MONEY mortgages

When a Reverse Mortgage Is Too Big a Risk

Q: Can I take out a reverse mortgage and invest that money in an account that would pay a decent rate of return? My home is paid off and the equity is just sitting there drawing no return. If repay the loan in 10 or 20 years with the money I invested, would I come out ahead? – Stan Larrison

A: In theory it sounds good, but to get the kind of return you’d need to make it worth doing, you’d have to take on a fair amount of risk. “You don’t want to gamble with your home equity,” says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, a little background on how reverse mortgages work. A reverse mortgage is a loan that allows you to convert your home equity into cash. Based on the amount you borrow, you’ll get a payment every month. You can also take the money as a lump sum or an equity line of credit. The proceeds of the loan are tax-free.

You have to be at least 62 and own the home as your primary residence. How much you’ll get depends on your age, home equity, and current loan rates. The amount you can borrow is capped, typically less than 60% of your home equity. For example, if you are 70, your spouse is 68, and you own a $255,000 house with no mortgage, you could get a $139,000 loan in the New York area, Mingone says. You can use a calculator to figure out how much you would qualify for where you live.

You don’t have to repay the loan as long as you live in the house. Once you do leave it, say when you pass away or move out to assisted living, the house gets sold and the proceeds go toward paying off the loan, as well as any interest or fees that have accrued. Keep in mind that the longer you have the loan, the more you will owe. And depending on the type of loan, the rates may be variable.

If the house sells for more than the loan balance, you or your heirs get the difference. If the house sells for less, you aren’t on the hook; the bank just takes a loss.

Now here’s why it would be hard to come out ahead by investing money from a reverse mortgage. First, reverse mortgages are costly loans to pay back compared with traditional loans. Reverse mortgage rates are currently about 5%, versus about 4% for a typical 30-year fixed rate loan. Closing costs are typically higher too.

You also need to factor in taxes. “If the money is invested in anything that has capital gains or interest income, you’ll owe taxes on that,” says Mingone. So you’ll need to aim for a 7% to 8% return to cover taxes and interest. To find an investment that would give you that kind of return, you’d have to take on more risk.

Still, there are some situations where a reverse mortgage makes sense, especially for retirees who are cash-poor and house rich, Mingone says.

If money is tight, the payments from a reverse mortgage can give you a new stream of income. If you have a mortgage on your current home and it’s hurting your cash flow, you can pay off your conventional loan with a reverse mortgage and eliminate that expense.

It could also be used to pay off high rate credit card debt, fund major home repairs, or cover big medical bills. Check out the AARP Reverse Mortgage Education Project for more information that can help you decide if a reverse mortgage is right for you. If you do go ahead, the federal government requires you to meet with a counselor before taking out the loan. You can find a counselor at the Department of Housing and Urban Development’s web site.

“There are definitely times when using a reverse mortgage is a smart move, but investing the money isn’t one of them,” says Mingone.

MONEY Taxes

Can I Write Off a $30,000 Loan That My Friend Never Paid Back?

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Neil Overy—Getty Images

A reader, Gerard, reached out to us recently wondering if there was any way to recover any of the thousands of dollars loaned to a friend. At this point, he doubts the person actually intended to repay the loan. Here’s what he told us:

My mother and I lent a series of loans to a person we regarded as a close personal friend for business and personal reasons in the amount of more than $30,000. We have tried since August of last year to arrange repayment without any success. My mother is a senior citizen and we believe that the debtor never intended to repay loan. What can we do (generally) and regarding taxes?

We posed the question to Burton M. Koss, senior tax adviser at Cortés & Baker, an accounting firm in Hilliard, Ohio. Koss said it’s possible that the loss could be claimed on taxes, but first Gerard and his mother will have to do some investigating to conclude the debt is uncollectable. “If it is really a bad debt, it’s a capital loss,” he said.

