Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.
Steps.
1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.
2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.
3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.
4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.
5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.
6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.
Tips.
If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.
Warnings.
Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.
The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.
Part 1 Calculating a Commercial Loan Amount to be Financed.
1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.
2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.
If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.
Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).
3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.
4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.
5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.
Part 2 Determining the Amount Financed for a Mortgage Loan.
1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.
2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.
Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.
For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.
3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.
4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.
Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.
A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.
For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.
Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.
5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.
6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.
7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]
Part 3 Using the Amount Financed.
1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.
2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.
For more information, see how to calculate interest payments.
3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.
4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.
Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.
For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.
5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.
A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.
Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?
Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.
Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?
Answer : You will be financing the selling price plus any fees, minus the down payment.
Tips.
When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.
Warnings.
The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.
A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.
Part 1 Arranging Financing with the Franchisor.
1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.
Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.
Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.
This information may be available online or in other documents provided with your franchise application, or you may need to request it.
2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.
McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.
3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.
The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.
Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.
Part 2 Securing Outside Financing.
1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.
Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.
These loans usually require you to have already established a relationship with a banker.
2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.
SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.
You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.
The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.
3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.
Two of the biggest online loan portals are Boefly and Franchise America Finance.
Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.
4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.
Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.
Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).
However, equity does not have to be repaid (unlike a loan).
You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.
Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.
Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.
If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.
Part 3 Using Your Own Assets.
1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.
Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.
2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.
You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.
You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.
Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.
3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.
If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.
Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.
So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.
Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.
Be warned, however, that if your new business fails, your retirement funds will be wiped out.
Part 4 Refinancing Your Franchise.
1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.
You can get a loan at a better interest rate.
You want to consolidate multiple loans into a single payment.
You want to change from and adjustable to fixed rate of interest, or vice versa.
You need more capital to update equipment, make improvements, or open an additional location.
2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.
Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.
Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.
3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.
There may be other penalties as well, based on the details of your old loan.
The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.
4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.
Strengths and weaknesses of your business.
Major milestones or accomplishments.
Expertise you have developed in running the franchise.
Goals for the next two to five years.
Two years of tax returns.
The payment schedule of your current loan.
5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.
Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.
You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.
Tips.
Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.
Warnings.
It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.
Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.
Seek purchase order funding. If you resell goods, then you might need a loan to pay your suppliers. In particular, a large order might require that you make additional investments in your company. With purchase order funding, the finance company will pay the supplier directly.
This type of financing works only if your markup is sufficiently large. You’ll need a gross profit margin of at least 30%.
You can contact a financing company about this type of funding.
Get an advance against your invoices. “Factoring” is a funding technique where you get an advance against your invoices. If your clients are slow to pay, then factoring can provide you with the cash you need. You may immediately get around 80% of the invoice value. When your client finally pays, you get the remainder less any fee charged.
You’ll only qualify if your clients have good credit. For example, government or reputable commercial clients are best.
Perform your research before working with a factoring company. Ask if they work with businesses of your size and ask about their experience. Also check if they have a minimum that you must factor.
Ask friends or family for a loan. People who know you can also lend money to finance your business. This is probably an ideal option if you are borrowing a small amount of money.
Approach family with the seriousness that you would a bank. Explain why you need the money and how you intend to pay it back.
Consider paying your lender interest. This will also show that you are serious and not looking for extra money to spend on luxuries.
Write up a promissory note and sign it. This will bind you contractually to paying back the money.
Withdraw money from your retirement account. You can finance a start-up or an existing business by using your IRA or a prior employer’s 401(k) account. You have to roll over your current funds into a retirement plan created for the business. The plan then uses the proceeds to buy stock in the corporation.
This is a complicated procedure, and you should hire a financing firm to help you with the process. Check how much the company charges and whether they charge a monthly advisory fee.
Also think carefully before using your retirement savings to finance your business. You had earmarked this money to support you when you retire. If your business folds, then you’ll lose these savings.
