Down Payment Assistance Programs

When is Private Mortgage Insurance Required?

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Private Mortgage Insurance, or PMI, is an insurance that protects conventional lenders. In other words, if you take out a Fannie Mae or Freddie Mac loan, you may pay this insurance. It only applies to borrowers that put less than 20% down on their home, though.

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If you qualify for conventional financing with a down payment less than 20%, you’ll pay PMI, which is a percentage of your loan amount. The exact amount you pay depends on your credit score and your loan-to-value ratio.

Typically, the less money you put down, the more insurance you will pay. The same is true with your credit score. The lower your credit score is, the more insurance you will have to pay.

What is Private Mortgage Insurance?

PMI or Private Mortgage Insurance is a policy that covers the lender – not you. So even though you pay the premiums, it’s insurance to protect the lender. Because the lender takes a risk giving you a mortgage with less than a 20% down payment, the insurance is required. This gives the lender a little relief should you default on the loan.

How Much is PMI?

As we stated above, the amount you pay will vary. On average, though, borrowers pay 0.3% to 1.5% of their loan amount annually. The lender will charge you 1/12th of the annual amount with each mortgage payment. This figure gets included in your debt ratio to help lenders determine if you still qualify for the loan.

Can You Cancel PMI?

There are several ways you can get out of paying PMI. At the onset of the loan, though, there is no way around it. If you put less than 20% down on a conventional loan, you must pay the insurance.

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Moving forward, though, you may be able to get out of paying the insurance for the long-term using one of the following methods:

  • Pay your principal down faster. If you make just the minimum mortgage payments required, you will stick to the standard PMI schedule as it shows on your amortization schedule. If you make extra payments towards the principal, though, you may knock the principal down faster. This means you’ll hit 80% LTV faster, which means quicker elimination of the PMI.
  • Keep track of your home’s appreciation. If you notice homes in the area are selling for more than what you thought your home’s value was, consult with a professional. An appraiser will be able to tell you if your home appreciated enough to help you eliminate PMI. If it did, you can pay for a professional appraisal and petition the lender for the elimination of the PMI.
  • Make home improvements that increase your home’s value. If you plan to renovate your home, make improvements that will increase your home’s value. If it increases enough and you pay the principal down far enough, you may see 80% LTV sooner rather than later, allowing you to remove PMI.

PMI is Different than FHA MIP

Don’t confuse conventional Private Mortgage Insurance with the FHA’s Mortgage Insurance Premium. The FHA insurance is government-backed and required for the life of the loan on every FHA loan. With the FHA loan, it doesn’t matter how much you put down on the home. The minimum requirement is 3.5% of the home’s purchase price. If you put down more, it doesn’t help your MIP. You pay the same amount as every other FHA borrower, which right now equals 0.85% of your loan amount.

The only way to get out of FHA MIP is to refinance the loan into a conventional loan. If you do this, though, it’s best to wait until you owe less than 80% of the home’s value. This way you won’t be stuck paying PMI too and you can start fresh on your conventional loan.

PMI does offer some benefits, even though it’s another charge on your mortgage payment. Without PMI, you might not be able to get a conventional loan with less than 20% down on a home. This makes the guidelines a little more flexible and conventional loan programs more accommodating.

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What’s the Difference Between Owner’s and Lender’s Title Insurance?

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When you buy a home, you have to take out title insurance, or at least you do if you borrow money to buy the home. Lenders require a policy that covers their interests in the property should someone try to stake a claim to the property after you close on it. Did you know that there’s also an owner’s title insurance policy? Lenders don’t require this insurance, but it’s highly recommended for all buyers, even those that pay cash for the home.

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What is Title Insurance?

When you buy a home, a title company runs a search on the home’s records. They look as far back as they can to determine that the home legally changed hands as many times as it did. They also look for any outstanding liens on the home that don’t pertain to the mortgage.

After the title search, the title company will issue title insurance. The insurance covers either the lender or the owner against any defects in the title that may have been missed. Both lender and owner’s title insurance have a one-time premium that you pay at the closing.

