buying a commodity – a mortgage. Sure, they are concerned about the service they receive, but ultimately the customer’s decision is based on the product they will receive. They want the best deal (the rate and fee combination that the mortgage I sell offers). So there is a disconnect.

What I’m selling, superior service, is ultimately not what the customer has as his or her number one priority. It is important, but if my product is not better than those selling the same product, my sale is in jeopardy – regardless of the level of service I provide.

So what can I do about my dilemma? I think I have a solution – be sure to tune in to next week’s update….

Have a great week!

New FICO Scoring Coming

I read an interesting article this week called "How FICO’s New Scoring Could Boost Your Score."

Here are the main takeaways from the article:

1. If you have medical bills in collections, you may see your credit score rise.
2. Paying off a bill in collections now makes sense.
3. Some consumers may now receive better loan rates.
4. The new credit score system will take a while to implement.

Click the link below for the full story.

http://www.cbsnews.com/news/how-ficos-new-scoring-could-boost-your-score

If you are ever interested in reading prior weekly emails, please visit my Facebook page. Mike Smalling Mortgage Advisor

The Week Ahead
This week, investors will continue to closely monitor the situation in Ukraine. In the US, the Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Tuesday. CPI looks at the price change for finished goods which are sold to consumers. Housing Starts also will be released on Tuesday. The FOMC Minutes from the July 30 Fed meeting will be released on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials. Existing Home Sales and Philly Fed will come out on Thursday.

The Week That Was
An escalation in the conflict in Ukraine was favorable for mortgage rates last week. Concern about the pace of global economic growth also was positive for mortgage rates, which ended the week near the lowest levels of the year.

Investors remain very sensitive to geopolitical events. This was evident on Friday when news services reported that Ukrainians destroyed part of an armed Russian convoy which had crossed the border into Ukraine. A shift to safer assets quickly took place, causing stocks to decline and increasing the demand for bonds, including mortgage-backed securities (MBS). This added demand for MBS pushed mortgage rates lower.

One concern about the conflict in Ukraine is that it will reduce the level of economic activity in Europe. Euro zone second quarter GDP data released this week revealed very weak growth. Sanctions imposed on Russia are adding to the burden, and any additional sanctions would create an even larger obstacle for the economies in the region to overcome.

In the US, the economic news showed that some parts of the economy are slowing as well. The biggest report was Retail Sales, which account for roughly 70% of US economic activity. During the end of the first quarter, Retail Sales showed a nice bounce back from depressed levels due to unusually severe winter weather. The momentum did not continue, though. For the last several months, the gains in Retail Sales have been diminishing, and the July data showed no increase from June. Slower economic growth reduces future inflationary pressures, which is positive for mortgage rates.

How Student Loans May Cripple Your Retirement

I was reading two separate articles this week. One was about student loan debt and the other about retirement savings. A couple of things hit me. First, out of more than 1,000 U.S. seniors surveyed in March 2014, aged 60 and over, 45% of them indicated that if they could turn back the clock, they would save more money for their retirement years (source: National Council on Aging). Second, the U.S. now has over $1 trillion in student loan debt (for effect, that looks like this: $1,200,000,000,000). On top of that, 14.7% of student loans that entered the repayment phase of the loan in 2010 are currently in default (source: St. Louis Federal Reserve). So what do the two have in common?

I don’t really have any raw data to back this hypothetical question up, but how the heck is someone who graduates from college, with a ton of student loan debt, supposed to save money for retirement (let alone buy a house)??? According to the Federal Reserve, there are 37 million individuals with student loan debt, so the average comes out to about $32,000 each. We have to realize that we are all going to make a sacrifice. We either sacrifice now or later. Here are some thoughts on choosing wisely for retirement.

The earlier someone starts accumulating savings for retirement, the better – it gives the money a lot longer to grow (remember that concept that Albert Einstein called the “8th Wonder of the World" – compound interest)? Let me give you an example: Let’s say Stan starts saving for retirement at 22 and puts in $500 per month, growing at 8%, until he is 35 and then never puts in another penny. At 65, assuming the same growth rate, he will have almost $1.4 million (from an investment of $78,000). Let’s say Ted doesn’t start saving for retirement until he is 35. To have the same amount of money at 65, he will need to save $923 per month for the 30 years between 35 and 65 (an investment of over $332,000). But, by that stage in life, there are so many other things that have to be paid for (children as a prime example), most don’t have the ability or discipline to save that kind of money every month.

