Final Post

After a total of about six months, my wife and I found our only little piece of Chicago to call our own. Closing went smoothly and we were able to move in right away.

Prior to moving in, we did a few renovations. We knocked down a wall, re did the floors, put up a back splash in the kitchen, painted, changed out fixtures, and put up wonderful blinds. All of this just a month prior to our wedding.

Both of us were very proactive prior to move in day. On move in day we had cable, internet, new furniture delivered, and all of our belongings in less than 24 hours. This would not have been possible with out my wonderful wife, my family, and my friends.

A few before and after shots of the house

Flooring under "eat in kitchen" that we regained after taking down the wall 

Painting

We hired Luigi from Mario Bros to take down our wall

I hope this blog was able to help a few folks navigate the home buying process. Feel free to reach out via comments. I will no longer post to this blog, but please follow my new DIY blog. I plan on posting various projects that my wife and I complete.

The Frustration With Home Buying

As I sit in my realtor’s Mercedes and prepare to sign away 30-40% of my salary for the next thirty-year, I joke, “I should add ‘offer writing’ to my resume.” This is our tenth offer. We feel it! This is the one. Ideal location, hits almost every single one of our needs and wants, and we can overbid. We go $5,000 over list and include stipulations to please the seller. A nervous excitement comes over my fiancée and I as we step out of our realtor’s car.

On the drive home, we talk about preparing for disappointment. We’ve submitted a solid offer, but for a buyer with a down payment under 20%, the chances for disappointment are high. In this market, inventory is low and the competition is fierce and includes buyers with bigger, better bankrolls, investors who higher folks to go out and buy houses as rental properties, developers looking for a lucrative flip in the best neighborhoods, and everyday folks, like myself, who have saved up some loot and no longer want to “throw money way” by renting.

We enter a multiple offer scenario and we competitively bid $249,000 for the property, a full $14,000 over the list price.  Ultimately, the home sells for $261,000! The sellers were a family of developers with a realtor for a son. Purchased in 2011 for just over $75,000, a $261,000 sales price yields them a gross sum of $186,000.  Even after factoring in labor, materials, taxes, brokerage fees, and commissions, I think it is safe to say that they doubled their money.

Even though we lose out, we gain more experience. We know that homes like these are few and far between in our price range, but they do come up. The next one is ours!

Free Money: Grants

Here are  a few programs that are available to help with a down payment. Please note that the both programs require you to pay a higher interest rate without the option to refinance for five years. In essence, you are simply borrowing the money and paying it back via a higher interest rate. Personally, I would take the lower interest rate any day of the week, unless you are planning on moving after five years.

Citylift: Down payment assistance for moving into certain areas or having certain union jobs.

SmartMove:  Up to $6,000 in down payment assistance.

Disclaimer:
This blog is for informational, educational and discussion purposes only. The author of this blog is not a lawyer, not a registered investment advisor, financial advisor, or mortgage loan officer. Even though topics may be discussed on this blog that involve legal or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice or investment advice. No reader should act in reliance on anything discussed in this blog without prior consultation with a licensed professional who is qualified to evaluate the reader’s individual facts and circumstances and offer an informed professional opinion with respect thereto. If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that the author of this blog shall have no liability resulting from such unilateral action or decisions by the reader.
The author of this blog takes care to see that the information it posts on this blog is accurate and truthful. Nevertheless, the author does not expressly or impliedly warrant or guarantee the accuracy of its postings and the information that others post here.
The author will, on occasion, post links to information on other websites. Such links and the information thereon are not under the author’s control. Merely because a link to a third party site appears in this blog does not mean that the author has reviewed or approved of the link and its content. The reader must treat information from third party links at the reader’s own risk, and the author accepts no liability with respect to such third party information.

You can do what!? How to Improve Your Credit Score

Credit Score "Groups"

"It's all about the verbage!" says Chris, the instructor for the home buyer's counseling sessions I am taking. In the last session, he explained a few things about credit scores which I found fascinating and hopefully can help you out at some point in your life. 

Credit Score Groups
At a conference for home buyers counselors, the keynote speaker asked the crowd if anyone ever had a client that followed the counselor's advice to pay off a creditor only to find out that the client's credit score went down. The entire audience raised their hands. The speaker explained to the crowd that the three credit bureaus place people into groups based on their credit profile.