What is Lender’s Title Insurance?

Lender’s title insurance, as the name suggests, protects the lender. You must pay for this premium at the closing. It doesn’t benefit you in any way; it only covers the lender up to the amount of the mortgage. This way if someone comes in and stakes claim on the home after you bought it, the lender has insurance coverage to cover legal fees and any potential losses.

Lenders title insurance stays in effect for the entire loan term. If you sell the house or refinance the loan, the current lender’s title insurance becomes null and void. You’ll have to purchase new title insurance for the new lender.

What is Owner’s Title Insurance?

You can buy owner’s title insurance for the amount you paid for the home. The owner’s policy protects you against lawsuits or other issues that affect your homeownership. Some of the most common issues include:

  • Errors in the deed
  • Mistakes in recording
  • Chain of title issues
  • Fraud or forgery
  • Undisclosed heirs

If there is a lawsuit regarding homeownership, you are the first target, which is why securing an owner’s policy is crucial. It will protect you financially from a lawsuit as well as help you cover the legal fees.

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Are Both Lenders and Owner’s Policies Required?

Only lender’s title insurance is a requirement if you take out a loan. if you pay cash, you don’t have to take out any title insurance. However, owner’s title insurance is highly recommended whether you have a mortgage or not.

The owner’s policy protects your investment in the home. This is especially important for cash buyers. If there is a large claim against the property and you lose all of your equity, you essentially lose your entire investment in the home.

Who Pays for Lender’s and Owner’s Insurance?

Each state and title companies within the state have different rules, however, in general, buyers pay the lender’s insurance policy and sellers pay the owner’s policy. Of course, buyers can pay for both policies and buyers can get seller assistance with a majority of their closing costs, essentially passing the buck to the seller.

Does Title Insurance Protect Against Liens?

Both owner’s and lender’s title insurance protect against liens. If the lien affects you financially or affects the home’s value, the insurance will protect you. For example, if there’s an unpaid tax lien on the home, the insurance would cover the financial aspect of the lien if the lien existed prior to the title search and was somehow missed.

Both lender’s and owner’s title insurance are important. They protect both the lender’s and your own interest in the property. Even the most thorough title search could miss something that may cause ownership or financial issue down the road.

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What are the Down Payment Gift Tax Consequences?

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The down payment is often the hardest part of the home buying process. It’s often the reason people continue to rent, rather than buy a property, because they don’t have enough money to put down on the home.

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Fortunately, many programs allow the use of gift funds. In other words, a family member, close friend, or employer may gift you money to put down on your home. Many people wonder about the tax implications of doing this. Does it affect you, the donor, or neither?

Accepting Gift Funds

As the recipient of gift funds, you’re off the hook when it comes to the IRS. They don’t tax the money because the donor already paid taxes on it. The money is a gift, not money you earned for doing something.

Of course, this must be documented so that the IRS knows it is a gift. Fortunately, lenders require this too. The donor must write a letter that states the money is a gift, the reason for the gift, and the amount provided. As long as the donor puts a statement in the letter that this money is a gift, you don’t have to worry about the taxes on your end.

Giving the Gift Funds

The donor may or may not have tax implications for giving you money. It depends on the circumstances. The important thing to know is that the donor probably won’t have to pay taxes this year or the year they gift you the money. Here’s why.

Each person has a lifetime amount they can gift without tax implications. That lifetime cap is $11.4 million right now. Remember, this is over an entire lifetime. On top of the lifetime cap, each person has a $15,000 exclusion per person. What this means is that the first $15,000 that you gift to any one person won’t count toward your lifetime cap and you won’t have to worry about paying taxes on it.

Here’s an example:

Your dad agrees to help you with your down payment. He offers to give you $15,000. The lender approves it, so you accept it. Your dad doesn’t have to pay any taxes on the gift he gave you and it doesn’t decrease his lifetime cap because it’s not over $15,000.

