What Affects Your Home Insurance Premium?

Home owner's insurance protects your property and belongings from unforeseen circumstances (such as a fire) by providing both property insurance and liability coverage. In some instances, you cannot control the premium you pay. Consider the following:

• Home age and materials. These two factors affect the premium you'll pay for home owner's insurance. Older homes are more prone to electrical, plumbing, roofing and foundation problems and thus can increase your premium. Check with your insurance provider to see if renovations can keep these related expenses down. Wood materials often warrant a higher premium because they are more susceptible to fire and water damage. 
• Location. Lower premiums are granted to homeowners who live near fire stations and not in flood plains or areas prone to natural disasters such as earthquakes. Additionally, neighborhoods with a high claim frequency may charge homeowners a higher premium.   

Fortunately, there are many things you are can do to lower your home insurance premium, such as:

• Increase your deductible. Generally speaking, there is a tradeoff between your monthly coverage payment amount and your deductible. A higher deductible means you will face lower monthly payments, but should you make a claim, you will be held responsible for paying more upfront.
• Find a provider who is a good fit for you. For example, some companies will charge higher premiums to pet owners. When shopping for an insurance provider, search for one that is pet-friendly and does not up-charge for pets.
• Keep your credit score as high as possible, which requires you to pay bills on time and avoid accumulating high levels of debt.
• Increase security by installing an alarm system, gated entrance, insurer-approved locks, or fence. These measures all result in a reduced likelihood that your home will be damaged or destroyed. Have fire sprinklers and an extinguisher, and take other precautions as needed. For instance, if you live in hurricane-prone region of the U.S., install hurricane shutters. Remember that floor insurance is a separate entity than home owner's insurance and should also be considered based on where you live.

Pre-Qualify for a Loan

House hunting is exciting, but the idea of financing a home is not. Meet with a mortgage officer to pre-qualify for a home loan. A pre-qualification, AKA prequal, illustrates a borrower's ability to get a loan. It's easier to obtain than a pre-approval because someone can get a pre-qualifcation online or over the phone; however, it is not as in depth as a pre-approval, which requires paperwork to back up your claims. Ideally, homebuyers should 1) get pre-qualified, 2) get pre-approved, 3) shop for a home based on their pre-approval, and 3) apply for the home loan. If your pre-qualification application isn't accepted the first time around, follow these three steps to improve your situation:

• Increase your credit score. You can improve your credit score in a number of ways. Order a copy of your credit history from TransUnion, Equifax, or Experian. Dispute any errors you come across--they will be removed within 30 days. Paying down your debt also helps, as debt accounts for 30% of your FICO credit score. Finally, pay your bills on time to slowly but steadily increase your score. 

• Don't change jobs. Lenders like to see that you've been with the same employer for at least two years, because this gives them confidence that you are stable and able to repay your mortgage. 

• Build income and financial assets. The simplest ways to afford the home you want are to get a pay raise and search for a lower priced home. Perhaps less obvious, you can find a co-borrower with good credit, hoping that your combined incomes will make the loan feasible. Build your assets by keeping a contingency fund--money reserved for emergencies with unexpected cash outflows. The fund should equal two or three months of your mortgage payments, and you must be able to prove (with bank statements) that this money has been in your account for at least 60 days prior to pre-qualification. 

Want to see if you will be approved before you visit a lender? Visit Bankrate.com's free online loan pre-qualification calculator. If you prefer to do the math yourself, the first step is the same--get your credit score. lenders prefer credit scores of 680+. Next, you should calculate the front-end ratio and the back-end ratio.

• Front-end ratio: proposed monthly mortgage payment / gross monthly income before taxes. This tells you how much of your monthly income goes toward mortgage payments and is not recommended to exceed 28%.
• Back-end ratio: total monthly debt obligations / gross monthly income. This tells you how much of your monthly income goes toward paying debts and is not recommended to exceed 36%. Note: debt obligations include credit cards, student loans, car loans, etc.

Finally, ensure that you have enough money for a down payment. As with contingency money, lenders like to see down payment funds in your bank account for a least 60 days. They also like for people to have their own money saved for a down payment--not the money of their friends or family.