So what happens? People get to 65 and wish they could turn back the clock and save more money. We have got to start teaching our kids, and learn this lesson ourselves, that borrowing large amounts of money to pay for an education is crippling. It is becoming one of the most significant detriments to young people buying homes, not to mention long term savings for things like retirement.

If you are ever interested in reading prior weekly emails, please visit my Facebook page. Mike Smalling Mortgage Advisor

The Week Ahead
This week, investors will be watching both geopolitical events around the world and major economic news in the US. The next Fed meeting will take place on Wednesday. The first reading for second quarter GDP, the broadest measure of economic growth, also will come out on Wednesday. The important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Core PCE inflation, ISM Manufacturing, Pending Home Sales, and many other reports will round out a very busy week. In addition, there will be Treasury auctions on Monday, Tuesday, and Wednesday.

The Week That Was
The conflicts in Ukraine and the Middle East had little impact on markets last week, while the economic data was slightly stronger than expected overall. As a result, mortgage rates ended the week a little higher.

The housing data released last week contained mixed news. Fortunately, the good news came from Existing Home Sales, which cover roughly 90% of the housing market. June Existing Home Sales rose 3% from May to the highest level since October 2013, marking the third straight month of increases. Also, the inventory of existing homes for sale rose to the highest level since August 2012. Less encouraging, June New Home Sales, accounting for the remaining 10% of the market, declined 8% from May, and the May results were revised sharply lower. These figures are frequently volatile from month to month. New homes inventories increased as well to the highest level since October 2011. To summarize, the bulk of the housing market showed continued improvement, and the tight supply of homes for sale in some markets may be showing signs of easing.

While Fed officials have recently downplayed the risk of higher inflation, many investors are not quite so certain. The inflation data released on Tuesday eased some concerns, but just slightly. The June Consumer Price Index (CPI), one of the most widely watched inflation indicators, increased at a 2.1% annual rate. Core CPI, which excludes the volatile food and energy components, was 1.9% higher than one year ago. With CPI holding steady close to the Fed's stated target level of 2.0%, investors will be keeping an eye out for signs of rising inflation which could pressure the Fed to tighten monetary policy.

Financial Success - The Solution is Simple

“What is the secret to a life that is free of financial burdens?”

I get asked this question a lot, in some form or fashion and not always in direct context to mortgage financing. Some people are buying their first home and trying to put together a game plan. Others are moving up in the world and trying to manage career and family. I’ve even had this question come from opposite ends of the time spectrum – high school students, trying to comprehend what a budget is, on one end, and soon-to-be retirees who are trying to figure out how to make their dollar last longer, on the other end. Even if the definition of financial success varies slightly depending on the generation or situation, people want a simple, easy to follow guide.

Well, here is the simple answer – practice stewardship. And here is the quantifiable answer - set up a budget and live on 80% of what you make each month. There you have it, nothing complicated about it. We should treat all of our earthly possessions as if they belong to someone else and it is our responsibility to take care of them. We need to spend our money in a manner that allows us to set aside 20% every month for giving and saving (10% each is a good guide). I will never overextend when I only spend 80% of what I make and I will have a safety net set up from saving at least 10% every month to help with any future, unforeseen need for an immediate cash outlay that is more than the monthly income allows. I know, it’s not rocket science - the solution is pretty simple.

Why is it then that 75% or more of the people I talk to on a daily basis don’t live this way with their finances? It’s kind of like the strategy to lose weight. Everyone knows the simple answer is to exercise and consume fewer calories. So why can’t people stick to what they know works? It’s because knowing what to do and doing it are diabolically different things. Maybe the simpler answer for both scenarios, physical and financial health, is to have self-discipline. Drink water when I want Coke. Save the money even though I want the new outfit. Drive the clunker another couple years when I “deserve” a new car. Go for a walk when I’d rather sit and watch TV. Get up earlier in the morning when I’d rather sleep. Live on a budget so you can experience financial success.

If you are ever interested in reading prior weekly emails, please visit my Facebook page. Mike Smalling Mortgage Advisor

The Week Ahead
This week, the important monthly Employment report will come out on Thursday due to the holiday on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, Pending Home Sales and Chicago PMI Manufacturing will be released on Monday. ISM Manufacturing will come out on Tuesday, ADP Employment will be released on Wednesday, and ISM Services also will come out on Thursday. Mortgage markets will be closed on Friday in observance of Independence Day.