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Now if your dad gave you $25,000 for your down payment it would look a little different. Since the $25,000 is more than $15,000, the $10,000 difference would count against his lifetime cap. Now obviously he still has a long way to go before he meets the cap, but it’s worth knowing that it decreases the cap.

Married Couples and Gifts

The maximum gift limit applies separately to married couples. In other words, the gift must be in one spouse’s name or the other – not both. This can work to your advantage. You can split the gifts if the total amount puts either of you over the $15,000 limit. For example, a $30,000 gift could be $15,000 from your dad and $15,000 from your mom. This keeps them exempt from the taxation while staying within the law.

Filing Taxes as a Donor

Keep in mind that even if a donor doesn’t owe taxes for gift funds, he or she may still have to file the proper tax forms. Donors must complete IRS Form 709 – US Gift Tax Return. The form must be completed in order to keep track of the gifts provided that affects your lifetime maximum. You must file the return with your standard 1040 by April 15 (October 15 if you extend).

Handling Gift Funds with Your Lender

Aside from the tax implications, you as the recipient must know what your lender requires. Don’t accept gift funds without first talking to your lender. Find out what they need in regards to proof of the gift. A gift letter is a given – all loan programs require that, but what else do they need? Many lenders require a paper trail, ensuring the money belongs to the donor and isn’t a loan somewhere down the line that affects your debt ratio and your mortgage eligibility.

Lenders will tell you how to handle the disbursement of funds and what proof they need that the transaction took place. Working closely with your lender and your donor’s tax advisor will have the best outcome. Everyone will come out of the process with the end goal met – helping you to buy a home.

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The Essentials New Homeowners Must Buy

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Before you close on your new home purchase, you should know the things you need to buy once you get into your home. All too often, new homeowners focus on the closing costs and down payment, not realizing the vast number of items they need to buy once they are in the home.

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So what do you need to buy when you move into your new home? Check out our list of essentials below so that you can best prepare yourself financially for your new home purchase.

New Locks

Whether you buy an existing home or a newly constructed home, you’ll want to change the locks. You don’t know who has keys to the existing locks and it’s not worth taking a chance. New locks and keys are fairly affordable, especially if you go to your local hardware store, but you can also call a professional locksmith to come take care of it for you.

Yard Tools

If you lived in a condo, townhome or apartment before, you probably don’t own lawn tools. At the very least, you’ll need a lawnmower and weed whacker. If you live in an area that it gets cold and snows, you’ll also need a shovel and/or a snow blower. Depending on your level of gardening, you may want to stock up gardening tools too.

A Basic Toolbox

As a new homeowner, you’ll need tools to make basic repairs. Even if you aren’t super handy, there will be a time you’ll want a hammer, screw driver, and wrench. Head to your local hardware store and ask about basic toolboxes – many stores have ready-made tool boxes for people starting out just like you.

Security System

Even if you live in the most affluent area, a security system may be necessary. Not only does it protect your house, but it may give you a sense of peace. Even a basic security system can deter a burglar for fear of being caught.

Smoke Detectors

Don’t rely on the effectiveness of the existing smoke detectors or even carbon monoxide detectors. Consider replacing all of them when you move into the home, unless it’s new construction. Also, make sure there is enough smoke detectors throughout the house. If there isn’t one in every bedroom and strategically placed throughout the first level, add more in order to enhance your level of safety in the home.

Window Coverings

Unless the previous homeowner left all of the window coverings, you may find the home quite open when you walk into as a homeowner. While you can buy temporary (paper) blinds from the local hardware store, they are temporary. Eventually you’ll want ‘real’ window treatments whether blinds, shades or curtains. At the very least, find window coverings for the most prominent windows, such as bedroom windows or any windows on the first floor that give
passerby a full view of your home.

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Cleaning Essentials

Whether you buy a new or used house, trust us, it will need a good cleaning. Even if someone cleaned it for you, there are certain things you’ll just want to clean yourself, not to mention the fact that you’ll need the cleaning supplies moving forward. Stock up on the essentials such as a broom, mop, and vacuum. You may also want a carpet cleaner, duster, large bucket, and plenty of cleaners including a general disinfectant.

