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When it comes to credit, knowing fact from fiction and understanding how to act is critical. Here are some common credit myths that may be preventing you from engaging in effective credit management:
MYTH: My score will drop if I check my credit.
FACT: Checking your own reports and score is considered a "soft inquiry" and has no negative impact on your credit score.
MYTH: There is only one score that all lenders use to determine my credit-worthiness.
FACT: There are literally hundreds of different scoring models used by the lenders in the marketplace today.
MYTH: Closing old credit card accounts will clean up your credit reports.
FACT: Some people advocate closing old and inactive accounts as a way to manage their credit. In most cases, closing your older accounts will make your credit history appear shorter, which can negatively impact your credit standing.
MYTH: Once you pay off a delinquent loan or credit card balance, the item is removed from your credit report.
FACT: Negative information such as late payments, collection accounts and bankruptcies will remain on your credit report for up to seven years. Certain types of bankruptcies stick around for up to ten years. Paying off the delinquent account won't remove it from your credit report, but it will update the account to indicate it as "paid".
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What should a smart home buyer do with that fat federal tax rebate check? Well, it is not that fat, but it could come in handy for buyers before, during and after the home buying transaction. The Economic Stimulus Act of 2008 includes, among other provisions, tax rebates, bureaucratically dubbed "economic stimulus payments." Starting in Spring, the U.S. Treasury Department began sending rebates to taxpayers, who had $3,000 of income and filed a 2007 tax return and have a valid Social Security number. Here are a few things you ought to consider with that unexpected windfall, if you are a home buyer - before, during and after your home purchase.
Save it! If you do not have that three to six months worth of income emergency saving fund, now is a good time to begin. Stuff happens around around the home when you least expect it and you will need some pocket money for incidentals during your home purchase. Look for a savings account that offers the best return. Online bankers generally offer the best interest rates, but shop around for other liquid savings, checking or investment accounts that you can start up for the amount of your rebate.
Rent a safe deposit box. After you buy a home, you will need somewhere to securely stash all those important documents, including your mortgage note, title and escrow papers, insurance policies, home improvement contracts, tax returns and estate documents. In many cases, the rebate will give you enough cash to rent a safe deposit box for decades. The boxes cost from $10 to $100 a year, plus a key deposit. If you sock the cash in an interest-bearing account and let the bank automatically withdraw the fee each year (or do it yourself), you will earn a small return in the process.
Buy a home inspection. Even if the seller offers his or her own inspection, you want your eyes on the prize as well. Home inspections are a good deal for resale, as-is (so that you know what "as-is" is), listings and new home purchases as well, giving the possibility of new home defects.
Buy enough homeowners insurance. For small homes, condos and townhomes, the largest rebates available will cover many policies for a year. That does not mean only buy what your rebate can afford. Make sure you buy enough replacement value coverage. If you work at home, use the rebate to buy extra business coverage as well as special liability coverage for your business.
Complete deferred "green" maintenance. Caulk the windows and doors. Add insulation. Have your furnace or HVAC (heating-ventilation-air conditioning), system inspected and cleaned. Swap out incandescent bulbs for CFLs (compact fluorescent lamps), and otherwise make your home more energy efficient and you will get your money back from savings on utility costs.
Splurge, but shop around. The real purpose of the tax rebate is to get you to spend money on stuff in the retail sector that will help kick-start the economy. If, after buying a home, you have your financial basics covered, shop around for the best deals at the lowest cost on goods and services for your home. For example, for around $1,000 Consumer Reports found Panasonis, Samsung and Sony offering the best 32 inch LCD TVs, and LG, Samsung and Hitachi offering the best 42 inch plasma models. The key is to get the most "stuff" for your money
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Down payment:
Saving funds for a down payment should be a part of an overall program to get your finances in order prior to shopping for a new home. This includes rounding up financial records, examining your spending habits and setting a budget you can live with. Remember, too, that the down payment is not the only up-front expense. Allowance for closing costs should be included in your savings budget.
How much is required?:
The down payment is usually expressed as a percentage of the overall purchased price of the home, and varies depending on the lender, the type of financing and the amount of money being lent. In the past, the typical down payment was 20%, but in recent years lenders have been willing to offer conventional financing with as Little as 3% down. U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA), or the Federal Housing Administration (FHA), also require minimum down payments.
Private Mortgage Insurance (PMI):
Typically, if your down payment is less than 20% of the purchase price, lenders will require you the carry Private Mortgage Insurance (PMI). This insurance protects the lender in case of default and usually involves an up-front payment at closing of escrow, as well as a monthly premium. However, once you have payed off 20% of the loan, you can request the policy be canceled. Some lenders cancel the premium automatically, while others require you to make a request in writing.
Gifts:
If you are having trouble saving enough money, many lenders will allow you to use gift funds for the Down payment - as well as for the related closing costs. The gift may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating that the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your home, ask your lender about their policies regarding gifts.
Earnest money:
Buyers are usually required to deposit earnest money with the seller when they make an offer. If the offer is accepted, the earnest money is then credited towards the down payment. The amount varies widely depending on the seller and local custom, but be prepared from the outset to have funds earmarked for this purpose.
Closing costs
In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, documentary stamps, loan origianation fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs.
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