“If the person who borrowed the money has any assets, or if they have a job and their wages could be garnished, then the debt may not be worthless,” Koss said. “You may be able to collect the money. You should consult an attorney to explore the possibility of filing a lawsuit.” If the borrower has assets or income, it may make sense to hire a lawyer to write a persuasive letter about repayment of the debt, he said.

The tax treatment depends on whether it’s a business loan. In Gerard’s case, Koss thinks it’s likely it’s a nonbusiness loan even though it was partly for business reasons. “A loan is only considered a business bad debt if the lender made the loan as part of the regular operation of the lender’s business,” he said. “If the lender is an individual who is not operating a business, then it is a nonbusiness bad debt.”

Taxwise, it would be similar to buying bonds in a company that went bankrupt. “It is essentially an investment that went bad, and the value of the investment is now zero,” Koss said. It is treated as a capital loss, which means you can deduct only $3,000 of the loss, unless you have a capital gain to offset. The remaining amount is carried forward to the following year. You can deduct up to $3,000 each year until it is used up.

The first step is to determine whether the debt is worthless. “If you are certain that you could not collect the money even if you filed a lawsuit and won, then the debt may be worthless. I recommend that you consult a professional tax adviser for assistance with the preparation of your tax return,” Koss said.

Making loans to family and friends can be a complex business. Though it can and sometimes does go well, it also has the potential to harm relationships if repayment doesn’t go the way people expected. Many experts recommend against lending money you cannot afford to give. (Or at the very least, you should be able to afford to make it a gift so that repayment is not required to make your own budget work).

More from Credit.com

MONEY Autos

My New Car Is a Piece of Junk. Can I Return It to the Dealer?

one owner car return
Hal Bergman—Getty Images

There are better ways to deal with a car you don't want than bringing it back to the dealership.

There was a time when you loved your car — when you happily drove it home from the dealer. But that love has grown cold, and now you wish you’d never laid eyes on it. You are chained to it by a payment book, much as you wish you were not.

We’ve had readers ask us if they can just “give the keys back” and get a car that IS reliable — one that they’ll feel better about driving their kids around in. And while just returning the car sounds like the dream solution, it can come with as many unanticipated problems as the vehicle you’re looking to unload. Assuming you have no recourse under your state’s lemon law, or your situation doesn’t pertain to a dealership’s return policy — if it has one — returning the car can be tricky and could have credit implications. This is something you’ll want to consider, especially if you plan to lease or purchase another car once you give the other one back.

To start with, returning the vehicle to the dealer won’t erase your debt, even though it may feel to you as if you are simply returning it.

“Technically, if you give the car back it is the same as a repossession,” explained automotive finance expert Matt Briggs, co-founder and CEO of CreditJeeves.com. “Keep in mind you have a legal obligation to pay the terms of the loan and the car dealer is typically not the finance company who holds the loan (unless they are buy here pay here). Either way you cannot simply ‘give back’ the vehicle to dealer and walk away,” Briggs said in an email.

Because it would be considered a repossession, the exact same thing would happen as does with a traditional repossession. That is, the car would be sold at auction, and you would be responsible for the difference in what the car brought at auction and the amount you still owed on the car, plus expenses involved in this process (towing, storage, repossession, title and sale). So, if you leave the car at the dealership, you still owe the debt (possibly more than the clunker is worth), but you don’t have a vehicle.

If all that makes it sounds like it would be simpler and cheaper to just sell it yourself, that’s precisely what Briggs suggests: “Most repossession auctions the cars sell for a much lower price than the retail value, so you may end up owing more then you would if you sold it private party (using a website like AutoTrader, eBay or Cars.com) or if you traded it in on a different vehicle.”

As far as damage to your credit, a car repossession will stay on your credit report for seven years after the original account went delinquent, Experian says. (You can see how your debts affect you by getting your free credit report summary on Credit.com, which will give you an explanation of what factors influence your scores.)