Appliances

Make sure you know if the seller will leave any appliances for you. If not, think about the essentials that you need including:

  • Microwave
  • Stove
  • Oven
  • Refrigerator
  • Freezer
  • Washer
  • Dryer

You may also need smaller things, like light fixtures and fans. You’ll have a good idea of what you need after you sign the purchase contract and find out what the seller will or will not be leaving for you.

Miscellaneous Items

If this is your first house, you may also need essentials, such as:

  • Ladder
  • Step stool
  • Garden hose
  • New bedding
  • Furniture
  • Towels
  • Throw rugs
  • Fire extinguisher

New homeowners have plenty of items they need/want to buy after moving into a home. Keep these expenses in mind as you set your budget. Don’t make the mistake of spending all of your money on the closing costs and down payment,, leaving yourself with nothing to spend on the essentials you need once you actually become a homeowner.

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How Much Money Should you Save to Buy a House?

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You know you want to buy a house, congratulations! Now comes the hard part – saving money for the house. You know there are different loan programs out there, so just how much money do you need?

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We will help you understand the different requirements below.

Difference Between the Down Payment and Closing Costs

First, know that the down payment isn’t the only thing you need to think about when buying a house. You also have to pay closing costs. These are separate from the down payment. The closing costs can add up to as much as 3% – 5% of the loan amount.

Here’s an example. If you plan to put down 20% on a $200,000 home, you would need $40,000 just for the down payment. You would then need between an additional $6,000 to $10,000 for the closing costs. This means anywhere from $46,000 to $50,000 to close on the loan.

Do You Need a 20% Down Payment?

Now here’s the real kicker – you don’t need a 20% down payment. Many people believe this is the only way to get a loan, but it’s not. You can put down as little as 3.5% in some cases. In fact, some loans even allow you to get away with no down payment; you just pay the closing costs! So how do you know how much you need? It depends on the type of loan program you choose.

Conventional Loans

Conventional loans carry the stigma that you need a 20% down payment, but that’s not the case. Yes, you need 20% down if you don’t want to pay Private Mortgage Insurance, but you can still get conventional financing without that large down payment.

You’ll find conventional lenders that allow you to put down as little as 5% on the loan. This does mean you will have to pay PMI until you owe less than 80% of the home’s value, but it gives you the chance to get conventional financing with its low-interest rates and attractive terms.

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FHA Loans

If you don’t qualify for conventional financing because your credit score is too low or your debt ratio is too high, you may want to consider an FHA loan. With FHA loans, you only need a 3.5% down payment. The FHA allows lenders to provide you with 97.5% financing.

In exchange for the large loan amount, you’ll pay an upfront mortgage insurance fee as well as an annual mortgage insurance fee. The annual MIP is added to your mortgage payment each month. You pay 1/12th of the annual amount each month. FHA loans don’t offer the option to eliminate MIP after you owe less than 80% of the home’s value, though. You pay the MIP for the life of the loan, so keep that in mind.

VA Loans

If you are a veteran of the military, Reserves, or National Guard, you may not need a down payment on your home. If you are eligible for VA financing and qualify, you can borrow 100% of the home’s purchase price. VA loans only charge an upfront funding fee in exchange for offering this loan to you; they don’t make you pay for mortgage insurance.

It’s important to remember that even with a 0% down payment loan, like the VA loan, you’ll still need the money to pay the closing costs. Lenders will verify these funds just as they would if you were to put money down on the home.

USDA Loans

USDA loans are another government loan program that provides 100% financing on your home. The catch with USDA loans is that you must be a low to middle-income family in order to qualify. You also must buy a home in a ‘rural’ area. The USDA has loose guidelines regarding what is rural, so you may be surprised to find the areas that you can live and still get 100% financing. USDA loans do charge upfront and annual mortgage insurance, though, just like FHA loans do.

