Growing Population of Self-Employed Need To Think Ahead Before Buying A Home

There is something life-affirming about a ten-second commute. Walking from your master bedroom to your home office every morning, you don’t have to deal with traffic, standing in line at Starbucks for that cup ‘o joe, or dressing for success. If you have a separate storefront or office, you can arrive and work with pride knowing you have created your own work environment. But there are drawbacks to being self-employed, especially when it comes to qualifying for a mortgage. Why? Because lenders have a tougher time assessing your income.

In a 2018 New York Post article, writer Gregory Bresiger quotes FreshBooks’ second annual Self-Employment Report. “Those nontraditional workers — who will approach 33 percent of the workforce in coming years — want more control over how and why they work, according to the report. Most won’t return to an organization, it said, adding that the self-employment movement will explode over the next two years.”

Self-employed individuals who plan to buy a home are wise to strategize several years in advance. If you understand how lenders consider mortgage applications and self-employment income, you can take steps to make yourself more appealing. Let’s look at some general guidelines for making you look attractive to that entity who would make it possible for you to become a homeowner.

Lenders are all about the risk they will be taking on when they look at your mortgage application. They want to make sure they'll be able to get back the money they lend you, so it's important that you show enough income to cover the mortgage payments easily. This isn't that hard when you have a regular job to go to and steady paycheck showing a pattern of healthy income. For a self-employed individual, however, income can fluctuate. One month may find you in the pink, making more investments in your business, and the next might see you struggling to pay your bills.

The MotleyFool’s Kailey Fralick puts it this way: “You may also have to provide a list of your existing debts and assets. Business owners may have to provide profit and loss statements from the last couple of years.”

It’s also important to know that lenders consider your income after deductions, which means you must be extra careful with write-offs, such as phone and internet services, office supplies, business trips, etc. While taking those deductions may help to lower your taxes, it also lowers your usable income in the eyes of mortgage lenders which, in turn, raises your debt-to-income ratio. That ratio is a measure of how much money you have coming in and going out each month. Guidelines for those ratios vary from institution to institution and it’s a great idea to sit down with your CPA or mortgage lender to determine how many deductions might be feasible when you are preparing yourself to qualify for a mortgage.

And don’t forget about that pesky credit score. It’s a measure of how responsible you've been with borrowed money in the past, and it’s of great importance to lenders. They may hesitate to lend to you if you have a number of late payments or they determine that you use credit too often. It's vital to keep your credit score as high as possible if you want to give yourself the best chance of getting approved.

For more information please contact me at 808-457-2455.

Thank you for visiting my blog, I encourage you to leave a comment or questions. Let me know if my blog has helped you. I would love to hear your thoughts and any ideas for future posts.

Roxy Redenbaugh

ACMC Loan Consultant

roxy@roxyredenbaugh.com 

Mortgage Coach

Branch Manager

NMLS #269926

Source: TheMotleyFool, FreshBooks, TBWS

Getting Kids Off On The Right Credit Score Foot!

There is so much to worry about when you’re a parent. But one thing you may not think much about is your child’s credit score. Like grades at school, that magic number has a lot of influence on their future, reflecting their spending habits and financial accountability. So how soon is too soon to start helping your child build credit?

While one must be at least 18 years old to take on a credit card or loan, you can make your child an authorized user on your credit card. Does the thought make you shudder? Fear not — it’s not as scary as you’d think. You don’t even have to tell them you’re doing it! All it means is that while you use your credit card responsibly, your child will benefit from what you have already established for them without him or her being responsible for any of the charges. It won’t have the same credit-building power as being the primary user on an account, but it’s a start.

If that idea doesn’t appeal to you, there are other opportunities to help when your child is a little older. For instance, you can co-sign on his or her first credit card, which may be a necessity if your child is a full-time college student at the age of 18. You could also co-sign a car loan or student loan, monitoring their commitment to making timely payments (or the promise of them). Co-signing means your child is the primary borrower, which will help build his or her score. Of course, there are risks if they don’t understand how credit and credit cards work or your child tends not to take things too seriously. You’ll be responsible for paying if your child doesn’t, so be sure you’re comfortable with this possibility before moving forward.

All this means, of course, that means education is key. Evidence suggests that educating kids about money will pay off in higher credit scores later on. A 2014 study by the Federal Reserve showed people in states that had mandated personal financial education in schools have higher average credit scores as adults than people in states without this requirement. Unfortunately, only 17 states require it, according to a 2014 survey by the Council for Economic Education. If you’re in one of them without it, it means you’ll likely have to take the lead in making sure your kids know how to manage money and use credit wisely. Even if your kids learn it in school, however, you are still their best teacher and example of how to handle finances and credit.