The Week That Was
It was another good week for mortgage rates. Weaker than expected economic growth data and increased concerns about Iraq were favorable for mortgage rates. These factors outweighed the negative impact of improving data in the housing sector, and mortgage rates ended the week a little lower.

The biggest surprise last week took place when first quarter Gross Domestic Product (GDP), the broadest measure of economic growth, was revised substantially lower from -1.0% to -2.9%. This was the fastest rate of decline since the first quarter of 2009. The news caused mortgage rates to move lower. The improvement in mortgage rates may have been even greater, but investors took into account that unusually bad winter weather was the main cause. Consumers postponed shopping, and businesses scaled back inventories. Much of the missed economic activity during the first quarter was simply delayed, and GDP growth is expected to rebound to around 3.5% during the second quarter.

The housing data released last week showed nice improvement. May Existing Home Sales increased 5% from April, which was the largest monthly gain since August 2011. Total inventory of existing homes available for sale rose 2% to a 5.6-month supply. May New Home Sales jumped 19% from April to the highest level since May 2008. The April Case-Shiller 20-city home price index showed that home prices were 11% higher than one year ago.

5 Questions to Ask Before Choosing a Real Estate Agent

US News had an article this week Click Here to Read addressing this question. I know this may be preaching to the choir a bit, but it made me think that anyone in sales should be proactive in any and all presentations they give to a potential client. As you read through this list, be thinking of ways that you can have these types of questions already answered. You may want to have them in writing and ready to hand to the client before the first question is even asked!

1. How long have you been in the business? Question behind the question: How much experience do you have working with clients who had the exact same need I have?
2. What geographic areas and types of properties do you handle? Real question: How qualified are you to sell my specific property in my neighborhood?
3. How will you communicate with me? Real question: Will you communicate with me exactly the way I want you to – when I want you to and using my preferred medium?
4. Can you share references?  OR Who can I talk to, that is doing what I am doing, that you have helped?
5. What will it cost me to sell this property?  Real issue: What is the bottom line $$ figure I will walk away with?
6. Bonus – my suggestion:  How will you market my property? Better stated: What are you going to do to earn the commission I’m going to pay you?

While these questions are specific to real estate, they apply, in some form or fashion, to all sales. Before meeting with a client, in person or on the phone, we need to have a game plan. It would be best in writing, so that you have answers to all of their questions before they are even asked.

If you are ever interested in reading prior weekly emails, please visit my Facebook page: Mike Smalling Mortgage Advisor

The Week Ahead
There will be two major economic events this week. The ECB meeting will take place on Thursday. Investors will be looking for news about additional stimulus measures. The important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Earlier in the week, ISM Manufacturing will come out on Monday and ISM Services will be released on Wednesday. Construction Spending, Factory Orders, the Trade Balance, and Productivity will round out the schedule.

The Week That Was
It was a volatile holiday-shortened week. Mixed US economic data was roughly neutral for mortgage rates. Anticipation of additional stimulus from the European Central Bank (ECB) was favorable, however, and mortgage rates ended the week a little lower.

In the big picture, mortgage rates are primarily being driven by indications about the pace of global economic growth and the resulting implications for central bank policy. In the US, investors are still sorting out the negative impact of unusually severe winter weather, but they expect the US economy to show moderate growth in coming years. The outlook in Europe is less optimistic, however. ECB officials have indicated that conditions in the euro zone warrant additional monetary stimulus to boost the economies in the region. Investors expect the ECB to signal new measures as soon as next week. One possible action could be a bond purchase program, and the potential added demand from the ECB has driven bond yields around the world lower in recent weeks.

The report on Gross Domestic Product (GDP) is the broadest measure of economic activity. As such, the data is revised multiple times. Investors anticipated that the first revision to first quarter US GDP would change the slight increase of 0.1% seen in the first reading to a decline of roughly -0.5%. This week's report showed that the decline was an even larger -1.0% during the first quarter. Investors were not worried by the shortfall, however, since it was due to an unexpectedly large decline in inventories. If inventories drop in one quarter, it means that production, and thus GDP growth, will be higher in future quarters. Current estimates are for second quarter GDP growth of around 3.5%, which would mean an average of roughly 2.0% growth over the first six months of this year.

Credit Cards Are Evil. Really??

First, let me say that I really appreciate Dave Ramsey – I believe he has the heart of a teacher and wants to help people be financially successful. Secondly, I firmly believe that one of the biggest contributors to financial failure, for many people, is credit card debt. I’m adamantly opposed to it myself, but is the best solution to follow his advice of not having credit cards? He and I disagree on the answer to this question.