So how much money you should save to buy a house depends on your situation. Obviously, the more you save, the lower your mortgage payment will be. It’s also the less interest you will pay over the life of the loan. If you don’t have money to put down on the home and cover the closing costs, you may want to consider a government-backed loan, such as the USDA or FHA loan to help keep your costs down as low as possible.

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Do Home Renovation Loans Carry Higher Interest Rates?

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You want to renovate your home, but find yourself without the cash to do so right now. While you might be able to obtain a personal, unsecured loan, the interest rates on it might be higher than what you want to pay. Another option is a home renovation loan. You have several options when you already own the home. Lenders may offer you a home equity line of credit, a home equity loan, or a cash-out refinance.

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No matter which loan you choose, you’ll pay interest. How much interest you pay does depend on the loan, though.

Home Equity Line of Credit

The HELOC, or home equity line of credit, usually has the lowest interest rate. Don’t fall for this loan just yet, though. Yes, you do get a low introductory rate, but the rate is variable. In other words, it could change from month to month. There’s no way to predict your rate either.

The good thing about the HELOC is you only pay interest on the funds you use. Let’s say you take out a $50,000 HELOC, but you only draw $10,000 of the funds right away. You would then only pay interest on that $10,000. If you leave the remaining $40,000 untouched for the remainder of the term, you’ll never pay interest on those funds.

Home Equity Loan

The home equity loan works a little differently. With this loan, you don’t get to draw funds as you need them. Instead, you receive the funds as one lump sum. You can put the funds in a savings account or some other safe place to use them as you need.

Because you draw all of the funds at once, though, you start paying interest immediately on the full amount. The interest rate charged on this loan is usually slightly higher than the HELOC too. But, your chances of securing a fixed-rate are much higher on this loan. So you may pay a little more interest upfront, but you never have to worry about the rate changing.

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Cash-Out Refinance

Your final option is the cash-out refinance. With this loan, you refinance your first mortgage and take out a larger amount. Let’s say you owe $150,000 on your current mortgage, but your house is worth $300,000. You may be able to take out up to 80% of the home’s value with the cash-out refinance. In this case, that means an additional $90,000 for your home renovations.

Lenders take a risk when they give you a larger loan than your outstanding first mortgage. Because of this, the interest rate on the cash-out refinance is usually the highest amongst the three choices. This doesn’t make it the worst choice, but it does mean it will cost you more to keep this loan, especially if you take a 30-year term. The longer you borrow the money, the more interest you will pay on it over the life of the loan.

So do home renovation loans carry higher interest rates? It depends on the chosen loan as well as your qualifying factors. Just like any other loan, lenders base your interest rate on the risk you pose. If you have borderline credit scores and high debt ratios, you may end up paying higher interest rates. If, on the other hand, you have great credit and low debt ratios, lenders may give you access to lower interest rates even on a home renovation loan.

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Understanding Seasoned Funds

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Did you know that when you take out a mortgage, you can’t just use any money that you come across for your down payment or closing costs? Lenders want what’s called ‘seasoned funds.’ Just what does this mean and how does it affect you?

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Keep reading to find out.

What are Seasoned Funds?

Seasoned funds, in the eyes of the lender, are funds that have been in your bank account for at least 60 days. They are seasoned because they have been in your account for at least two months. That’s plenty of time for any loans, such as a second mortgage or a personal loan, to pop up on your credit report. Lenders can then put two and two together, figuring out that you borrowed the money for the down payment.

If the money sits in your account for at least 60 days and there aren’t any new loans on your credit report within that time, the money is considered sourced. The lender won’t ask for proof of origination. Instead, they consider it your money and you are free to use it for the down payment, closing costs, or qualifying purposes.

Why can’t you Just Add Money to Your Account?

It seems silly that you just can’t add money to your account, right? It’s your money after all. But, lenders need to protect themselves against default. They need to know that the money in your account belongs to you and you are free to spend it without the worry of repayment.