Use a credit card. Depending on how much money you need, you might use a credit card.[23] Credit cards are a good option if you can get an introductory 0% rate for 12 months or more. Remember the following tips for credit cards:
Make sure to get a business credit card. You want to keep your business and personal expenses separate. If you commingle them, then it looks like your business isn’t really a separate entity, which could hurt you if your business is structured as an LLC or corporation.
Use the card wisely. It’s probably not a great idea to use the credit card for big purchases, like equipment. Instead, seek an equipment loan. Use your credit card instead for short-term financing, such as to pay travel expenses.
Raise money through crowdfunding. You can get funding for one-off ideas, such as writing a screenplay or financing the creation of a rap album. You create an account with a crowdfunding site, and people who visit the site can donate to your project.
Crowdfunding is only for small, discrete projects, not long-term financing for a continuing business.
Common crowdfunding sites include Indiegogo, RocketHub, and Peerbackers.[26] Visit these sites and read up on their terms and conditions.
Take a home equity loan. Your home may be the largest asset you own. Accordingly, banks will lend to you if you use your home as collateral. You can get an equity loan or a home equity line of credit (HELOC), which you can use to fund your business.
With a home equity loan, you get a lump sum and pay it off in equal monthly installments. By contrast, a HELOC acts like a credit card. You use what you need up to a limit and then pay it back.
Talk to a lender about the terms and conditions of taking a home equity loan or a HELOC. Compare interest rates and how much time you’ll have to pay off the loan.
Using your home as collateral shouldn’t be your first option. If your business fails, then you will lose your home.
Search for grants. You might be able to get a grant from the federal, state, or local government. Some non-profits also provide grants to businesses. Grants are often given to support emerging technologies and are typically reserved for specialized businesses. Grants are not a good option for most businesses.
However, if you think you might qualify, then check your local business development office to see what is available.
You can also use the BusinessUSA Financing Tool, which is available here: https://business.usa.gov/access-financing.
Tips.
Franchises have additional funding options. For example, the franchisor may be willing to lend you money. You should ask franchisors whether they extend funding to potential franchisees.
There are many benefits to an owner financing deal when purchasing a home. Both the buyer and seller can take advantage of the deal. But there is a specific process to owner financing, along with important factors to consider. You should begin by hiring people who can help you, such as an appraiser, Residential Mortgage Loan Originator, and lawyer.
Part 1 Hiring People to Help You.
1. Hire an appraiser. Both the buyer and the seller should hire their own appraiser to determine the value of the house. The seller receives an appraisal in order to select a price for the home, and the buyer gets an appraisal to confirm that the selling price is fair. You can find an appraiser in the following ways:
look in the Yellow Pages, ask for a referral from a mortgage company, bank, or realtor, contact your state’s licensing agency.
2. Hire a real estate attorney. Both parties should work closely with a real estate attorney. A real estate attorney can draft all of the necessary paperwork. The attorney can also protect your interests. For example, the buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death.
You can get a referral to a real estate attorney by contacting your local or state bar association. Bar associations are organizations made up of attorneys, and they often provide referrals to their members or can help you find an attorney.
3. Get advice from a Residential Mortgage Loan Originator (RMLO). A Residential Mortgage Loan Originator can give you advice on how to manage owner financing in a way that is transparent and compliant with regulations. When you owner finance a home, you are essentially providing the buyer a loan until they complete their payments on the home. Since you want your agreement to be clear and binding, it's good to work with a mortgage professional.
Your RMLO can help ensure that your owner financing documents are compliant with the Safe Act and Dodd Frank Act.
Make sure your RMLO is properly licensed by your state. Check with your state’s Department of Business Oversight or equivalent state office to check.
Part 2 Preparing for the Sale.
1. Get approval if you still have a mortgage. Owner financed sales work best when the owner has title free and clear or the owner can pay off the mortgage with the buyer’s down payment. However, if the seller still has a large mortgage, they need to get their lender’s approval.
Check whether you can pay off the mortgage with the buyer’s down payment. If not, then contact your mortgage company and discuss that you want to sell the house.