For example, if a person owes a creditor for multiple months/years that person is in a certain credit score group, let's call that group "People Who Owe Creditors." Within that group, credit scores can range between 550-600. Since this person has been in the group for a long period of time, his or her credit score is a 600. This person then pays off his/her creditors and finds that his/her credit score has dropped. They probably are thinking, "What the heck!? I paid my debts and my credit score dropped!?" This is probably a very crappy feeling. Now, from my understanding, what has occurred is this: this person is now in a new credit score group. Because he/she is new to the group he/she is "low man on the totem pole" and is branded with the lowest credit score possible for this group. Let's call this group "People Who Recently Had Debts and Settled Them." The scores in this group can range from 580-650. So even though the individual paid his/her debts, since he/she is in a new group, their score could dip down to a 580 (from a 600); however, the individual has the potential to reach a credit score of 650 in this group vs. a 600 max in the previous group.

Please note that the credit scores are arbitrary for this example. I do not know what the groups are or what the credit score ranges are (see the picture for a better idea of the groups).

Verbage
Talk is cheap, but verbage can make or break you when it comes to your credit score. Chris explained to us that if you're in a bind and owe a creditor money there are multiple things you should know before paying one red cent. If you are dealing with the creditor directly, he suggests you come to agreed terms and then submit those terms in writing. One key stipulation to include is how the creditor will report this information on your credit report. To avoid a derogatory comment, Chris suggests you state that you will pay the agreed amount only if the creditor reports that information as "paid agreed amount." on your credit report. This line shows up on your credit report, but cannot be interpreted as a derogatory line.

If you do not do this, the creditor can submit a line that reads, "paid less than amount owed." This can be interpreted as you didn't pay your debts and you're a dead beat. Those little words can make or break you when it comes time to finance something big, like a house.

Show Me Proof
Now here is an option for the bold. Chris explained to us that a creditor must show you written proof that you agreed to the terms of this contract and agreed to repay the money you borrowed. You may submit a written letter that states, I will not pay this debt unless I see my signature on record. The creditor then has thirty days to respond. If they do not respond in thirty days, you hit them with a second letter that instructs them to strike the debit and the comments from your credit report.

Credit Rebuilding Letters

Most creditors do respond, but on rare occasions they do not respond OR on even rarer occasions, the debt has been sold so many times and someone drops the ball when it comes to keeping records, so the creditor does not have proof. In that case, you are not required to pay your debt! Sounds crazy, but Chris says that this does happen. At the very least, it doesn't hurt to try.

Chris gave us a list of letters that he gives to people to send to their credit agencies in given situations. I have posted a picture of the list. He said that he would email me the letters sometime on Monday (today: 11/18) in multiple Word documents. Once I get them, I can send them out if you are interested (just comment on here or message me personally). I hope I've provided you with some information to think about if you wish/need to improve your credit score.



If your credit is fine, here are three basic rules to follow.

1. Do not come close to "maxing out" on credit cards. Try to keep your balance below 30% of your credit limit (ex: credit limit $10,000...do not keep a balance higher than $3,000).

2. Pay everything on time and the amount agreed upon. Late payments cannot be fixed over night. Resolving credit issues takes time!

3. Order copies of your credit reports periodically or before your apply for new credit. If you are rejected for a credit card, that lowers your credit score. Dispute any information that you find that is incorrect. Remember "derogatory" information lowers your credit score.

Remember, life does happen and debts do occur. If you ran into financial problems in the past, it pays to educate yourself and learn your options if you need to improve your credit. I hope I'm able to help educate some folks with this post. Best of luck!


Disclaimer:
This blog is for informational, educational and discussion purposes only. The author of this blog is not a lawyer, not a registered investment advisor, financial advisor, or mortgage loan officer. Even though topics may be discussed on this blog that involve legal or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice or investment advice. No reader should act in reliance on anything discussed in this blog without prior consultation with a licensed professional who is qualified to evaluate the reader’s individual facts and circumstances and offer an informed professional opinion with respect thereto. If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that the author of this blog shall have no liability resulting from such unilateral action or decisions by the reader.
The author of this blog takes care to see that the information it posts on this blog is accurate and truthful. Nevertheless, the author does not expressly or impliedly warrant or guarantee the accuracy of its postings and the information that others post here.
The author will, on occasion, post links to information on other websites. Such links and the information thereon are not under the author’s control. Merely because a link to a third party site appears in this blog does not mean that the author has reviewed or approved of the link and its content. The reader must treat information from third party links at the reader’s own risk, and the author accepts no liability with respect to such third party information.

The Search Process: Wants vs. Needs

Candid shot of our neighbor

When my fiancee and I searched for apartments two years ago, we spent a lot of time looking at a bunch of crappy apartments we didn't really want. We were focused more on aesthetics than practicality and needs. This lead to multiple attempts at offing each other in our sleep. At the end we sort of came to a consensus on certain needs/wants, but we were not explicit about them. We vocalized that we needed a unit with in-unit wash/dryer and central A/C, but other than that things like neighborhood, square footage, quality of neighbors, and a few other things were never discussed. Thus, our current apartment is nice, but it is too small, the neighborhood is okay, and our crayon eating neighbors have the social qualities of a blob fish. This time around, my fiancee and I are making a list and checking it twice...especially for blob fish crayon eating neighbors.

