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Anyone who has applied for a home loan probably has some familiarity with the importance of having a strong FICO score. FICO stands for Fair Isaac Company. There are three major bureaus that provide credit information (Experian, Equifax and TransUnion). These bureaus got together and created a competing score called the VantageScore. CreditKarma explained, “The VantageScore offers additional features, such as predictive scoring and a 24-month review of credit history, that the classic FICO model doesn’t incorporate.” For a comparison of the Vantage Score to the FICO score, click here.
This new score has a different scale. Experian, Equifax and TransUnion used a score that ranged from 300 to 850. This new VantageScore has a range from 501 to 990. This has led to some confusion as to how these scores compare. Lenders usually charge consumers to check their credit. They obtain the three scores from the major bureaus and generally use the middle score to base the lending rate that they offer the borrower. Some lenders have begun to use the VantageScore. For more information see: What Credit Scores to Mortgage Lenders Use?
Borrowers may want to obtain their score in order to repair any issues prior to applying for a loan. This can cost them around $20 if they want to receive a full Equifax or TransUnion score. Experian does not offer reports to consumers.
There are some other free options for credit reports. These include:
CreditKarma.com – Offers a TransUnion Transrisk and Vantage Score report.
CreditSesame.com – Offers Experian National Equivalency Score
Credit.com – Offers Vantage Score
While many sites offer different reporting options like these, they may not show exactly the same scores that the lender will obtain when they receive all three major bureau reports. Consumers, who apply for a loan and have paid to have their credit checked, can ask for a copy of their credit report from their lender.
The good news is that entrepreneurs have more options for funding than in the past. According to Entrepreneur.com, access to capital is improving for small businesses. This may be a frightening time to begin an entrepreneurial venture. However, there are an increasing number of available financing options. The following list contains some of the most prevalent in the current market.
- Banks – The number of people going to banks for loans is increasing. “According to a report this week on banks with more than $10 billion in assets, the overall volume of loan applications increased by 5.6 percent in September over August, reports Biz2Credit, an online credit marketplace in New York City that connects small and midsize businesses with lenders.”
- SBA Loans – Entrepreneurs have also traditionally gone with loans from the Small Business Association. “In 2011… it backed $30.5 billion in 61,689 loans to small business.”
- Angel Investors – “Angels invested $9.2 billion in 27,280 startups in the first two quarters of 2012, a 3.1 percent increase in dollars and a 3.7 percent increase in number of entrepreneurial ventures over the same time in 2011, according to a report this week from the Center for Venture Research at the University of New Hampshire.”
- Venture Capitalists – “In 2012, venture capital firms have raised $16.2 billion, representing a 31 percent increase from the $12.4 billion raised in the first nine months of 2011, according to a report from Thomson Reuters and the National Venture Capital Association released this week.”
- Crowdfunding – There have been some unusual ways that entrepreneurs have managed to raise funds. Crowdfunding has been growing in popularity. Entrepreneurs can raise funds through networking on the internet. Supports fund other people’s ideas or interests.
- Microlending – One of the top microlending sites is Kiva.org. Kiva is “a non-profit organization with a mission to connect people through lending to alleviate poverty. Leveraging the internet and a worldwide network of microfinance institutions, Kiva lets individuals lend as little as $25 to help create opportunity around the world.”
- Pledging – Kickstarter is a unique site allows entrepreneurs to keep ownership and control over their work while tens of thousands of people pledge millions of dollars to help finance their creative ideas. The idea must reach its funding goal or no money changes hands. Entrepreneurs that receive their anticipated funds, can test concepts without risk.
One of the things entrepreneurs plan for is the time that they will eventually sell their company. Currently many older business owners have found it difficult to reap the anticipated rewards of retirement. As the author of the Entrepreneur Exit Strategies for your Business pointed out, “it’s not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get the money back out.” If businesses were once very successful, the economy may have impacted their current worth. Even with what may once have been considered a strong exit strategy, plans may have been affected by the economic downturn.
Boomers trying to sell their businesses are receiving offers that are not enough to finance their retirement. In the Wall Street Journal article The Economy Stole My Retirement, it noted that one small business owner expected to sell for $2 million but recent losses from the recession has made that impossible. She now has seen offers as low as $250,000.