There is a way, however, to force a dealer to “eat steel,” said Eugene Melchionnne, a Connecticut bankruptcy attorney and contributor to Credit.com, and that is by surrendering the car and discharging the debt in bankruptcy. He explained via email: “There is also a process for ‘cramming down’ the debt to the value of the car in bankruptcy and in a Chapter 13 case, you can spread the balance owed over an extended period of time,” he said in an email. “For example, if the car loan is for $20,000, but the car is worth $10,000, the loan can be reduced to $10,000 and if there are say, four years left to pay at $500/mo., the payments to can be spread out to a maximum of five years on the lowered balance resulting in $330+ a month savings.”

Still, for most of us, simply driving the car back to the dealership and handing over the keys, however tempting, is not a workable strategy. So after you dig yourself out of this mess, do as much due diligence as possible before you buy next time.

“Bottom line,” Briggs said, “you have a legal obligation to pay the car loan in full so make sure you are getting a good deal before you sign on the dotted line.”

More from Credit.com

This article originally appeared on Credit.com.

MONEY mortgages

The Surprising Way to Save $190K on a Mortgage

house on chain
Peter Dazeley—Getty Images

A 30-year fixed-rate mortgage is the standard in the industry right now, but with interest rates so low, is the 15-year loan a better option?

One of the best ways to eliminate your mortgage debt is moving into a 15-year fixed-rate loan. With the average spread a full 1% compared to its 30-year mortgage counterpart, a 15-year mortgage can provide an increased rate of acceleration in paying off the biggest obligation of your life.

Can You Pull It Off?

In most cases, you’re going to need strong income for an approval. How much income? The old 2:1 rule applies. Switching from a 30-year mortgage to a 15-year fixed-rate loan means you’ll pay down the loan in half the amount of time, but it effectively doubles up your payment for each month of the 180-month term. Your income must support all the carrying costs associated with your home including the principal and interest payment, taxes, insurance, (private mortgage insurance, only if applicable) and any other associated carrying cost. In addition, your income will also need to support all the other consumer obligations you might have as well including cars, boats, installment loans, personal loans and any other credit obligations that contain a monthly payment.

The attractiveness of a 15-year mortgage in today’s interest rate environment has mass appeal. The 1% spread in interest rate between the 30-year mortgage and a 15-year mortgage is absolutely real and for many, the thought of being mortgage-free can be very tempting. Consider today’s average 30-year mortgage rate of around 4% on a loan of $400,000 — that’s $287,487 in interest paid over 360 months. Comparing that to a 15-year mortgage over 180 months, you’ll pay a mere $97,218 in interest. That’s a shattering savings of $190,268 in interest, but there’s a catch — your monthly mortgage payment is going to be significantly higher.

Here’s how it breaks down. The 30-year mortgage in our case study pencils out to a $1,909 monthly payment covering principal and interest. Weigh that against the 15-year version of that loan, which comes to $2,762 a month in principal and interest, totaling $853 more per month, but going to principal. This is why the income piece makes or breaks the 15-year deal. Independent of your other carrying costs and other credit obligations, you’ll need to be able to show an income of $4,242 a month to offset just a principled interest payment on the 30-year fixed-rate mortgage. Alternatively, to offset the principled interest payment on the 15-year mortgage, you would need and income of $6,137 per month, essentially $1,895 per month more in income just to be able to pay off your debt faster. As you can see, income is a large driver of debt reduction potential.

What to Do If Your Income Isn’t High Enough

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

Lenders are going to consider the minimum payments you have on all other credit obligations in the following way. Take your total proposed new 15-year mortgage payment and add that number to the minimum payments on all of your consumer obligations and then take that number and divide it by 0.45. This is the income that you’ll need at minimum to offset a 15-year mortgage. Paying off debt can very easily reduce the amount of income you might need and/or the size of the loan you might need as there would be fewer consumer obligations handcuffing your income that could otherwise be used toward supporting a stable mortgage plan.

Can You Borrow Less?