2. Consider performing background checks to control risk. Both the seller and buyer should perform background checks on each other. Many owner financed sales are short-term, for five years or so. At the end of the term, the buyer is expected to refinance and then make a “balloon payment,” paying off the balance of the loan. As a seller, you will want assurance that a buyer can get a traditional loan at the end of the contract term, which means you definitely want to check their credit history and employment.
In fact, sellers should consider having buyers complete a loan application. You can verify references, employment history, and other financial information.
Buyers also benefit from background checks. For example, they might discover that the seller has been financially irresponsible. If the seller still holds a mortgage on the home, there is a risk of default.
3. Determine loan details. One advantage of an owner financed sale is that the seller controls details about the financing. Because the seller is assuming a lot of risk, they should come up with terms that protect them. Talk with your attorney about what the terms of the loan should be. Consider the following.
a substantial down payment (usually 10% or more), an interest rate that is higher than usual (though less than your state’s maximum allowable interest rate), a loan term you are comfortable with.
4. Ask your lawyer draft a purchase and sale agreement. You want to protect yourself legally by making sure that you have all of the necessary legal documents prepared. Your real estate attorney can draft a purchase and sale agreement, which both seller and buyer will sign. This document provides information about the following:
closing date, name of the title insurance company, final sale price, details about a down payment, if any.
contingencies which must be met for the sale to proceed, such as an acceptable inspection and a clear title report.
5. Draft a promissory note. The seller also needs the buyer to sign a promissory note or other financial instrument. Your lawyer can draft this document for you. It should contain the following information.
borrower’s name, property address, amount of the loan, interest rate, repayment schedule, terms for late or missed payments, consequences of default.
6. Have your lawyer draft a mortgage. The mortgage provides security for the loan. Your lawyer should also draft this document for you. The mortgage is what allows you to repossess the house should the buyer default on the loan.
Part 3 Completing the Sale.
1. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment. Remember that not every state allows balloon payments.
For example, you can base monthly payment amount on a hypothetical 30-year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.
2. Close the sale. Both the buyer and seller should have independent attorneys who can review all paperwork to make sure that it is complete. You should schedule a closing to sign everything and make copies.
3. Hire a loan servicer to manage payments. The seller should talk to their lawyer about whether they want to hire a loan servicer. If they do, then their lawyer can recommend someone. A loan servicer provides many important services.
collects the mortgage payments, sets up an escrow, handles tax statements and payments, makes insurance payments, processes payment changes, performs collection services, if necessary.
4. Record your mortgage or deed of trust. You can record it in the county land records office. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.
Part 4 Deciding Whether an Owner Financed Sale is Right.
1. Analyze your situation as a seller. Owner financed sales are rare, and you shouldn’t jump into one until you have thoroughly considered your situation. Think about the following.
You usually must own the house free and clear of any mortgage. Otherwise, you will need your lender to give you permission to sell.
Taxes can be complicated and you’ll want to hire a tax professional to help you.
You might have to go through the foreclosure process if the buyer stops making payments. This can be costly and time-consuming.
However, you may make much more money on an owner financed sale than if you sell the traditional way.
2. Determine if an owner financed sale is ideal as a buyer. Buyers usually like owner financed sales because a seller might be less choosy than a bank or mortgage lender. However, you should consider the following.
You might have to come up with a larger down payment than you normally would. The owner-seller is taking a risk by financing your sale, and in return they might want a larger down payment or higher interest.
Owner financed sales often close faster than other sales.
You need to be sure you can make the balloon payment if one is written into the contract. If you break the contract, then you could lose the house and all of the payments you have made up to that point.
3. Talk with professionals if you have questions. In addition to working with a real estate lawyer, you might want to meet with a tax professional, such as a certified public accountant. Ask about the tax benefits of an owner financed sale compared to selling outright.
If you are a buyer, then you should talk about how to raise your credit score so that you qualify for a traditional mortgage when the balloon payment comes due.