Even in situations, such as receiving a bonus from work, getting a tax refund, or receiving money for your wedding must be sourced or you must wait until the funds are in your account for at least 60 days. Fortunately, it’s easy to source money from most situations, such as:

  • Selling property
  • Selling a car
  • Selling stocks or bonds
  • A bonus from work
  • A tax refund

If you can provide proof of the funds, you can use them even when they aren’t yet seasoned. If you can’t provide proof of origination, wait at least 60 days or you risk loan denial.

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Lenders need to protect themselves. They need to know that you can easily make the mortgage payment. If you can’t source the money, they assume one of two things:

  • You borrowed the funds and must pay them back
  • You are just using the funds to inflate your account to get qualified

Obviously, inflating your account doesn’t work. You need the money for the actual down payment and closing costs. Borrowing funds affect your debt ratio and your ability to repay the mortgage, which could lead to a loan denial.

What Funds Don’t Need to be Seasoned?

While it all sounds complicated, there are some funds that you don’t have to worry about seasoning:

  • Automatic deductions – If you have a portion of your paycheck deducted every pay period and placed in a savings account, lenders can see the pattern. You don’t have to wait until all the money is in there for 60 days. The proof from the last several paychecks will be plenty to prove your intentions.
  • Retirement accounts – If you are a first-time homebuyer or you are of retirement age, you may take funds from your retirement account. Providing your retirement statement and your deposit ticket is plenty to prove where the funds came from. You don’t have to wait until you have the funds in hand for 60 days.
  • Gift funds – Family, close friends, employers, and charitable organizations may provide you with gift funds. This is money they give you rather than loan you. With proper documentation, you don’t have to worry about seasoning these funds.

Most loan programs allow the use of at least some gift funds. In order to accept them, seasoning or not, you need a gift letter and proof of the funds’ transfer. The gift letter must include:

  • Name and identifying information for the donor
  • Relationship between you and the donor
  • Amount of the gift
  • Reason for the gift including the property address
  • A statement that the money isn’t a loan and no repayment is expected
  • Date of the gift

Lenders use the gift letter along with proof of the deposit on your end to accept gift funds. If they are worried about where the funds came from, they may ask the donor for proof of funds’ origination. Providing the last two months of bank statements, investment statements, or the bill of sale of an asset will suffice.

If you are unsure about whether your funds are seasoned or not, talk to your loan officer. As a general rule, if the funds are in your account for 60 days, you’re good. Of course, every lender has its own rules. Some may still require proof of the funds’ origination if it’s an extra-large deposit. Carefully evaluate your steps before applying for a mortgage for the best results.

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Understanding Discount Points

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When you take out a mortgage, you have to lock in your interest rate. It’s a big decision as it affects your mortgage payment and the total cost of your loan. In the process, your lender may offer you the option to pay discount points. Before you jump at the chance, you should understand what they are and how they affect your loan.

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What are Discount Points?

A discount point is a fee you pay upfront (at the closing) to lower your interest rate. You may hear lenders say that you are ‘buying down your interest rate.’ You can consider it prepaid interest. Rather than the lender charging you a higher interest rate, they charge you a fee upfront. You pay the interest ahead of time in order to get the lower interest rate.

How Much do Discount Points Lower your Rate?

The question everyone wants to know is how much they will save. This does vary by lender. In general, lenders lower your interest rate by 0.25% for every point you pay. One point equals one percent of the loan amount. If you borrow $200,000, one point equals $2,000 and is paid at the closing.

Again, the exact amount varies by lender. Always ask the details about the discount points. Ask to see both interest rates – the rate without points and the rate with points so that you can make an informed decision. Some lenders may offer the option to pay a full point, half a point, or even one and a half points. Every situation is different.

What do Points do For You?

If you pay discount points, it lowers your interest rate for the life of the loan. As long as you keep the same loan, you keep that rate. You don’t have to pay any fees in the future, either. It’s a one-time fee. Lenders charge it to collect the interest they otherwise would have earned on your loan over its lifetime. The lender comes out the same in the end – it’s you that sees the difference.

Is it Worth it?

This is what you should really focus on – is it worth it to pay points? Looking at it from the surface, who wouldn’t want to lower their interest rate, right? But sometimes it doesn’t make sense to do so.