From the Checklist

I discovered a list which was very helpful and somewhat humorous. My fiancee insisted that our future home have a boat lift and well/water pump.
The list we found has helped us focus on our needs vs. wants. I do not think this is the end all be all list, but if does help narrow down a few things.

We communicated things that we want (s.s. appliances, driveway, finished basement) and things that we need (garage/parking space, hardwood floors, two bathrooms, safe neighborhood). We input those parameters into various searches and came up with a slew of results on sites like redfin, Trulia, and Zillow. Thus began the search process.

Our search for a home began, and we merrily looked at homes. This was a lot of fun, but a bit tedious. We eventually enlisted the help of a realtor, Bob. For over a decade, Bob has sold home across the Chicagoland area. He comes highly recommended and he is very professional. Bob is good at making you feel comfortable and his knowledge is reassuring. Additionally, Bob sends us MLS (Multiple Listing Service) reports that include our parameters so we do not have spend time searching on the real estate websites (although, we do it occasionally). The reports are helpful and keep your preferred home saved and typically included what the big three real estate sites have.

We know that we might have to compromise certain needs when the time to make a decision comes, but listing our needs an wants really helps us toss out possible contenders. As for the neighbors, I can imagine that to be hit or miss, but I plan on attending community events to get a feel for the area prior to putting an offer on a place. I also use the Chicago Tribune's "Crime in Chicago" page to compare neighborhoods (please note that the site only uses a three month span). I've also had some success at researching future building developments in the area, as well as looking at community organizations websites. I haven't knocked on anyone's door yet, but I definitely haven't crossed that off of my list.

Disclaimer:
This blog is for informational, educational and discussion purposes only. The author of this blog is not a lawyer, not a registered investment advisor, financial advisor, or mortgage loan officer. Even though topics may be discussed on this blog that involve legal or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice or investment advice. No reader should act in reliance on anything discussed in this blog without prior consultation with a licensed professional who is qualified to evaluate the reader’s individual facts and circumstances and offer an informed professional opinion with respect thereto. If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that the author of this blog shall have no liability resulting from such unilateral action or decisions by the reader.
The author of this blog takes care to see that the information it posts on this blog is accurate and truthful. Nevertheless, the author does not expressly or impliedly warrant or guarantee the accuracy of its postings and the information that others post here.
The author will, on occasion, post links to information on other websites. Such links and the information thereon are not under the author’s control. Merely because a link to a third party site appears in this blog does not mean that the author has reviewed or approved of the link and its content. The reader must treat information from third party links at the reader’s own risk, and the author accepts no liability with respect to such third party information.

Pennies, Nickles, and Dimes...They All Add Up

I would love to spend a few weeks staying in the over-water bungalows in Bora Bora or a few weeks munching on fresh ceviche and sipping cool Cusquenas on the shores of Mancora with my beautiful fiancee, but the truth is, I can't afford it. If I wanted to, I could empty out my savings accounts and pay for my fiancee and I to jet-set for an entire summer. I don't think my fiancee's job would appreciate that very much and I would be financially insolvent after such a trip. Facing the reality of what you can afford versus what you can pay is necessary if one wishes to purchase a home. Sure, you can pay for drinks at the bar every weekend, but can you actually afford it in the long run? I know the answer to this question varies based on income and other factors (like the state of your liver). Either way, if you decide to start saving your cash for a big purchase, you must honestly ask yourself, "Can I actually afford this or can I only pay for it?"

Budgeting
I'm a big proponent of using cash. Yes, I see great advantages in using rewards cards that let you rack up cash back incentives or miles for travel, but personally, I feel that credit cards can lead to trouble as I stated in my earlier post. The key to budgeting, and eventually saving, is breaking down the areas which you spend your money and then deciding where you can cut back to save. I'm going to be transparent about my finances and post a typical monthly budget. There are a few things to note: 1. My fiancee and I split the rent 60/40, 2. Utilities are split 50/50, and 3. Money leftover in any category gets shifted around as needed (ideally, it ends up in my savings account, but that's not always the case). You probably do this on your own already, but if you don't definitely start and limit your self on things like eating out and going out.