Business owners who had planned to travel and relax in their golden years are now spending 10-12 hours a day or more working to salvage companies. Some have no foreseeable chance of selling in the future. Many have put all of their money into their businesses and would have to live only on social security if they let the businesses fail.
While it is admirable to have high expectations for an entrepreneurial venture, it is the wise business owner who does not keep all of his or her eggs in one basket. Just as Enron employees learned the hard way, it is not a good idea to have all of your money invested in the company in which you work. If the company goes under, people not only lose their jobs but their life savings as well.
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It may not be as easy to purchase a new home in today’s real estate market. I teach real estate courses, I have a real estate license, and I spent years working in the lending industry. Because of that, people often ask me about what a home buyer should know about the process.
When I was a loan officer, the market was considerably better. First time home buyers had more options. Currently banks are hesitant to lend and buyers need to come up with more funds on their own. In the past, it wasn’t unusual for banks to lend at least 95% of the cost of the home. Now it isn’t unusual for banks to only cover 80% of the cost. FHA loans offer higher percentages but the amount you can borrow is limited.
Getting the Loan
As a loan officer, I did a lot of first time home buyer seminars. At those seminars, people had a lot of questions about the home-buying process. A big part of what they wanted to know was how their credit score affected their ability to get a loan.
A person’s credit score is extremely important in the loan process. The score alone does not dictate whether you will get the loan, but it is a big piece of the puzzle. Banks will also look at your work history, income and how much money you have for the down payment.
If you have a poor credit history, it doesn’t mean that will hurt you forever. As time goes by, your poor credit history fades if you do the right things and is replaced with good payment history. Your credit score should not vary that much from month to month. However, if you have had late house payments in the past or a bankruptcy, it can drop your score more quickly than other things. Improving your score takes longer than hurting your score. It isn’t common under normal circumstances for a score to change 20 points in a few months’ time.
That is why it is important to periodically check your credit report and contact the credit agencies if there is incorrect information on it. There are three main credit agencies: Equifax, Experian and Transunion.
If you report an error to these agencies, they must investigate it and respond to you within 30 days. Sometimes certain information will show up on one agency report and not on another. In order to get information removed from all of them, you need to contact all of them. Don’t assume that because you take care of contacting one agency, that the others will be corrected automatically.
Your score is sometimes referred to as a FICO score, which stands for Fair Isaac and Co., the software company that developed the score. In order to have a FICO score, you must have at least one account that has been open for 6 months or longer. Also, there has to be one account that has been updated in the past 6 months. The higher your score, the better risk you are and the more likely a bank will lend you money.
There are 5 main categories of information that are taken into account in determining your FICO score:
• Payment history accounts for about 35 percent of the score. Do you pay your bills on time? Are there any collections or bankruptcies? Bankruptcies will stay on a report for seven to ten years, depending on the type.
• Amounts owed accounts for about 30% of the score. How much do you pay on your accounts? How high of a balance do you have? How much of the credit granted do you actually taken advantage of?
• Length of credit history accounts for about 15%. How long have your credit accounts been established?
• New credit accounts for about 10%. How many recent requests for credit do you have?
• Type of credit accounts for 10%. What kind of credit mix do you have? Do you have credit cards, retail cards, mortgages, etc? You don’t have to have all types, and it isn’t a good idea to have accounts that you don’t use. However, it is worse to close an account that you don’t use than to leave it.
Here are some tips you can use to raise your credit score:
• Pay on time.
• If you missed payments, get current.
• Paying off a collection doesn’t remove it from your report, though it does improve your score.
• Contact creditors if you are having trouble making payments to see if they can help you.
• Don’t maximize how much you take out on your accounts. Keep balances as low as possible.
• Don’t move debt around unless it means you’ll be getting a lower interest rate. You still owe the same amount of money.
• Don’t think closing unused cards will raise your score.
• Don’t open a lot of cards just to have available credit.
• Don’t open too many new accounts too quickly.
• If you have had problems, re-establish new credit history.
• Check out your credit score from time to time.
• Only get new credit cards as needed.
• Manage the cards you have responsibly.
• A closed account will still show up on your credit report.