4. Make sure your buyer can cover the balloon payment. Owner financing is most often used when the buyer or property does not qualify for a conventional loan. This means the buyer may not have the resources to cover the balloon payment at the end of your term. Discuss your buyer's options before entering into a contract with them.
If you are a buyer, make sure that you have your options for paying the balloon payment lined up before you agree to the seller's terms.
5. Consider a lease-to-own option. This option is often more advantageous for the buyer and less complicated for the seller. You and the person interested in your home will lock in a potential sale price for the home, as well as a lease agreement ranging from 2 to 5 years. During that time, the person will pay you rent on the home, with a portion of that rent going toward a down payment on the house. After the lease ends, the person can choose to proceed with the sale as arranged, or they can opt to walk away.
If they walk away, they don't get a refund on the extra money they paid toward the down payment.
If they do walk away, you'll need to relist your home.
Tips.
The seller should ask that the buyer purchase homeowner's insurance and confirm the seller as mortgagee.
The seller should establish a land contract. With a land contract, title doesn’t pass to the buyer until the final payment has been made. Discuss this option with your attorney and see if such a contract is feasible.
As more and more Americans require nursing home care, their families are struggling to find ways to pay for, or at least reduce, the immense cost of care. In 2012, the average cost of a private room was over $90,000 a year and a semi-private room cost $81,000 a year. For most people, paying for a loved one’s nursing home care presents an almost insurmountable financial obstacle. However, there are ways to finance and reduce the cost of a nursing home so that a loved one can get the type of long-term care that they require.
Method 1 Reducing Costs and Using Personal Assets.
1. Consider in-home care. Long-term nursing home care costs between $6,000 and 9,000 a month and many people cannot afford this option. To save money, you may want to consider in-home care, which costs approximately $21 an hour for a care assistant. This option is not only less expensive but it allows your elderly or disabled family member to reside in his or her home for as long as possible.
2. Negotiate long-term care costs. If you are paying out-of-pocket for long-term nursing care, you should negotiate the overall cost with the nursing home. While some nursing homes may refuse to negotiate, others would prefer to take a lower private care rate because it still pays more than state-sponsored Medicaid programs.
3. Relocate your loved one. The cost of nursing home care varies greatly from state to state and even from locality to locality. If your loved one has family members who live in different states, you should determine which state has the lowest cost for nursing home care. Nursing home care in Texas, Utah and Alabama can cost less than half of nursing home care in states in the Northeast.
4. Qualify for a Reverse Mortgage. A reverse mortgage is a loan that a homeowner gets from a bank against the value of their home. The loan converts the home's equity into cash and the homeowner receives either a cash sum, regular payments, or a line of credit equal to the equity in the home. After the owner's death, the bank may foreclose on the home (get ownership without further liability to the home owner) or members of the estate may sell the home and pay off the loan.
In order to qualify for a reverse mortgage, each homeowner must be at least 62 years old and live in the home where the reverse mortgage was taken.
A reverse mortgage may be a good solution if you are in good health. You can use the proceeds from the reverse mortgage to pay for long-term care insurance or to make your home more accessible so that you can remain in the house as long as possible.
If you are in need of care but do not require nursing home care yet, you can use a reverse mortgage to pay for in-home caregiver services. This provides seniors with the ability to stay in their home for a fraction of the cost of a nursing home.
If you are a married couple and one of you need nursing home care, a reverse mortgage can pay for nursing home care and allow the healthy spouse to remain in the family home. If the spouse needing care dies, the surviving spouse can stay in the home so long as they can continue to pay for property taxes and insurance.
Method 2 Qualifying for Medicaid.
1. Determine whether you qualify for Medicaid. Medicaid is a state and federal government program that assists low-income individuals with a variety of medical care, including nursing home care. You can only qualify for Medicaid if you fall below the monthly income and asset limits set by your state.