Rent: $1,050
Utilities (Gas, Electric, Cable/Internet): $150
Cell: $90
Student Loans: $125
Gym: $80
Car Insurance: $55
Groceries: $250
Entertainment: $250
Savings: $280
Total: $2,410


Saving Money
Envelopes
I've heard of the "envelope savings method." The idea here is that you budget your cash in multiple envelopes and label them for their use. I use this method, but I do not use multiple envelopes, I use post-its to separate the cash in one envelope. The money you do not use at the end of the month gets put into a savings account (but it usually end up shifting money around). This helps me budget and save because I don't over spend like I would if I used a debit or credit card.

I Got Five On It
This is an odd one, but apparently it helps folks save. I've never tried it, but the ideas is you save every five bill you receive as change for a purchase. I think it's a bit quirky, but some folks say it helps.

Change Jars
An oldie, but a goodie. I've used this to help stretch my dollars every year. I have an old jelly jar that I've had for about ten years. Every year it gets filled with $100 in change around summer time. This past summer, my fiancee and I used the $100 for a lunch and dinner while we were in Hawaii. Save those pennies!

Automatic Transfers
If you have a savings account, awesome! If you don't get one! I use my bank's savings account and I have two savings accounts with my online trading account. I have automatic transfers for each account. My savings account with the bank has $30/week deposit, the brokerage accounts each have bi-monthly deposits of $40. Currently, my bank savings account will be used for my down payment, one brokerage account will be used for cash-on-hand for random expenses on the day of our wedding, and the third account is being used to save for things like the appraisal, home inspection, and closing costs.  I have also used the accounts to save for Christmas shopping, a vacation, and my fiancee's engagement ring. Multiple savings accounts are great to have and I highly recommend them if you want to keep your cash fluid.

After budgeting your money, you need to figure out what to do with it. You can't let your money get old and slowly suffocate from inflation under your mattress. In case you don't know, unspent money loses value (around 2%) every year. In other words, if you have $100 that you saved since October 2012, it is now worth around $98. Doesn't sound like a lot? Well, if you move the decimal east a few zeros that's a lot of cash going to waste ($10,000 in 2012 is now has the buying power of $9,816). Either way, your money is better off earning SOME interest rather than NO interest.

Diversify to Avoid Inflation
Stocks
Personally, stocks are my favorite way to save money. In late 2009, I purchased a few shares of various stocks after the stock market tanked. I've since sold the rest and kept GE. GE, like some stocks, pays a dividend. At .18 cents per share, it's not a lot. However, it does add up over time. Since 2009, I've doubled my money and earned a small amount of cash every three months from GE's quarterly dividends. I plan on selling all of my stocks once we put an offer on a home. I will probably pull the money within the next three months to avoid and crazy market fluctuations. Please be cautious when investing because you can just as easily lose your money.

Bonds
I've never purchased a bond, but I used to get them for my birthday as a kid. When I was 16, my mom found them all and gave them to me. I cashed them out and used them as part of my down payment for my car. Basically, a bond is a loan that you make to an institution with a promise that they will pay your loan back, plus interest, by a certain date. The treasury has a type of bond known as a "T-Bill" which you can purchase through any online brokerage or your bank. An NPR reporter released a segment in which he discussed investor confidence in the government during the shutdown. He purchased a T-Bill for $999.78, which could be sold for $1000 at the end of this month yielding him a whopping .22 cents.

CDs
I have a friend who is a big believer in CDs and I like them too. This is a good idea if you plan on sitting on your money for a long time. You can lock in various interest rates based on how long you plan on leaving your money in them (3 months, 6 months...5 years, 10 years). The idea is that you choose how long to lock in your money and then you leave it in there to gain interest. The downside of this savings method is that you cannot remove your money until the date specified by the certificate. If you have an emergency and really need the money, you will be penalized for breaking the contract. Penalties vary by institution.

No matter how you decided on budgeting and saving your money, the bottom line is save early and save often. Even if you're not planning on making a huge purchase anytime soon, save for an emergency. Even if you feel like you can't save a whole lot. Avoid that extra beer once a week and you can throw $10/week in to a jar. At the end of the year you'll have $520. That can put a big dent in your Christmas present budget or pay for half your rent!

Thanks for reading and feel free to comment or shoot out a question! Look for my next post about Wants vs. Needs!