Most experts agree it’s wise to explain the basics of earning, saving and spending before your children become teenagers. Preteens are likely to understand the concept of borrowing and repaying debts, so that’s a good age to start explaining the concept of credit. And a serious talk about responsibility is definitely in order here. If words fail you, have one of the many books written about the topic on hand, such as The Complete Guide to Personal Finance: For Teenagers by Tamsen Butler

How can you tell your child is credit-ready? Most parents know their children’s strengths and limitations and have gut feelings about when it’s feasible for them to handle money and credit on their own. It may be when they start driving or when they get their first part-time job, enabling them to pay for something in an emergency. For others, this comes as late as college, when co-signing for a credit product makes more sense.

If your child demonstrates an interest in building credit, seems to grasp the idea of building a budget, and saves and spends money wisely, chances are it’s a good risk to go ahead and help them establish credit. Look for his or her degree of honesty regarding money and a willingness to ask questions about something they don’t understand. Impulse spending (an inability to delay gratification) is a red flag telling you the time is not yet right.

Just because you can do all this doesn’t mean you should. Educate your kids about money first, then consider helping them get on the path to a good score when the time is right. And who knows? With all those healthy financial habits under their belts, they may someday find they can get approved for a loan to buy a home of their own at an earlier age than you ever thought possible.

Thank you for visiting my blog, I encourage you to leave a comment or questions. Let me know if my blog has helped you. I would love to hear your thoughts and any ideas for future posts.

Roxy Redenbaugh

ACMC Loan Consultant

roxy@roxyredenbaugh.com 

Mortgage Coach

Branch Manager

NMLS #269926

Source: TBWS

Using Real Estate As A Vehicle For Wealth

For many of us, our most significant investment and largest profits in life are due to having bought a house — something that acts as a de facto bank account, grows in equity and provides shelter all at once. But what if we want to use real estate as a money-making opportunity instead?

Real estate has, of course, made many millionaires. The Wall Street Journal recently reported how more than 80% of borrowers who refinanced in the third quarter chose the “cash out” option, withdrawing $14.6B in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac. Now, many are finding their homes to be a tappable source of wealth. “Home equity is the big pot of gold,” said Sam Khater, the chief economist at Freddie Mac.

It’s not hard to see why many have successfully made money buying and selling real estate because of the diverse ways to grow wealth with real estate investments. Forbes writer David Greene talks about having become a student of creating wealth through real estate and has compiled a list of some of the traits he sees as common among the most successful investors, whether they’re house flippers, residential home landlords, or large apartment complex owners.

Knowledge is, of course, key. Real estate investors always seem to know more than those around them — what drives markets, how to time market cycles, and which things to watch out for. “They are much more likely to recognize shifting markets before others do and are prepared to take advantage of these opportunities when they present themselves,” says Greene.

“The very best never stop learning, and real estate is no exception,” says Greene. Apart from websites where investors can learn, network, and find solutions to their problems, some also collect books written on how to invest in real estate, reading them over and over again. Greene recommends developing the ability to analyze a property for cash flow as well as recognizing an under-valued property when you see one. Then develop a basic understanding for estimating rehab costs along with the various pieces at play when it comes to owning rental property.

“The more you know about real estate investing, the less fear you’ll have,” he says. “Overcoming fear is one of the best things you can learn to do if you want to carve out a successful career for yourself in real estate.”

Patience is also a virtue. Greene agrees that it may sound simple, but that’s not always the case. “When it comes to real estate investing, there is a lot of pressure on you to move and move fast. The best deals go quick, and allowing projects to run past the agreed upon timeline can be expensive. Investors are constantly facing pressures to do more, do it faster, and do it cheaper.”

He goes on to say how the best investors know when they need to run fast and when they need to stop and wait to see how things develop. “Patience can take several forms when it comes to real estate investing,” he says. “Learning to recognize areas where you’ll need to practice it can save you from a lot of expensive mistakes.”

Understanding market cycles are also of vital importance. “Top investors zig when everyone else zags. They are fearful when others are greedy and greedy when others are fearful. Waiting for the market to slow down, or crash even, can require more intestinal fortitude but it is also a much better time to be picking up assets.”

To study advice Greene offers regarding how to transform a property, how to be efficient, and how to be keenly focused and how to develop important relationships, he encourages you to go to BiggerPockets.com, where you can get tips like this for free. “In a hot market, you don’t just find good deals,” he says. “You make good deals. Top notch investors see ways to add value to properties without spending more money than they have to. For those with the vision to bring it about, there can be big rewards for those who buy the ugly duckling and turn it into the beautiful swan.”

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Thank you for visiting my blog, I encourage you to leave a comment or questions. Let me know if my blog has helped you. I would love to hear your thoughts and any ideas for future posts.

Source: Wall Street Journal, Forbes, TBWS

Roxy Redenbaugh

ACMC Loan Consultant

roxy@roxyredenbaugh.com 

Mortgage Coach

Branch Manager

NMLS #269926