You can determine whether you meet the eligibility requirements for your state at: https://www.healthcare.gov/medicaid-chip/getting-medicaid-chip/
If you qualify for Medicaid, you can apply online at https://www.healthcare.gov/medicaid-chip/getting-medicaid-chip/ or check the website for the address of your state Medicaid office and apply in person.
2. Qualify for Medicaid. If your assets are currently too high to qualify for Medicaid and you want to protect your personal assets from nursing home expenses, you can consider legally reducing your assets in order to qualify for Medicaid.
Before attempting to reduce or transfer your assets, you should speak with an elder law attorney. Medicaid has very strict rules about what assets can be transferred and what purchases are allowable to reduce your income. If you improperly reduce your assets, Medicaid can penalize you for months to years and prohibit your qualification for the program.
The National Association of Elder Law Attorneys has information about elder law specialists on its website at: https://www.naela.org. The American Bar Association also provides attorney referral information at: http://apps.americanbar.org/legalservices/findlegalhelp/home.cfm.
3. Reduce your assets. In order to qualify for Medicaid, you can reduce your assets by.
Paying off debt, such as a mortgage, student loans or credit cards.
Paying for in-home medical care, Paying for necessary home repairs, such as a new roof or furnace.
Transfer funds to your spouse for his or her benefit, Transfer funds or set up a trust for your blind or disabled child or for a disabled person under the age of 65.
4. Set up a Medicaid Asset Trust. With a Medicaid Asset Trust, you transfer all of your assets into a trust and give up control over those assets. Any funds placed in the trust do not count towards the Medicaid asset limits. However, if you transfer funds into the trust within 5 years of applying for Medicaid, you may be subject to Medicaid’s “lookback provision.” Under this provision, Medicaid may penalize any person that it determines conducted a non-exempt transfer under the Medicaid regulations. If you are penalized, you may not be able to qualify for Medicaid for months or even years.
Method 3 Using Insurance Options.
1. Purchase long-term health insurance. Unlike regular health insurance, long-term health insurance is designed to pay for long-term care, which may include nursing home care, in-home care or medical equipment. When evaluating long-term health insurance polices, you should carefully select a policy that covers nursing home care if you reasonably believe that you will not have someone to care for you at home should you fall ill and become unable to care for yourself.
It is best to acquire long-term health insurance when you are younger and in good health. As you get older, long-term health insurance becomes much more expensive and many seniors are either unable to afford or qualify for a policy.
2. Cash in your life insurance. Another way to pay for nursing home care is to cash in your whole life insurance policy. Certain policies allow policyholders to cash in their insurance policy for 50 to 75 percent of the face value of the policy.
Keep in mind that this is only an option for whole life policies, not term life policies where there is no cash value.
Depending on your individual life insurance policy, there are two ways that you can cash in your policy: accelerated benefit or life settlement.
If you qualify for an accelerated benefit, the insurance company will pay between 60 and 80 percent of the face value of the policy. Under certain policies, you may have to be suffering from a terminal illness in order to qualify for an accelerated benefit.
A life settlement is a policy payout that you negotiate with an outside company not the insurance company that issued the policy. These settlement companies look at the value of your policy, your age, and your health and pay you between 40 and 75 percent of the face value of the policy. Depending on the health and age of an individual, it may be possible to sell some term policies.
Before negotiating a life settlement, you should speak with an elder law attorney as there may be tax and Medicaid implications from receiving the proceeds of the policy through a settlement company.
3. Check Medicare benefits. While Medicare does not pay the cost of long-term nursing home care, you may qualify for a certain portion of the stay if you were transferred to a nursing home within several days of a hospital stay and you require skilled nursing or rehabilitative care. If you go to a Medicare-approved facility, your stay may be covered for up to 100 days.
Medicare will also pay for in-home care for a certain period as well. This coverage may help if you are trying to reduce assets or do not physically require full nursing-home care.
Tips.
Do not try to transfer or reduce assets before speaking with an experienced elder law attorney.