Disclaimer:
This blog is for informational, educational and discussion purposes only. The author of this blog is not a lawyer, not a registered investment advisor, financial advisor, or mortgage loan officer. Even though topics may be discussed on this blog that involve legal or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice or investment advice. No reader should act in reliance on anything discussed in this blog without prior consultation with a licensed professional who is qualified to evaluate the reader’s individual facts and circumstances and offer an informed professional opinion with respect thereto. If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that the author of this blog shall have no liability resulting from such unilateral action or decisions by the reader.
The author of this blog takes care to see that the information it posts on this blog is accurate and truthful. Nevertheless, the author does not expressly or impliedly warrant or guarantee the accuracy of its postings and the information that others post here.
The author will, on occasion, post links to information on other websites. Such links and the information thereon are not under the author’s control. Merely because a link to a third party site appears in this blog does not mean that the author has reviewed or approved of the link and its content. The reader must treat information from third party links at the reader’s own risk, and the author accepts no liability with respect to such third party information.

"I Ran the Credit on You and Your Fiancee. Call Me to Discuss."

That was the response I received last week from our loan officer (or loan originator, as his website says). Around July, I started kicking the idea of purchasing a home around in my head. I spoke to my sister and her husband (they own their home) and asked for recommendations and tips about the process. They told me that I should get pre-qualified for a loan to see what I can afford.

I went to my bank's website and filled out the application and waited for a response. About four hours later, I received an email stating that I was qualified for a $200,000 mortgage. Now, from my understanding, a pre-qualification means that based of the information you've provided, you can borrow X amount of dollars. Pre-approval, on the other hand, means after an application fee and the submitting various documents you will be approved for a loan from the institution (provided the appraisal matches the offer). Read more about the difference on investopedia.

My brother-in-law and sister used a realtor named Bob for the purchase and sale of their first condo. They also used him when they purchased their current home. I spoke to him and laid out our strategy for home buying, which I will lay out in another post for you guys. I told him about my pre-qual and he suggested that I should get pre-qualified again with my fiancee to see what we can afford together. He recommended Allen Smith from GuarnteedRate. Allen has been super helpful through the entire process and we will most likely use him and GuarnteedRate as our lender. My fiancee and I submitted the application through his website.

Now, an important component of the home buying process and a successful relationship is communication! We have been open and honest with each other since day one. She explained to me, on our second date (I think), that she ran into a few credit issues because of an unsavory ex who "handled" her finances. She had a few collections on unpaid credit cards, but she had been paying them off and actually finished earlier last year.

It was because of this communication and honesty, that Allen's email was not a shock or a point of discontent. Additionally, my credit score is strong enough to carry us both if necessary. The credit score revealed that my fiancee's credit was not optimal and would only hinder our approval. Allen went through and explained that some of the collectors did not re-report after she paid off her collections. The report also revealed a joint credit card with a high balance. His recommendation was to contact the collectors and have them re-report, or else my fiancee would be on a "credit treadmill" that will not let her credit score "move forward."

As for my credit, Allen explained that my income, savings, and investments qualify me for a $250,000 mortgage. He was prudent to say that the $250,000 approval does not mean I can purchase a home that is valued at $250,000. Rather,  several factors, known as housing expenses, are rolled into that $250K amount and cannot exceed 43% of my monthly income. This is a change coming from government regulation and the number is to help distinguish "Quality Mortgages" so lenders can avoid a second sub-prime lending fiasco. Read more about it here.

After subtracting things like credit card payments, car payments, and student loans, the loan officer will give a number that your monthly mortgage cannot exceed. My monthly mortgage, as of now, cannot be more than $1,678. This number must include PMI, homeowners insurance, property tax, mortgage interest, and the principal. Property tax can be a deal breaker on many homes because a higher the property tax means you will only be able to afford a "cheaper" home. Let's break it down in two scenarios...

Home 1
Price of Home: $200,000  
Down Payment: $10,000 (5%)
Taxes: $2,500

Here is what you would pay per month....

PMI: $80
Home Insurance: $100 (just an estimate, this can be lower after discounts)
Property Taxes: $208
Mortgage Interest: $400
Principal: $527
Total: $1,331 (monthly mortgage)

Home 2
Price of Home: $200,000  
Down Payment: $10,000 (5%)
Taxes: $6,000

PMI: $85
Home Insurance: $100
Property Taxes: $500
Mortgage Interest: $416 (this goes up because of the money you are escrowing for property tax)
Principal: $527
Total: $1,628 (monthly mortgage)

Disclaimer: this is the first time I am making these calculations. My math might be off a bit. Check out bankrate's mortgage calculator to see what your mortgage could look like, please note that their calculation does not include homeowners insurance.

Based on this, someone with my housing expense limit would just barely qualify for the mortgage on the second home and definitely qualify for the first one (an alternative option would be to make an attempt at an 80-10-10 mortgage or increase their down payment). At the end of the day, finding the right home may come down to a balancing act between the factors that determine what you're able to pay monthly.

Next Monday, I'll post about budget management and savings. Stay tuned and feel free to comment or ask questions.