Borrowing less money is a guaranteed way to keep a lid on your monthly outflow maintaining a healthy alignment with your income, housing and living expenses. Extra cash in the bank? If you have extra cash in the bank beyond your savings reserves that you don’t need for any immediate purpose, using these funds to reduce your mortgage amount could pencil very nicely in reducing the 15-year mortgage payment and interest expense paid over the life of the loan. The concept of the 15-year mortgage is “I’m going to have to hammer, bite, chew and claw my way through a higher mortgage payment in the short term in order for a brighter future.”

Can You Generate Cash?

If you can’t borrow less, generating cash to do so may open another door. Can you sell an asset such as stocks, or trade out of a money-market fund in order to generate the cash to rid yourself of debt faster? If yes, this is another avenue to explore.

You may also want to explore getting additional funds via selling another property. If you have another property that you’ve been planning to sell such as a previous home, any additional cash proceeds generated by selling that property (depending upon any indebtedness associated with that property) could allow you to borrow less when moving into a 15-year mortgage.

Are You an Ideal Match for a 15-Year Mortgage?

Consumers who are in a financial position to handle a higher loan payment while continuing to save money and grow their savings would be well-suited for a 15-year mortgage. The other school of thought is to refinance into a 30-year mortgage and then simply make a larger payment like you would on a 25-year, 20-year or 15-year mortgage every month. This is another fantastic way to save substantial interest over the term of the loan, since the larger-than-anticipated monthly payment you make to your lender will go to principal and you’ll owe less money in interest over the full life of the loan. As cash flow changes, so could the payments made to the loan servicer, as prepayment penalties are virtually non-existent on bank loans.

There is an important “catch” to taking out a 15-year mortgage — you also decrease your mortgage interest tax deduction benefit. However, if you don’t need the deduction in 15 years anyway, the additional deduction removal may not be beneficial (depending on your tax situation and future income potential).

If your income is poised to rise in the future and/or your debt is planned to decrease and you want to have comfort in knowing by the time your small kids are teenagers that you’ll be mortgage free, then a 15-year loan could be a smart move. And when you’re mortgage is paid off, you’ll have control of all of your income again as well.

Proximity to retirement is another factor borrowers should consider when carrying a mortgage into retirement isn’t ideal. These consumers might opt to move into a faster mortgage payoff plan than someone buying the house for the first time.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well. You can check your credit scores for free on Credit.com every month, and you can get your free annual credit reports at AnnualCreditReport.com too.

More from Credit.com

This article originally appeared on Credit.com.

MONEY College

Former Corinthian College Students Won’t Pay Their Debt

Students of the now-defunct Corinthian College are refusing to pay off their student loans, saying that the for-profit college left them saddled with unreasonable debt.

MONEY Credit

A Creditor Took Me to Court. Now What?

court gavel
Oliver Cleve—Getty Images

A creditor filed a judgment against you but you weren't notified—now it's ruining your credit. What can you do?

Sometimes, the first time you find out you’ve had a judgment entered against you is when the judgment-holder seeks to enforce it. While due process is supposed to notify all parties to a court action ahead of time, there are many reasons why you may not have gotten that notice. You may have moved from the address where notice was delivered and it did not follow you to your new address. Or someone might have received your notice and simply tossed it away. Or you got the notice, but did not fully understand what it meant.

Looking at your credit report regularly is one way to see if there are any judgments against you. Judgments are listed in the public record section of the credit report. However, credit reports are not always completely accurate or up to date.

If there is any doubt in your mind, you should contact the court where you think the judgment might have been entered. Many courts have online access where you can check your name without leaving your seat. Others require an in-person visit to view the public record of judgments. Here’s a list of the various courts and what can be done to access them. And here’s what you need to know about dealing with a judgment.

When You Didn’t Know About the Lawsuit or Judgment

There are various scenarios that allow you to ask a court to reopen a judgment — for example, if you weren’t notified or served the original papers. However, as the judgment in the case gets older, the likelihood of succeeding under that argument goes down dramatically. The rules and time periods vary greatly from state to state. This is one of those times when it is best to consult with a qualified lawyer who knows the court rule and laws on the subject.