Be wary of advisers who are not attorneys. Throughout the country, there are people and companies who exploit the elderly and their caregivers by inducements of Medicaid qualification.
Real estate can be a very good investment. Depending upon your resources, you may need to know how to finance the real estate. When financing, there are a number of considerations and options for you to consider.
Steps,
1. Review your financial background. Prior to considering a loan you should be aware of several factors which may affect your loan approval.
Check your credit score. A low credit score may affect the interest rate that you will pay or may prevent you from getting the loan.
Make sure you save enough money to cover a down payment. Although no money down loans have existed, it is likely you will pay an upfront payment of anywhere from 3.5% to upwards of 20% of the cost of your new real estate. A second loan may help defray that cost.
You may need to establish that you have a stable level of income, and a lender may consider the ratio of your debt to income. A high percentage of debt to income could disqualify you for a loan.
2. Assess the maximum amount of mortgage you can afford. You will need to take a look at your income and expenses, including your debt. That debt should include any installment debt, mortgage debt on a second property, loans, credit card debt, child support and additional debt which will be acquired with the new property. That additional debt should include the new projected insurance, taxes and home owners fees. You should add that debt to any other monthly expenses, such as food, clothing, health care, and transportation costs to determine the amount of your overall obligations should you complete your purchase. Of course certain expenses such as your current rent payments would be excluded. Subtract the obligations from your income to determine the maximum mortgage payment you could make and decide the mortgage amount you would be comfortable making.
3. Secure pre-approval or pre-qualification for a loan with a lender. A lender will review your finances and give you an idea how much you can borrow. The pre-approval process goes through a more in depth analysis of your finances and more accurately reflects an amount that you can borrow. Neither review is binding on the lender.
4. Determine the type of loan you want or need. The first option most people consider is the conventional loan. There are several types of conventional loans.
The fixed loan locks in the interest rate and the payment amount for the duration of the loan.
In the adjustable rate mortgage, the interest rate is subject to change over the course of the loan.
A jumbo mortgage comes into play when a loan is higher then a certain amount which then results in a higher interest rate.
A loan may also have a balloon payment which usually allows for a lower interest rate for a period of years and then finishes with a final lump sum payment.
5. Pursue alternative financing if a conventional loan is unavailable or not your best interests. One option is to see if the lender will consider taking on other collateral you own to secure the loan. Also, the seller may agree to either finance part of the loan, or agree to lease the property to you with the intent to sell it to you. One other option is to secure a private money loan from private investors looking to make money on their investment.
Tips.
The process of pre-approval or pre-qualification not only gives you an estimate of your maximum mortgage, it tells a potential seller that you are a serious buyer which can give you an advantage over offers from other buyers.
Warnings.
Even though you are pre-approved for a mortgage at a certain amount, it does not guarantee that you will be able to afford that mortgage. Remember to review your current financial situation and try to anticipate any future expenses before taking on a mortgage that ends up too large to handle.
As more and more Americans require nursing home care, their families are struggling to find ways to pay for, or at least reduce, the immense cost of care. In 2012, the average cost of a private room was over $90,000 a year and a semi-private room cost $81,000 a year. For most people, paying for a loved one’s nursing home care presents an almost insurmountable financial obstacle. However, there are ways to finance and reduce the cost of a nursing home so that a loved one can get the type of long-term care that they require.
Method 1 Reducing Costs and Using Personal Assets.
1. Consider in-home care. Long-term nursing home care costs between $6,000 and 9,000 a month and many people cannot afford this option. To save money, you may want to consider in-home care, which costs approximately $21 an hour for a care assistant. This option is not only less expensive but it allows your elderly or disabled family member to reside in his or her home for as long as possible.
2. Negotiate long-term care costs. If you are paying out-of-pocket for long-term nursing care, you should negotiate the overall cost with the nursing home. While some nursing homes may refuse to negotiate, others would prefer to take a lower private care rate because it still pays more than state-sponsored Medicaid programs.