You should figure out your break-even point. This is the point that you pay back the money paid for the points and start reaping the savings of the lower interest rate. Here’s how it works.

Figure out how much you’ll save on your monthly payment by paying the discount points. Let’s say the difference in payments is $100. Next, determine the exact cost of the points. Let’s say the points cost you $2,000. It would take you 20 months to pay back the money paid for the points:

$2,000/$100 = 20 months

This is your break-even point or the point that you start reaping the savings of the new, lower payment. Use that break-even point to decide if paying the points is worth it.

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Think about how long you’ll be in the home. Let’s say you plan to move in three or four years. It may not make sense to pay the fee upfront just to save $100 for a few months or even two years. If you know that this is your ‘forever’ home and you don’t plan to refinance in the near future, paying the points makes sense. You’ll save $1,200 per year on the interest. Add that up over 10 or 20 years and you’ll save a lot of money.

If you aren’t sure of your plans, you may want to skip the discount points, or keep them as low as possible. For example, maybe you split the difference with the lender. Rather than paying a full point, you pay a half of a point and lower your interest rate slightly. This way you still save money and it’s not the end of the world if you end up moving or refinancing in the near future.

Of course, before you pay points, assess your financial situation. Will it hurt you to pay those points upfront? If you need the money for your down payment, closing costs, or just to get into the home comfortably, don’t pay it. You can use the money now and pay the loan down as you can. You can always make extra principal payments toward your loan in the future, which ultimately decreases the total amount of interest that you pay over the life of the loan.

Whether or not you pay discount points is a personal decision. Compare all of your options not just from one lender, but several. This way you can choose the loan that makes the financial sense now and well into the future. Remember, buying a house is one of the largest investments you’ll make in a lifetime.

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How to Correct Mistakes on Your Credit Report

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Have you checked your credit report lately? If not, you should. Did you know that more than 40 million Americans have mistakes on their credit report? Many people don’t even know it because they don’t check their credit regularly.

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First, we’ll discuss how to check your credit report and then help you learn how to fix any mistakes you find.

How to Check Your Credit

Did you know that you have access to a free copy of your credit report annually? In fact, you have access to three credit reports per year – one from each credit bureau. Trans Union, Equifax, and Experian each have their own credit report for you. If you visit www.annualcreditreport.com, you can get access to your free report every year.

We suggest that you pull one report every few months throughout the year. This way you spread out how often you check your credit report. This gives you a better chance of catching errors early on and fixing your credit score before it gets too damaged.

Fixing Errors

Now that you have your credit reports, go over them with a fine-toothed comb. Look at every line. Do the trade lines belong to you? Are the balances right? Is the payment history correct? Do you notice anything that is incorrect?

Don’t forget to look at all the data. This includes personal information, public records, and all financial information. Anything that is incorrect should be fixed.

You’ll need to file a dispute with the credit bureau. Make sure you contact the bureau that has the incorrect information. Sometimes it’s just one bureau and other times it’s all three. If the mistake was on the part of the credit bureau, chances are that only one will have the mistake. If the creditor made the reporting mistake, though, it’s worth checking all three credit reports for the inaccurate information.

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You can file the dispute online, via phone, or regular mail. Each bureau has its own requirements, but in general, you must:

  • Provide the information about the dispute. Tell the credit bureau in detail why you think the information is incorrect. Are numbers transposed? Does the trade line not belong to you? Is the payment history incorrect? Give as much detail as possible so that the credit bureau is able to change it effectively.
  • Provide information about the dispute to the creditor. You should also let the creditor know about the incorrect information. Provide the creditor with the same information you gave the credit bureau including the reason why you think the information is incorrect.
  • Provide as much proof as possible. The credit bureau and creditors may or may not take your request seriously if you don’t have proof. Gather as much paperwork as you can to prove your point and supply copies to the credit bureau and creditor.
  • Ask for a specific action. Think about what you want out of your dispute. Do you want the information deleted? Do you just need the data corrected? Be specific with your request so the outcome is the one you desire.

