What is a High-Yield Savings Account?

By Sabrina Karl

The internet has changed many things in our lives, from how we connect with others to how we shop. You can also count changes to personal banking among the major impacts of living in an online world, with our ability to electronically manage our money now the status quo.

One specific consequence is how easy — and quick — it’s become to move money from one bank or credit union to another, no matter where those institutions exist. As a result, it’s not as important anymore that one’s checking and savings accounts reside at the same institution.

Enter high-yield savings accounts. Though not all of them carry this name, this certain breed of savings account pays rates much higher than what you’ll earn on a standard savings account  — sometimes 20 to 25 times more. The minor catch is that it may require opening the savings account at an institution new to you.

Both traditional banks and credit unions as well as internet-only banks offer high-yield savings accounts. What both types will have in common, however, is a highly digital experience. In exchange for much higher rates, high-yield accounts typically offer only online access, and may limit features.

Dozens of high-yield savings accounts around the country are currently paying 1.50% to 2.00% APY, or even higher. Compared to the national average of 0.09% APY, that’s a noticeable boost in interest each month.

The simple key is establishing transfer connections between your primary account and the new account, so that moving money in either direction is easy and fast (often taking one day, and almost never more than three). But if that lag time is too much, one strategy is holding some funds in a savings account at your primary bank (offering instant transfers) with an additional high-yield account elsewhere.

Can money be gifted for a house down payment?

By Sabrina Karl

With first-time homebuyers often struggling to save a down payment, gift money from their family can be a welcome fix. But simply transferring funds from the Bank of Mom & Dad to Johnny’s bank account won’t alone solve the problem. Both giver and recipient need to follow certain gift money rules.

First, the type of mortgage being applied for, as well as the borrower’s credit score, will determine how much personal investment is required in the down payment vs. how much can come as a gift. For instance, FHA loans have different rules on this than conventional mortgages, so the first step is learning the rules for the particular loan and situation.

Also note that down payment gift money must generally come from a family member, such as a parent, grandparent, aunt or uncle, or a sibling. Gifts from friends are typically not allowed, but contributions from a spouse, domestic partner, or fiancee usually are accepted.

Once the allowable gift amount is determined, be aware that all lenders will ask to see 2-3 months of bank statements. So any large, non-routine deposits that show up during that time period will need to be explained and documented.

Specifically, a gift deposited within that 2-3 month window will need to be confirmed with a gift letter from the donor. Most importantly, this letter establishes the relationship of the giver to the recipient and explicitly states that the money provided is being gifted, not loaned, with no expectation of the donor being paid back.

Gift money can be an excellent way to help new buyers get into their first home a little sooner than they would be able to on their own. The trick is simply doing your homework so both giver and lucky recipient can satisfy the lender’s requirements.

Is a home inspection required when buying a home?

By Sabrina Karl

Among the myriad steps of buying a new home is having a home inspection performed once you’re serious about purchasing a specific house. But as far as your lender is concerned, is a home inspection required?

Home inspections are certainly a smart move. Performed by certified professionals, the inspection will evaluate the existing condition of all aspects of a house, including the roof, foundation, electrical and plumbing systems, heating and cooling mechanicals, walls, windows, and insulation.

These inspections typically cost $300-$500 and result in a detailed report laying out the area-by-area findings throughout the house.

Typically, homebuyers order a home inspection after having their offer on a house accepted, giving them a chance to negotiate any price adjustments based on deficiencies or required repairs identified by the inspection, or to abandon the offer altogether.

As smart as it is to order an inspection, however, your lender almost certainly won’t require it. What mortgage lenders do require is an appraisal of the home, but this is not at all the same as a home inspection.

Whereas an inspection assesses the quality and condition of the home’s structure and its major systems, an appraisal aims merely to determine the home’s fair market value, so the bank can be sure the requested loan is appropriate given the value of the property.

One exception is for FHA loans, where the required appraisal also includes a basic inspection to determine that the home is safe and habitable. But the FHA inspection component comes nowhere near the comprehensiveness of a professional home inspection.

Gaining a complete understanding of a home’s physical strengths and weaknesses before you purchase it is invaluable. Just be clear that the inspection is an investment you make to protect your own interests — and peace of mind — rather than the lender’s.

Existing debt not stopping homeowners from renovating

By Sabrina Karl

A recent survey asked U.S. homeowners if they plan to renovate their home in the next five years. About 7 in 10 said they would. The more interesting facet, though, is that this was a survey of homeowners who are carrying $10,000 or more in unsecured debt.

Mortgages and car loans are secured debt, so someone with unsecured debt means they owe on credit cards, student loans, personal loans, or other debts that don’t involve collateral, like a house, car, or boat.

Still, among the 1,028 indebted homeowners surveyed, 69 percent said they plan to renovate in the next five years. And almost half (48 percent) expect to spend more than $15,000. About a quarter (26 percent) project to spend upwards of $25,000.

How do they plan to pay for the renovations? Although 58 percent said they had cash savings to contribute, roughly a quarter of respondents said they would tap a home equity loan (29 percent), a credit card (28 percent), and/or a personal loan (24 percent). Since many respondents reported using multiple methods to foot the bill, percentages sum to more than 100 percent.

Across generations, millennial homeowners were the most likely to take on additional unsecured debt to fund their home improvement project, with 36 percent reporting they would use credit cards and 31 percent saying they’d take out a personal loan.

Generation X and baby boomer homeowners leaned more heavily towards home equity loans, at 28 percent and 25 percent, respectively. For Gen X, only 21 percent said they would use cards and 20 percent, a personal loan. Among boomers, 23 percent planned to use a credit card and just 13 percent, a personal loan.

The online survey was conducted for Freedom Debt Relief by Atomik Research between July 3 and 14, 2019.

The top 4 things mortgage lenders want to see in your application

By Sabrina Karl

When applying for a mortgage, lenders ask for so much information and documentation that it can be hard to understand exactly their magnifying glass is trained on. But what they specifically want to see can be boiled down to four factors: your credit history, your debts, your income and employment, and your funds available for a down payment and reserves.

Your credit score is among the first things they will assess, both to make sure you meet a minimum threshold (generally at least 620) and, for scores above that, the interest rate they’ll be willing to offer. The higher your credit score, the better the rate you can secure.

Also under close scrutiny and calculation will be how much debt you hold relative to your income. Mortgage lenders need to see that the sum of your monthly debt obligations, plus your proposed mortgage payment, will not exceed 43 percent of your monthly pre-tax income. And they’d prefer to see a debt-to-income ratio of 36 percent or lower.

To determine this ratio, knowing your income is also critical. That’s why lenders want to see two years’ worth of income and employment history. But they’re also assessing whether your income appears reliable, or if there’s reason to worry that what you’re bringing home now is not likely to be indicative of your income in the future.

Lastly, a lender will pay close attention to how much money you’ll have available for a down payment, how long you’ve had it, and how much reserve you’ll have afterwards. Proof that you’ve had the funds for at least two months is important, as they won’t count money that shows up just before closing. They’ll also want you to have some cash leftover for moving and home expenses, as well as potential surprises.