When the Judgment Is From Another State or a Federal Court

Federal court judgments are enforceable in every state, as the jurisdiction of a federal court is national. However, because the required amounts of a federal lawsuit are so much larger, you probably have a greater problem than just the entry of a judgment. You would know if you are being sued in federal court.

State court judgments, however, do not have power beyond that state’s borders. In order to enforce an out-of-state judgment against you in your home state, the judgment has to be domesticated, or registered in the courts of your home state. The requirements for that can vary from state to state and the process for the creditor can be quite expensive and time-consuming. It is not common for out-of-state judgments to be enforced in another state because the process can be daunting and expensive. But the record of that judgment will likely appear on your credit report.

Can a Judgment Be Enforced If You’ve Been Paying?

Many judgments will contain an order of payments. The court’s rules or state statutes may require that you be allowed to pay the judgment in installments. But an installment order does not carry a requirement that you receive a periodic statement like a credit card or loan. Some installment payment orders may require weekly, not monthly, payments. There is usually no grace period on the due dates for payment and no provision for changing the payment terms unless the court orders it. So if you are a day late in making your payment, or even a penny short in paying the full amount required, the judgment creditor may be entitled to ask the court for an order enforcing the judgment. This can mean a wage garnishment, a bank account attachment or a lien on your house.

Even though you may have been making payments on the account to the original creditor, it does not mean that you have been making the payment in the proper amount or paying on time. Or you may have been sending money to the wrong party. The account may have been sold or transferred and the place where you are sending money is the wrong place, which can be money thrown out of the window. Always make sure you know who you are paying, pay the required amount and pay on time. Your contract may require that you pay off the entire balance you owe at once if you default in your payment terms in place, amount or time.

Judgments Can Be Altered

Even if the judgment is final and cannot be reopened, it does not mean that the terms of the judgment cannot be changed. For instance, if the judgment does not allow installment payments, terms for installment payments may be added. Or if the payments are beyond your ability to pay, then they may be lowered to fit your income. Be aware however, since judgments typically allow for interest on the debt to continue running at some rate, too small a payment may be just throwing money away since it never covers the accruing interest. If you have insufficient income or assets to pay a judgment, then you may want to explore bankruptcy as an option. With certain limited exceptions, judgments can be discharged in bankruptcy.

Judgments Can Be Sold

Much like any other account receivable, a judgment can be sold by a creditor to another entity. When judgments are sold, the transfer must be recorded on the court docket or it is not valid. Before you make payments on a judgment, make sure that the payments are going to the right person. That is why it is so important to obtain from the court file the name and address of the judgment creditor. If you pay the wrong person, you won’t get credit for those payments.

Document Your Payments On the Judgment

It is vitally important to keep good records of every payment you make on the judgment. Accounting errors occur and you want to make sure that you get credit for every payment you make. Since interest may still be running on the debt and there will be additional amounts added to your balance for court costs and attorney fees, you must keep track of the balances and the payments. It’s not a bad idea to periodically contact the holder of the judgment to determine your balance if you are paying on it to make sure your numbers jibe with theirs.

Don’t Ignore a Judgment Once You’re Aware of It

Judgments do not have a short lifespan. A judgment in Connecticut, for example, is good for 20 years, and it does not end there. Before the judgment expires, it can be renewed for another 20 years. For many people, 40 years is the length of an adult working life. Again, the duration of a judgment varies greatly from state to state, so consult with an attorney and do not ignore it. While a judgment might stay on your credit report for seven years, it may remain effective long beyond that date. Like zombie debt, a judgment may come back to life when you least expect it.