As of July 2014, the average 30-year fixed rate mortgage was 4.13%

Bad Credit? Don't Panic

Your credit score is important—it’s what lenders use to determine your qualifications for a home loan. You can request a free credit report here.  Then meet with a lender, who can help you come up with a game plan to strengthen it. Keep in mind it can takes months, or even a year, for your credit score to rise after you improve your finances. The illustration below breaks down how your credit score is determined:

If you have excellent or good credit (a score of 700+ according to credit.com), you’re in good shape. But what if you’ve got poor or bad credit, at 649 and below? Conventional loans may not be able to help. Instead, talk to a lender about the Federal Housing Administration’s loan program, which requires a credit score minimum of only 580 (most lenders, however, require 620 or 640) for a loan with a down payment of 3.5%. Lenders will also want to see documentation of your income and assets to calculate your debt-to-income ratio, which, as a rule of thumb, should not exceed 41% of your monthly gross income. The FHA insures lenders against default and offers mortgage rates comparable to those of conventional loans. However, FHA loans do have higher mortgage insurance requirements than conventional loans, as mortgage insurance payments must be made for the entire life of the loan unless you make a bigger down payment. Remember, a lender can always help you determine which type of loan is best for you.

Post-Grad Housing Market Expected to Improve

90% of Americans 35 and younger prefer to own a home over renting one, according to a recent Fannie Mae survey. However, only 36% do own a home, down from the 2005 peak (43%) and the lowest percentage yet since home ownership by age was first recorded in 1982. Many factors come into play when examining barriers to home ownership, including the following:

• Student debt. It's no secret that the cost of higher education is rising. Moreover, more students are pursuing advance degrades (such as a masters degree or MBA), luring students even further into debt.

• Stagnant wage growth. Recently, wage growth has been offset by higher prices, hindering prosepctive homeowners. 

• Tight lending standards/inadequate credit. Not having enough credit makes it difficult for prospective homeowners to qualify for loans. Tight lending standards make it even more difficult, as lenders are more selective when approving people for home loans. Unfortunately, it takes time to build a good credit score. 

• Competition. Ironically, many of America's "youngest" cities are also the most expensive--New York City, Chicago, Las Angeles, and San Francisco among others. Competition in these cities drives up housing prices, pricing young residents out of the market. Furthermore, people in their 20s and early 30s cannot compete with the all-cash offers that are more common in competitive markets. 

• Low inventory. Low inventory has characterized the housing market for over a year now, meaning the market typically favors sellers over buyers. When in-damand houses enter the market, they tend not to stay there long; some sell within the week. This discourages first-time homebuyers, who want more time before committing to any given house. 

• Inability to generate a down payment. Many of the above points (including stagnant wage growth and student debt) result in the inability to generate a down payment. People in their 20s and 30s have yet to reach their prime earning years, and have also had less time to build up their savings. 

Fortunately, things are looking up for young homeowners. Mortgage lending is loosening up, as lenders approve people with lower credit scores and smaller down payments. As the job market continues to recover from the 2007-2008 crisis, incomes are expected to rise. However, this will likely not result in a housing "boom." Currently, many recent graduates are living with a parent (11 million in 2012, according to Pew Research Center). Instead, college graduates will slowly and steadily trickle out of their parents' homes and into the adult world.

Guidelines for First Time Homebuyers

Home ownership is a big investment in time, money, and lifestyle. To get the most for your money, follow these four guidelines.

1. Boost your credit score. How? Request your free credit report at the start of the year. Dispute issues and pay off debt. Refrain from opening new credit lines and avoid buying big ticket items such as cars and furniture, as this will cause your score to temporarily drop.  Your credit score influences your mortgage approval and rates.

2. Save for a down payment. Also to get the best mortgage rates, plan for a 20-30 percent down payment. Cut optional expenses and save that money for either a down payment or private mortgage insurance.

3. Do your research. Determine what type of loan you want (conventional or unconventional), what you can afford, and what you qualify for. An online mortgage term comparison calculator will help you get an idea of the cost. To see current rates and get quotes from local lenders, click here.

4. Find the best Realtor. In an age dominated by technology, a Realtor remains irreplaceable. Buying a house is stressful—let a professional guide you through the process, negotiate on your behalf, and handle paperwork. Realtor.com suggests looking at various Realtor’s client testimonials—read mine here. I work with both buyers and sellers in the Central Ohio area. If I can help you or someone you know, please contact me. 

What You Need to Know About Home Loans and Credit Scores

Lenders consider a variety of factors when issuing mortgage loans, including job history, debt-to-income ratio, income & assets, and the amount your down payment will be. However, their primary concern is credit score. It's important to check your credit report for errors and areas of improvement.


