Financial planning experts share easy ways you can trick yourself into saving more money.
Q: “What’s the fastest or easiest way to rebuild my credit? I want to buy a house, and I can’t get approved.” —Tracy, Fargo, N.D.
A: “The bad news is you really do need a good score to get a home loan today,” says Keith Gumbinger, vice president of HSH.com, a website that tracks the mortgage and consumer loan industry.
If your credit score is below 700, you’ll be hard pressed to find a lender willing to give you a conventional home loan, and if you do, the interest rate and fees are likely to be far too high. So you may want to take the time to rebuild your credit before you shop for a home.
“Before you decide you should you jump in, maybe you want to step back and look at the circumstances that lead to your current credit score,” says Gumbinger. “Look at your bills. You don’t want to put yourself in a position where you could lose the home. It’s expensive to maintain a mortgage.”
To boost your credit score, first get a free copy of each of your three credit reports from annualcreditreport.com. Scan them for mistakes that could be dragging down your score and fix them. After that, repairing your credit comes down to having credit and making your payments on time.
“You can’t improve your score if you don’t have debts, so you will need a credit card or new credit line where your payment history can be recorded,”says Jack M. Guttentag, a finance professor at the University of Pennsylvania’s Wharton School and founder of The Mortgage Professor website.
You also need to avoid maxing out the cards you have. “If you have a credit card that allows you to draw up to $10,000, having a $9,500 balance will hurt you,” says Guttentag. “Having a $2,000 balance will help you.” For more on improving your credit score, check out our Money 101 guide.
Your other option if you want buy now is to get a loan through a government program designed to help less creditworthy borrowers.
The Federal Housing Administration backs loans that have more relaxed qualification standards (including down payments as low as 3.5%), and the Department of Veterans Affairs has a program that helps members of the military borrow. If you happen to live in certain rural areas, you might qualify for a U.S. Department of Agriculture lending program designed to entice people to settle in less-developed parts of the country.
For a full FHA loan, the agency says you typically must have a minimum credit score of 580. With a 10% down payment, the FHA will insure loans for borrowers with scores between 500 and 579 (below 500, you you typically won’t qualify). The VA and USDA do not set minimum credit standards.
However, these minimums can be misleading. The private lenders who actually make these loans typically have higher standards. Most FHA, VA, and USDA-approved lenders look for credit scores between 620 and 660, and your best chance for getting approved will be to have a score at the high end or above this range, says Gumbinger. If you’re close, being able to show a healthy bank balance or a monthly rent bill that’s higher than your future mortgage payment may help.
Wells Fargo, the country’s biggest mortgage lender, said earlier this year that it would accept credit scores of 600, down from 640, for FHA and VA loans. Bank of America said that it may also accept certain cases with credit scores in the low-600 range, depending on that borrower’s ability to repay the loan.
Keep in mind that these loans carry additional fees. FHA loans require an upfront mortgage insurance premium of 1.75% of the loan value, as well as an annual premium based on your loan-to-value ratio, loan size, and length of the loan. USDA loans carry an upfront premium of 2% and an annual fee. VA loans have a funding fee that varies based on factors such as the type of loan and the size of the down payment.
Even if you qualify for one of these loans, Gumbinger cautions about getting in over your head. These programs are best if your credit problems are due to a job loss or medical bill. “If this was a one-time event and you’re getting past it, then no problem,” he says. “But if you have perpetual problems that are affecting your credit score, maybe you’re not well-aligned for home ownership.”
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Some investors are impatient for the Fed to raise interest rates. They may want to be a little more patient after hearing what happened to Sweden.
If you’re a saver, or if bonds make up a sizable portion of your portfolio, chances are you’re not the biggest fan of the Federal Reserve these days.
That’s because ever since the financial crisis, the nation’s central bank has kept short-term interest rates at practically zero, meaning your savings accounts and bonds are yielding next to nothing. The Fed has also added trillions of dollars to its balance sheet by buying up longer-term bonds and other assets in an effort to lower long-term interest rates.
Thanks to some positive economic news — like the recent jobs report — lots of people (investors, not workers) think the Fed has done enough to get the economy on its feet and worry inflation could spike if monetary policy stays “loose,” as Dallas Fed President Richard Fisher recently put it.
If you want to know why the argument Fisher and other inflation hawks are pushing hasn’t carried the day, you may want to look to Sweden.
Like most developed nations, Sweden fell into a recession in the global financial crisis. But unlike its counterparts, it rebounded rather quickly. Or at least, that’s how it looked.
As Neil Irwin wrote in the Washington Post back in 2011, “unlike other countries, (Sweden) is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe.”
Even though the Swedish economy showed few signs of inflation and still suffered from relatively high unemployment, central bankers in Stockholm worried that low interest rates over time would lead to a real estate bubble. So board members of the Riksbank, Sweden’s central bank, decided to raise interest rates (from 0.25% to eventually 2%) believing that the threat posed by asset bubbles (housing) inflated by easy money outweighed the negative side effects caused by tightening the spigot in a depressed economy.
What happened? Well…
Per Nobel Prize-winning economist Paul Krugman in the New York Times:
“Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”
And deflation is a particularly nasty sort of business. When deflation hits, the real amount of money that you owe increases since the value of that debt is now larger than it was when you incurred it.
It also takes time to wring deflation out of the economy. Indeed, Swedish prices have floated around 0% for a while now, despite the Riksbank’s inflation goal of 2%. Plus, as former Riksbank board member Lars E. O. Svensson notes, “Lower inflation than anticipated in wage negotiations leads to higher real wages than anticipated. This in turns leads to many people without safe jobs losing their jobs and becoming unemployed.” Svensson, it should be noted, opposed the rate hike.
Moreover, economic growth has stagnated. After growing so strongly in 2010, Sweden’s gross domestic product began expanding more slowly in recent years and contracted in the first quarter of 2014 by 0.1% thanks in large part to falling exports.
As a result, Sweden reversed policy at the end of 2011 and started to pare its interest rate. The central bank recently cut the so-called “repo” rate by half a percentage point to 0.25%, more than analysts estimated. The hope is that out-and-out deflation will be avoided.
So the next time you’re inclined to ask the heavens why rates in America are still so low, remember Sweden and the scourge of deflation. Ask yourself if you want to take the risk that your debts (think mortgage) will become even more onerous.
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Q: Should I use savings to pay off car loans or make a down payment? — Carmella F., Pittsburgh
A: The first line of business is to make sure you have enough savings for an emergency fund, a minimum of four months if both spouses are working, six months if one isn’t, says Pittsburgh financial planner Diane Pearson.
Paying off the $30,000 in two car loans you told us you have would deplete your savings. Not only does that leave you vulnerable to unforeseen expenses, plowing money into assets that only lose value as they age doesn’t make sense, says Pearson. When applying for a mortgage, banks would prefer to see $30,000 in savings plus car loans over no savings and vehicles owned free and clear.
Mortgage rates declined slightly over the past week.
Average rates notched down slightly to 4.14% with an average of 0.5 points, down from last week’s 4.17%, according to Freddie Mac. A year ago, rates on 30-year mortgages were 4.46%.
The rate on an average 15-year mortgage was 3.22% with 0.5 points, down from 3.50% a year ago. For adjustable rate mortgages, a five-year ARM this week averaged 2.98% with 0.3 points and a one-year ARM averaged 2.40% with 0.4 points.