When You Pay the Judgment in Full, Get a Release

Unless you are making your payments directly to the court, the judge has no way of knowing that you have paid the judgment off. When a judgment is paid in full, the person holding the judgment should file a satisfaction of judgment with the court to show that it is paid in full. When making your final payment, not only should you document that it is your final payment, but you should request a copy of that satisfaction of judgment document and make sure that a copy is filed with the court. Do not assume that anyone else will take this step.

Similarly, if a lien has been filed on any property to secure the judgment payments, you will want an original of a release of judgment so that you can be sure that it is filed with the appropriate authorities. Some states require a filing in the land records in your town or county clerk’s office or with the Secretary of State where the property is located. Again, without proper documentation, the records offices will have no knowledge that the judgment is paid. Although bankruptcy can discharge most judgments, you must take additional steps to get a release of the lien in a bankruptcy case so the record is clear that there is no further claim against your property.

Finally…

When the judgment is paid in full, be sure to get a fresh copy of your credit report to determine that it is being reported on your credit report as paid. Nothing will hurt your creditworthiness more than to have a credit report showing that you have a judgment against you that remains unpaid.

You can get your free annual credit reports on AnnualCreditReport.com. You can also watch for changes by getting your free credit score every month on Credit.com.

MONEY Ask the Expert

One of the Most Important Retirement Decisions You Need to Make

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Robert A. Di Ieso, Jr.

Q: My wife is 62 and I am 65. She has a small pension of $21,000 and can take it as a lump sum or an annuity of $154 a month. We also have a credit card with $17,000 at 8% and two car loans of $17,000 at 8%. Should we use the money to pay off debt or roll it into an IRA? – Joe Skovira, Cheshire, Conn.

A: Choosing the right way to handle a pension payout is critical to your retirement success. It’s all too tempting to use that money to pay off debts, when your other sources of cash run short. But raiding your pension could be a mistake. “You should pay off the debt but don’t sacrifice the pension to do it,” says Rich Paul, a certified financial planner and president of Richard W. Paul & Associates.

Even though the pension income is small, that $154 monthly check adds up $1,800 a year, or a 9% payout. It would be hard to generate that consistent income on your own in an IRA. “Those are guaranteed dollars that you’ll receive for the rest of your life—you can’t get that kind of return with conservative investments,” says Paul.

There are also taxes to consider. If you take the pension as a lump sum, and don’t roll it over into an IRA, you’ll likely owe capital gains or income taxes. Moreover, the income from that lump sum might push you into a higher tax bracket, further eroding its value.

As for your debts, they’re clearly a drain on your cash flow. So look for ways to free up cash to pay off those bills by cutting your spending. For strategies on getting on top of that debt, see here and here.

It also makes sense to prioritize your credit card debt over the car loans, says Paul. That way, if you ever need extra cash, you’ll have a bigger credit line to tap. You could even use the $154 to step up payments on the credit card.

“It all comes down to cash flow. You’ll feel a lot more comfortable in retirement with more guaranteed income and less debt,” says Paul.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Related:

Should I save or pay off debt?

What debts should I pay off first?

Should I take my pension as a lump sum or as monthly payments?

MONEY home financing

It Could Soon Be Easier to Get a Mortgage

Fannie Mae headquarters in Washington, DC
Kevin Lamarque—Reuters

The nation's largest mortgage firms plan to once again buy loans where the borrowers put as little as 3% down.

Perhaps you thought the days of putting little money down for a home were gone. Well, not so fast. On Monday the CEO of Fannie Mae, Timothy Mayopoulos, announced that the housing giant planned to once again buy loans for which the borrowers put as little as 3% down. Mayopoulos told the crowd gathered at the Mortgage Bankers Association conference in Las Vegas that Fannie, which along with Freddie Mac supports the bulk of the mortgage market today, is working to finalize the details of the offering and gain regulatory approval to proceed. “We want this business,” he said.

So far no details have been announced about what income or credit score requirements borrowers making such small down payments will need to meet the group’s standards. Mayopoulos said more information would be released in the coming weeks. Both Fannie and Freddie previously purchased loans with 3% down but had stopped in recent years. Today the firms usually require at least a 5% down payment on most loans.