If you avoid getting any credit cards, it will remove the temptation of over-spending and I get that. However, responsibility is the real issue here. Not spending more than you can pay off at the end of each month and not overspending because "there is less emotional pain when paying with a card", should always be our practice. Now, if you completely buy in to avoiding all debt and not having any credit cards, where does that leave you? It may keep you out of debt, which I am a HUGE fan of, but it is also going to keep you from having a credit score.

Does that mean you can’t get a mortgage loan? No. Does that mean it is going to make it much more difficult? Absolutely. There are options where non-traditional credit (things that don’t show up on your credit report like rent, utility payments, insurance etc.) can be provided to support a loan. Many times options like FHA and THDA work just fine, but what about conventional loans?

I worked with a client this week that has the ability to put 20% down, which will enable her to avoid mortgage insurance. In her case, a conventional loan is the best option. She has a great job, low debt to income ratios and plenty of cash. She has lived a very disciplined life and has no debt – and no credit. Period. For several reasons (interest rates being tied to credit scores as the primary), it is going to be incredibly difficult to get her the financing she deserves. We’ll find options for her, but it will require additional documentation on her part and will likely be less favorable pricing. There is a better way.

For clients like this, who live frugally and are committed to saving, what is the danger to owning a couple of credit cards? In my opinion, when done strategically, there isn’t any. I have a daughter in college that has been taught from the time she had a concept of money, that she better never carry a balance on a credit card. When she graduates, she will have at least two cards that will have been opened for 24+ months. They will have no annual fee and have a maximum limit of $500. She can’t get in trouble this way and she will have a stellar credit rating when she graduates. So let's be responsible and take advantage of building good credit to our advantage.

If you are ever interested in reading prior weekly emails, please visit my Facebook page: Mike Smalling Mortgage Advisor

The Week Ahead
The biggest economic release this week likely will be the Fed Minutes from the April 30 FOMC Meeting which will come out on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials. Investors also will be watching the housing data. Existing Home Sales will be released on Thursday and New Home Sales will come out on Friday. Mortgage markets will close early on Friday in observance of Memorial Day.

The Week That Was
The two biggest reports on economic growth released last week both fell short of the forecasts, which was favorable for mortgage rates. In addition, expectations increased for a bond purchase program by the European Central Bank (ECB), which also was positive for mortgage rates. As a result, mortgage rates ended the week near the lowest levels of the year.

In recent weeks, the economic data generally has shown a solid rebound from the weather-related slowdown seen this winter. Last week's data for April activity caused investors to grow a little more cautious about the outlook for the rest of the year, however. While the forecast was for a third straight month of large gains, April Retail Sales rose just slightly from March. Retail Sales account for roughly one third of consumer spending, so a big miss is significant. Another important indicator of economic activity, Industrial Production, showed a sharp decline, surprising most economists.

A bright spot in last week's economic data came from the housing sector on Friday, and the better results offset some of the improvement seen in mortgage rates earlier in the week. April Housing Starts increased 13% from March, far exceeding the consensus forecast, and they were 26% higher than one year ago. April Building Permits rose 8% from March to the highest level since June 2008. Most of the increase came from multi-family units, however. Excluding multi-family units, Housing Starts showed much more modest gains.

Navigating Mortgage Insurance

I'm finding that more and more customers are opting for financed mortgage insurance on conventional loans. When a borrower has a very good credit score, there's only about a .25% addition to the interest-rate, even on a 95% loan, to forgo the monthly MI payment. So, for example, someone borrowing $200,000 on a 95% conventional loan would pay $1,013 for principal and interest at 4.5% and another $90 for mortgage insurance, for a total of $1,103 not counting taxes and homeowner's insurance. The same person could take a rate that is .25% higher and have a payment with no monthly MI payment. The principal and interest would increase to $1,043 per month, but with no mortgage insurance payment, the total is $60 less per month.

Obviously, the main advantage of financing the MI is a lower monthly payment. The other significant advantage is a little more interest to deduct from a tax perspective. The main disadvantage is that the borrower now has a permanent rate that is .25% higher than it would have been had they taken the lower rate and paid the monthly MI. Most mortgage insurance payments are only required to be made for two years and then only until the loan is paid down to 80% of the home's current value. So at some point the mortgage insurance can be dropped which would leave the borrower with a payment that is a little less long-term, taking the monthly mortgage insurance payment option.