Credit bureaus typically have 30 days to investigate your request. The issue may not get resolved in 30 days, but the credit bureau must start the investigation within that time. The exact time that it takes depends on the willingness of the creditor. If they drag their feet, it may take longer. That’s why it’s important to stay in contact with the creditor too.

How to Handle a Dispute That Doesn’t go Your Way

Your dispute may or may not go your way, there’s no surefire way to tell. If the creditor denies your dispute, you can request that the credit bureau put a copy of the dispute on file. They can also add a statement to the trade line stating that you dispute the tradeline and the reason.

Future creditors will see the dispute and decide how to handle it. Some may ask you questions about it. Others may just look over the tradeline, especially if it has negative information reporting. The exact circumstances of the situation will determine the outcome.

The most important thing you can do is stay on top of your credit information. You’ll need a good credit report to get new loans, get insurance, rent a home, buy a home, and even sometimes get a job. Be vigilant in checking your credit report and requesting changes if there are any errors. It’s worth the time and effort it takes to fix the errors on your report.

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How Money Distribution Works at a Real Estate Closing

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You are ready to close on your loan – it’s an exciting time! As you sit down at the closing table, you may wonder how the money distribution works. Who pays out the funds from the loan? How do they receive the money?

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Keep reading to find out.

Who Distributes the Money?

First, let’s clear the air. The bank or lender that wrote and funded your loan isn’t the entity distributing the funds. Instead, there’s a third party called the closing agent. The closing agent typically works for the title company. If not, it could be a representative from your attorney. The agent receives the money, typically as a wire, from the bank and handles the disbursement at the closing.

Receiving the Funds

First, the closing agent must receive the funds. As we discussed above, the bank typically wires in the loan amount. But, buyers often have to bring funds to the table too. Buyers must bring a cashier’s check in order for the closing agent to accept it. You can’t bring cash or a personal check. You can also opt to have the funds wired, but you must arrange this ahead of time.

The closing agent or title company will have the appropriate amount of funds to disburse to the appropriate parties. They use your cashier’s check or wired funds to reimburse what they had to put into the transaction. Everyone is aware of the amount of money needed at least three business days before the closing when the Closing Disclosure gets released.

Disbursing the Funds

In general, closing agents pay the sellers’ mortgage company receives first. This payment is crucial in order for the property to exchange hands. The seller’s mortgage lien must be cleared from the property. After the first and any subsequent liens are cleared, the closing agent can disburse the remaining funds.

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After the seller’s mortgage company, the closing agent pays:

  • Third parties – There could be numerous third parties involved in the transaction, but in general, there are appraiser, attorney, and title company fees. The closing agent will also pay any necessary government fees, such as tax service or recording fees.
  • Real estate agent – The closing agent will pay the real estate agent from the proceeds of the sale. This money doesn’t come from your loan directly. It comes off the top of the seller’s proceeds. Realtors charge up to 5% of the sales price of the home. The seller and realtor agree on this amount before working together. The closing agent disburses the funds for the seller at the closing so the seller doesn’t have to come up with the funds himself.
  • Escrow account funds – If you are setting up an escrow account (most loans do), you’ll need funds to set it up. At a minimum, lenders require 2 months of taxes and insurance to set up the account. Depending on the due date of the taxes and insurance, though, the closing agent may need more funds to ensure there are enough funds to cover the costs.
  • Paying off any liens – If there are any other liens on the property aside from the seller’s mortgage, those most be paid at the closing too. Property liens transfer with the property, not the person, so it’s often a requirement as a part of funds’ disbursement.

The final funds remaining are for the seller. After all third parties, mortgage companies, and other creditors receive their funds, the seller gets the proceeds. Sellers know before the closing how much they will receive, just as buyers know how much they must bring to the closing. The Closing Disclosure shows both sides of the transaction.

If you have any questions about money disbursement at a real estate closing, make sure to ask the closing agent before the actual closing. The three business days before the closing that you have the Closing Disclosure is meant to give you time to digest the figures and ask any questions you may have.

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