Melvin Watt, director of the Federal Housing Finance Authority, which regulates the two government enterprises, said his group was working with them to develop “sensible and responsible guidelines” for the 3% loans, in an effort “to increase access for creditworthy but lower-wealth borrowers.” He cited “compensating factors” in evaluating such borrowers, though he didn’t say what those factors would be.

A 3% down payment is not exactly nonexistent today. The Federal Housing Administration has been offering mortgages with as little as 3.5% down for years. Traditionally, most borrowers were lower income, and the amount they could borrow was capped, but today even higher income folks use FHA loans to buy homes in expensive areas (loan limits vary by state but typically top out at $625,500). In recent years, these mortgages—which come with higher fees than traditional loans, as well as pricey mortgage insurance—have accounted for a larger than normal share of the market.

Now Fannie seems intent to grab some of that business. The low-down-payment loan, Mayopoulos promised, “will also be competitively priced, including against FHA execution.”

In a related move, FHFA’s Watt also announced that the agency is working to provide more details on when the housing giants can force a lender to buy back a loan that goes bad, which he hopes will encourage banks to loosen their lending standards. Over the past few years Fannie and Freddie have required lenders to buy back millions of dollars of bad loans, “sometimes for seemingly minor issues, such as missing a piece of paperwork,” said Keith Gumbinger, vice president at mortgage information publisher HSH.com.

“This clarification might allow lenders to look at riskier borrowers with less fear of having to buy these loans back in the future,” he said. He noted, though, that any changes are likely to be incremental: “It might let a few more borrowers in at the margin, but it won’t be like flipping a light switch where FICO scores down to 640 are now in.”

It’s important to note that Fannie and Freddie can’t force banks to lower their lending standards. In fact, most banks today require tougher standards than the government agencies impose, partially because they are fearful of having to buy back loans that go bad. For example, Fannie and Freddie will buy loans with FICO scores as low as 620, but most banks require at least a 660 or 680, Gumbinger said.

Similarly, lenders could always decide not to offer 3% down loans, even though Fannie and Freddie have agreed to eventually start buying them again. So it remains to be seen whether and how much the rule changes, when they are formally announced in the next few weeks, will ease the way for borrowers.

Read More About Getting a Mortgage in Money101:
How Much House Can I Afford?
What Mortgage Is Right for Me?
How Do I Get the Best Rate on a Mortgage?

MONEY Ask the Expert

Here’s One Good Reason To Borrow From Your 401(k)

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Robert A. Di Ieso, Jr.

Q: Should I use my 401(k) for a down payment on a house?

A: Let’s start with the obvious. It’s rarely a good idea to borrow from your retirement plan.

One major drawback is that you’ll give up the returns that the money could have earned during the years you’re repaying the loan. Your home isn’t likely to give you the same investment return, and it’s difficult to tap real estate for income in retirement. There’s also a risk that you’ll lose your job, which would require you to pay back the loan, typically within 60 days, though home loans may have a longer repayment period.

Still, 401(k) borrowing has undeniable advantages. For starters, “they’re easy loans to get,” says Atlanta financial planner Lee Baker. You don’t have to meet financial qualifications to borrow, and you can get the money quickly. Interest rates for these loans are generally low—typically a percentage point or so above prime, which was recently 3.25%. Another big plus is that you pay yourself back, since the rules generally require you to fully repay within five years; 10 years if you buy a house. (Otherwise, the amount will be taxable, plus you will pay a penalty if you’re under 59 1/2.) So you eventually do replace the money with interest. Be aware, most plans limit your borrowing to $50,000 or 50% of your account balance, whichever is less.

Given how easy it is to get a 401(k) loan, it’s no wonder many workers tap their plans for home buying, especially Millennials. About 10% of home buyers borrow from their 401(k) and another 4% use funds from IRAs, according to the National Association of Realtors. And overall some 17% of Millennials report borrowing from their company plan, according to a 2014 Ameriprise study, Financial Tradeoffs. “It is where they have accumulated most of their savings,” says Baker.