When people came to me to apply for a loan, I would ask them if I could run their credit. That is what you can expect a loan officer to do as well. They have to know what your credit is in order to know if you will qualify for the loan. Although many people are worried that their credit will affect their credit score, one inquiry will take less than 5 points off of their score. Rate-sopping can cause multiple requests on a report, but as long as the inquiries are within a 14-da6 period, it will only count as one inquiry as far as points taken off. Also the score ignores all inquiries made during the 30 days prior to scoring, so if you find a loan within 30 days, those inquiries will not affect your score while you are shopping.
What is a good score? Traditionally lenders usually liked to see at least 620 to get better rates. Scores over 700 sometimes can get even better rates. If your score was under 620, you could still get a loan, but you would pay a higher interest rate. The numbers change as programs change, but it is a good idea to try and keep scores as high as possible.
Once you get into a house and have house payments to make, whatever you do, do not be late on it. That is one of the worst things you can do to your credit. Should you be late with a house payment, the next time you go for a home loan, the bank is less likely to forget that tardiness than a late credit card payment. Having one late house payment in the last 12 months prior to applying for a home loan can severely affect your ability to qualify for a home loan. If you have a 30 day late payment in the last year, you will have to pay a higher interest rate on your new loan, which could cost you many thousands of dollars. Many lenders offer automatic withdrawal from your checking account. If you have problems remembering to pay your payments, I highly recommend calling your bank and signing up for that service.
Finding the Agent
The first part of the home-buying process is actually getting pre-approved for the home loan. It is only after you have received that, that you can actually start looking for a home. If you don’t have a real estate agent, you might ask your lender to recommend someone.
Another good place to find an agent is by asking friends and family. If they haven’t really had a chance to use anyone yet, you might drive through neighborhoods where you are interested in buying and see if there are any signs up of agents in the area. If you see several signs with a certain agents name on it, it probably means they know the area well and may be a good person to contact.
Remember you do not need to stay with a real estate agent or loan officer that you do not like. You have the right to drop them. They are working for you and if they make you feel uncomfortable or aren’t responsive, you should exercise your right to pick someone else.
The good news about being the home buyer is that the home seller is the one who pays the real estate agent. Your agent will receive a commission for helping you but it will not have to come from you.
There are a lot of things you can do to protect yourself in the home-buying process. Your agent should help you with home inspections and direct you to appropriate insurance agents if you don’t have one.
The Important Things to Remember
Here is the minimum you should know about Home Buying and Renting:
• If you can afford to buy, there are tax advantages over renting.
• Understand what constitutes a FICO score.
• Fix any bad things you have on your FICO score by contacting all 3 credit agencies.
• Get preapproved for a loan before ever looking at homes.
• Find a real estate agent through referral or through checking out neighborhoods where you are interested in buying.
• If you don’t feel comfortable with your agent, get a new one.
• Remember the home buyer does not have to pay the real estate agent.
• Protect yourself with home inspections and insurance.
Crowdfunding is the latest buzz word in entrepreneurial lending. Fundable is a new company that offers “crowdfunding for startup companies”. Crowdfunding occurs when people network through the internet to raise money to support other people’s ideas or interests. Fundable’s site allows entrepreneurs to raise capital through crowdfunding activities. Fundable’s site states, “Startups create a funding profile that provides an overview of their company, their fundraising goals, and the rewards they are willing to provide potential backers. Thereafter, they reach out to their personal networks as well as the broader Fundable community to enlist their support.”
Backers may pledge money and/or offer assistance. Fundable mixes Kickstarter-style and equity-based crowdfunding. Fundable shares similarities to Kickstarter, in that the process involves all-or-nothing funding. Goals must be met in order to receive the funds and there is no limit to the amount of money that may be raised. Scribd.com explained that there are differences between Fundable and Kickstarter. “Fundable will seek to fund for-profit companies, while Kickstarter is all about creative projects, like literature, movies and the like.”
With the recent push for Obama’s Jumpstart Our Business Startups (JOBS) Act, Fundable may be able to take advantage of the crowdfunding law to solicit funds online from unaccredited investors. However, Mashable explained, “Crowdfunding legislation is so new that the U.S. Securities and Exchange Commission (SEC) hasn’t set rules for it and Fundable needs to be approved by the SEC as a broker/dealer before it can handle investments. In the meantime, the company is focusing on offering rewards-based deals — which makes it look, for the time being, like a less-populated version of Kickstarter.”
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