Straight Talk on Mortgages, Credit Cards & More

If you are applying for a mortgage, or know of anyone that is, it is obviously far more difficult and frustrating a process than it was several years ago. Generally, here are things you will need: 30 days worth of pay stubs, 60 days worth of bank statements and two years worth of W-2’s and tax returns. You also may need to complete IRS Form 4506T – this form is used to verify that the tax returns you gave the potential lender were the same ones given to the IRS. For real. As, or if, the loan process starts to drag out before being finalized, you may be asked for current check stubs. Borrowers need a solid credit history….for conventional financing you probably need a credit score of 680 or higher, depending on the down payment, and 640 or higher for government financing. Be ready to document a minimum of two years of job history. You also need a debt-to-income ratio of 45% or lower. The mortgage originators and bank loan officers end up getting crucified by potential borrowers because they are out in front of the borrower asking for all this stuff – usually because an underwriter in a back room somewhere is asking for this load of info/documentation. So…the best item needed in the process is patience.

Let’s talk more about credit card…here are some common myths and facts regarding credit card scores.

  • MYTH: You have to stay in debt to have a good credit score. FACT: Your scores will be better if you pay off credit cards in full. The people with the best scores tend to be those who keep their card debt below 10%-15% of their available credit limits – or, even better, pay off their cards in full each month. Along these same lines, closing an unused credit card can actually hurt you. Say you have 3 cards. Each have a $6,000 limit. So, you have a total of $18,000 in available credit. On these cards you rack up a total of $2,700 in charges for the month. You pay the $2,700 off in full. You have used a total of 15% of your available credit…that is good. If you closed one of the cards, you have now charged 22.5% of your available credit…not as good.
  • MYTH: It’s not important to order your credit report. FACT: Credit reports often contain errors, some of which compound over time. One in four consumers finds an error on their report significant enough to affect their scores. Count me in the “one” category.
  • MYTH: If you co-sign a student or other loan, it doesn’t affect your credit. FACT: Payment information on co-signed loans can be reported for both borrowers, regardless of who pays. Remember, when you co-sign a loan, you’re not just vouching for the borrower. You’re agreeing to be responsible for the debt in the event the borrower can’t or won’t pay.
  • MYTH: You can hide credit card debt by transferring balances to low-interest cards. FACT: Scorers and lenders look at your total debt, not the interest you pay on it.

Almost all of the larger banks used to process the transaction amounts that were the largest first….then work their way down to the smallest….that came in overnight. That way, they could nail you for more overdraft checks/transactions and charge you more fees! After much consumer screaming, most banks switched to posting the day’s transactions chronologically, instead of from largest to smallest, causing fewer overdrafts. Make sure your bank follows this policy…just ask them.

In dog years, I have now passed over the 350-year-old marker! In human years, here are some useful Financial Milestones in your life:

  • Age 55 – If you are 55 or older, and lose or leave your job, you can take a distribution from your 401(k) and pay only income taxes on the distribution – but avoid the 10% early withdrawal penalty. It’s called “separation from service”.
  • Age 59 ½ – Whatever type of retirement account you have – IRA, 401(k), 403(b), SEP, or SIMPLE – you can begin making withdrawals penalty-free. You pay income tax on the earnings. For a Roth IRA, contributions and earnings can be withdrawn penalty-free and tax-free if you have had the account at least 5 years.
  • Age 62 – Unless you are disabled, this is the earliest age you can start collecting Social Security benefits. They are at a reduced amount because you have not reached your full retirement age (between 66 and 67 depending on the year you were born).
  • Age 65 – You are now eligible for Medicare.
  • Age 66-67 – Full retirement age – can collect full Social Security monthly benefit. Basically, you need to decide at what age to start collecting SS benefits. You will have a good idea, based on your financial situation, when you get there.
  • Age 70 ½ – You are now required to begin taking withdrawals from your retirement accounts, with 2 exceptions. If you are still working, you do not have to deduct from your 401(k). You are never required to take minimum distributions from a Roth IRA.

Going back to my cage…..don’t forget to give me some great holiday meal scraps from your table…bark at you soon.

Mike De Stefano, Principal