All that said, when it comes to buying a home, a 401(k) loan can make sense. If you can put together enough cash for a 20% down payment, you may able to avoid avoid mortgage insurance, which can your lower monthly bill. And with interest rates still low, having a down payment now can enable you lock in a good rate compared with waiting till you have more money when mortgage rates may be higher.

If you go this route, though, take a close look at your financial resources both inside and outside your plan. Will you have to tap all your savings, leaving you vulnerable if you have a financial emergency? Do you have enough cash flow to meet your monthly payment and pay the loan? Is your job relatively secure or do you have to worry about a layoff that will trigger the automatic repayment provision?

And if you borrow, don’t forget to keep saving. A common mistake people make is halting regular contributions during the pay back period, which puts you further behind your retirement goals. At the very least, says Baker, contribute enough to get your employer match.

More on Home Buying:

Should I Pay Off Loans or Save for a Down Payment?

Single and Thinking of Buying a Home? Here’s Some Advice

“At 27, I’m the First of My Friends to Own a Home:” A Buyer’s Story

MONEY family money

How to Ask a Pal or Relative to Pay You Back

As far as unpleasant tasks go, asking a relative or friend to repay a loan ranks up there with getting your wisdom teeth pulled or spending a weekend alone with your in-laws.

The best way to avoid this awkward conversation?

“Don’t lend money to friends in the first place,” says Peter Post, director of the Emily Post Institute. Of course, that advice isn’t going to help if you’ve already ponied up the cash. Here’s what will.

THE GROUND RULES

Talk in person. Don’t text, email, or call; faceless communications are too easily misread. Instead, invite your friend or family member to chat over coffee or a beer so the atmosphere is more relaxed, says Randy Cohen, author of Be Good: How to Navigate the Ethics of Everything.

Let the relationship guide you. Decide what’s more important: getting your money back or staying on good terms with the borrower. If you care more about the person than the cash and you’re in a position to do so, you may be better off forgiving the debt.

YOUR BEST APPROACH

1. Opening gambit. “I was happy to lend you the money when you needed it. That’s what friends do.”

The strategy: You’re gently reminding your pal that you came through when he or she was in trouble.

“Putting it this way shows you sympathize with your friend,” says Cohen. “Chances are, the person feels bad about not paying you back. An understanding tone decreases your chances of a hostile response.”

2. Be direct. “When do you think you will be able to pay back the $500 I lent you?”

The strategy: Hinting will get you nowhere, says Philip Galanes, author of Social Q’s: How to Survive the Quirks, Quandaries, and Quagmires of Today, because the person may misunderstand (perhaps willfully) what you’re asking.

Like ripping off a Band-Aid, the process will be less painful if you do it quickly and directly.

Start off nicely; getting angry is more likely to result in the borrower pushing back than if you stay calm.

“There’s no sense in starting Defcon 3,” Galanes says.

3. Add urgency, as needed. “We’re going to get hit with some really big tuition bills soon and could really use that money.”

The strategy: Of course, you don’t need to justify asking for your money back, but it can be helpful to cite a pressing reason — as long as it’s true.

“Evoking a specific thing makes repayment seem more like a necessity than simply an option,” says Cohen.

4. Provide a deadline. “I’d really like to get the money back before the end of June.”

The strategy: Specifying a schedule for payback is crucial. Otherwise, the loan may hang out there indefinitely, even if the borrower has given lip service to paying you back — and you’ll just have to revisit the conversation at a later date.

5. Offer flexibility. “Would it be easier for you to pay me back over time, say, $100 a month?”

The strategy: If the borrower pushes back or you know he will have a tough time coming up with the cash, etiquette expert Cynthia Lett suggests breaking repayment into smaller chunks or reaching another compromise.

After all, you must really care about this person; otherwise, you would never have lent him the money.

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