The key is finding the break-even point of how long someone would need to stay in the home, paying on that loan, to determine which option works best. That is where we come in - to advise clients on how to structure this part of their loan so that they receive the most benefit. But it is important for you to understand that there are options.

If you are ever interested in reading prior weekly emails, please visit my Facebook page: Mike Smalling Mortgage Advisor

The Week Ahead
This week, Retail Sales will be released on Tuesday. Retail Sales account for about 70% of economic activity. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for finished goods which are sold to consumers. Housing Starts will be released on Friday. Industrial Production, Philly Fed, and Consumer Sentiment will round out the schedule.

The Week That Was
Last week was a light week for economic data, and investors mainly focused on the central banks of the US and Europe. Comments from Fed and ECB officials remained favorable for bonds, and mortgage rates moved down a little during the week, to the lowest levels of the year.

At the beginning of the year, the consensus outlook was for a moderate pace of economic growth in the US and for mortgage rates to slowly climb higher. Despite a weather-related slowdown over the winter, the growth outlook appears to be on target, yet mortgage rates have moved lower this year.

There are several factors which have contributed to the decline in mortgage rates this year. One reason is that inflation has remained low. The major indicators, such as the Consumer Price Index (CPI) and the PCE index, show that core inflation is well below the Fed's target level of 2.0%, and it is expected to remain low in coming months. Expectations for future inflation are a major factor in setting mortgage rates.

The conflict in Ukraine is also favorable for mortgage rates. During periods of uncertainty, investors typically shift to relatively safer assets, increasing the demand for mortgage-backed securities (MBS). Another influence has been the expectation that the European Central Bank (ECB) will begin a bond purchase program similar to the one used by the Fed over the last few years. The expected added demand for bonds from the ECB has pushed down rates around the world.

Get Rich Quick

It is very rare that someone hits it big overnight and goes from Average Joe to Joe Millionaire. When I’m counseling my clients, I always encourage them to look at their personal finances and wealth building as a process, not an occurrence. It may be boring, but things like living within a specified budget, eliminating non-mortgage debt, investing in retirement accounts, saving for kid’s college, paying cash for cars – and buying them used, are all vital components to a long term strategy that helps us develop financial security over a lifetime. I’m constantly in that mode personally and always advising in that manner.

When I ran across Seth Godin’s blog this past week titled Get Rich Quick, it caught my attention. But as I quickly realized, he took a different slant. He is obviously not talking about building monetary wealth, but enriching our lives. I thought it was incredible and worth sharing. Here is how you really get rich quick:

• Enrich your world by creating value for others.
• Enrich your health by walking twenty minutes a day.
• Enrich your community by contributing to someone, without keeping score.
• Enrich your relationships by saying what needs to be said.
• Enrich your standing by trusting someone else.
• Enrich your organization by doing more than you're asked.
• Enrich your skills by learning something new, something scary.
• Enrich your productivity by rejecting false shortcuts.
• Enrich your peace of mind by being trusted.

If you are ever interested in reading prior weekly emails, please visit my Facebook page: Mike Smalling Mortgage Advisor

The Week Ahead
Next week, ISM Services will be released on Monday. The JOLTS report, measuring job openings and labor turnover, will come out on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. A meeting of the European Central Bank (ECB) on Thursday also may influence US markets. The ECB is considering a bond purchase program similar to the one in the US that is currently being wound down.

The Week That Was
The major economic data released last week continued to show an even better than expected bounce back from a weather-related slowdown during the winter. Despite the economic strength, though, there were few signs of inflationary pressures, helping mortgage rates end the week lower, near the best levels of the year.

The economy added 288K jobs in April, far more than expected, and the largest monthly increase since January 2012. Average job gains over the last three months were a healthy 238K, up from 167K over the prior three months. The Unemployment Rate unexpectedly dropped from 6.7% to 6.3%, the lowest level since September 2008. Looking below the surface, though, a large part of the decline in the Unemployment Rate was due to people leaving the labor force. Average Hourly Earnings, a proxy for wage growth, were flat, limiting the upward pressure on inflation.

The impact of unusually severe winter weather appears to have taken an even bigger bite out of economic activity during the first three months of this year than what had been expected. The initial reading for first quarter Gross Domestic Product (GDP), the broadest measure of economic growth, was just 0.1%, down from 2.6% during the fourth quarter. This report often receives large revisions, though, as more data is collected.