Your credit score may influence the type of loan you seek. FHA-insured loans generally have lower credit score requirements than conventional loans. It's often easier for a person to qualify who 1) lost a home in a short sale or foreclosure to get a new mortgage faster, and 2) has damaged credit. However, with an FHA-insured loan, you must pay mortgage insurance on the loan--which is often for the life of the loan, and higher than private mortgage insurance if you make a down payment of less than 20 percent.

Conventional lenders look more exclusively at credit score when issuing loans. Private mortgage insurance is automatically cancelled when your loan-to-value ratio reaches 78 percent.

The simplest way to boost credit score is to pay all your bills on time. Take these additional steps to boost your credit score over time:

• Pay off collections or judgments against you ASAP
• Update your over-the-limit and post-due accounts
• Reduce your credit card debt to no more than 25%  of your credit line on each card
• Don't open new lines of credit
• Don't close your credit card accounts (you'll be using more of your overall credit limit if you do)
• Use a credit card you haven't used for a long time, then pay the bill in full. This demonstrates your ability to responsibly handle credit. 

Want to know more? Read about how the FICO credit score is calculated and 7 mistakes that can lower your credit score. 

Determining Your Mortgage Payment

When buying a home, one of the most important factors is price. How much you can spend on a home depends on how much cash you can put down on a down payment, and how much money you can borrow. Before you begin looking for a home, seek pre-approval, based on credit and income, from a lender. Additionally, determine what you, personally, are comfortable paying. Your lender will be much less familiar with your lifestyle and future plans, and therefore will not consider some pertinent factors when approving you for a loan. Are you saving up for a family? Do you travel often? These are just a couple of questions you should ask yourself when generating your housing budget. To estimate your ideal mortgage payment, you can assess your current comfort level with your rent payment and look at your monthly income and expenses.

As a homeowner, your housing payment includes:

• Principal 
• Interest 
• Property taxes 
• Homeowners' insurance. 

Additional expenses:

• If you put less than 20 percent down on your home, you will have to pay mortgage insurance. 
• At least 1 percent of the home price should be set aside for maintenance and repairs.
• Some homeowners need to pay homeowner association dues (HOAs) or condominium fees. 

Lenders will look at your debt-to-income ratio when approving a loan. Most lenders won't approve loans with a ratio higher than 41-43%. You can use a mortgage calculator to help determine your debt-to-income ratio. Essentially, you'll want to divide your gross monthly income (all income documented by paystubs or tax returns) by your monthly debt payment (new housing payment and minimum monthly payment on outstanding debt, such as a credit card, a car loan, or child support).

Aside from income and debts, lenders will also look at:

• Assets
• Downpayment
• Credit score 
• Job history 

Your mortgage payment depends on your loan term and interest rate. A shorter loan term generally has a lower interest rate; however, it also means higher monthly payments. Interest is also affected by credit score. A higher credit score means a lower interest rate. Ultimately, a good lender can evaluate your personal circumstances and make recommendations for a loan program based on your individual financial needs. 

FHA Loan Modifications Hurt Borrowers

On April 1^st of this year, the U.S. Department of Housing and Urban Development (HUD) raised the annual Mortgage Insurance Premium (MIP) by 10 basis points, hoping to strengthen the Federal Housing Administration (FHA) insurance fund and decease FHA’s market share. Moreover, as of July 3^rd, the annual premium no longer cancels at 78 percent loan to value (LTV).

Marianne Collins, executive director and COO of Ohio Mortgage Bankers Association, writes in In Contract magazine that these alterations may make FHA the “loan of last resort.” Monthly conventional Private Mortgage Insurance (PMI) doesn’t have an up-front premium the way FHA does. Additionally, PMI continues to drop off at 78 percent LTV.

A borrower with a 680 credit score and 3 percent down payment would pay much more for a FHA loan requiring a down payment of 3.5 percent than s/he would for conventional monthly private mortgage insurance. Conventional PMI will even be lower at a credit score of 660 and a 5 percent down payment. Due to the lower cost of conventional PMI when compared to FHA MIP, private mortgage insurance companies are “making a huge comeback.”

Collins adds that only borrowers in high risk situations (such as those with low credit scores and brief periods since foreclosures and bankruptcies) have a reason to consider FHA for their financing. This could lead to a high default rate, because higher credit scores are absent to balance out the portfolio. Finally, Collins argues that FHA should do the opposite of what it has implemented: it should reward good credit by offering an insurance premium lower than private mortgage insurance for borrowers with good credit. To view FHA loan requirements, click here. For an additional explanation of FHA mortgage insurance and its changes, watch the YouTube video below.