3. Relocate your loved one. The cost of nursing home care varies greatly from state to state and even from locality to locality. If your loved one has family members who live in different states, you should determine which state has the lowest cost for nursing home care. Nursing home care in Texas, Utah and Alabama can cost less than half of nursing home care in states in the Northeast.
4. Qualify for a Reverse Mortgage. A reverse mortgage is a loan that a homeowner gets from a bank against the value of their home. The loan converts the home's equity into cash and the homeowner receives either a cash sum, regular payments, or a line of credit equal to the equity in the home. After the owner's death, the bank may foreclose on the home (get ownership without further liability to the home owner) or members of the estate may sell the home and pay off the loan.
In order to qualify for a reverse mortgage, each homeowner must be at least 62 years old and live in the home where the reverse mortgage was taken.
A reverse mortgage may be a good solution if you are in good health. You can use the proceeds from the reverse mortgage to pay for long-term care insurance or to make your home more accessible so that you can remain in the house as long as possible.
If you are in need of care but do not require nursing home care yet, you can use a reverse mortgage to pay for in-home caregiver services. This provides seniors with the ability to stay in their home for a fraction of the cost of a nursing home.
If you are a married couple and one of you need nursing home care, a reverse mortgage can pay for nursing home care and allow the healthy spouse to remain in the family home. If the spouse needing care dies, the surviving spouse can stay in the home so long as they can continue to pay for property taxes and insurance.
Method 2 Qualifying for Medicaid.
1. Determine whether you qualify for Medicaid. Medicaid is a state and federal government program that assists low-income individuals with a variety of medical care, including nursing home care. You can only qualify for Medicaid if you fall below the monthly income and asset limits set by your state.
You can determine whether you meet the eligibility requirements for your state at: https://www.healthcare.gov/medicaid-chip/getting-medicaid-chip/
If you qualify for Medicaid, you can apply online at https://www.healthcare.gov/medicaid-chip/getting-medicaid-chip/ or check the website for the address of your state Medicaid office and apply in person.
2. Qualify for Medicaid. If your assets are currently too high to qualify for Medicaid and you want to protect your personal assets from nursing home expenses, you can consider legally reducing your assets in order to qualify for Medicaid.
Before attempting to reduce or transfer your assets, you should speak with an elder law attorney. Medicaid has very strict rules about what assets can be transferred and what purchases are allowable to reduce your income. If you improperly reduce your assets, Medicaid can penalize you for months to years and prohibit your qualification for the program.
The National Association of Elder Law Attorneys has information about elder law specialists on its website at: https://www.naela.org. The American Bar Association also provides attorney referral information at: http://apps.americanbar.org/legalservices/findlegalhelp/home.cfm.
3. Reduce your assets. In order to qualify for Medicaid, you can reduce your assets by:
Paying off debt, such as a mortgage, student loans or credit cards.
Paying for in-home medical care.
Paying for necessary home repairs, such as a new roof or furnace.
Transfer funds to your spouse for his or her benefit.
Transfer funds or set up a trust for your blind or disabled child or for a disabled person under the age of 65.
4. Set up a Medicaid Asset Trust. With a Medicaid Asset Trust, you transfer all of your assets into a trust and give up control over those assets. Any funds placed in the trust do not count towards the Medicaid asset limits. However, if you transfer funds into the trust within 5 years of applying for Medicaid, you may be subject to Medicaid’s “lookback provision.” Under this provision, Medicaid may penalize any person that it determines conducted a non-exempt transfer under the Medicaid regulations. If you are penalized, you may not be able to qualify for Medicaid for months or even years.
Method 3 Using Insurance Options.
1. Purchase long-term health insurance. Unlike regular health insurance, long-term health insurance is designed to pay for long-term care, which may include nursing home care, in-home care or medical equipment. When evaluating long-term health insurance polices, you should carefully select a policy that covers nursing home care if you reasonably believe that you will not have someone to care for you at home should you fall ill and become unable to care for yourself.
It is best to acquire long-term health insurance when you are younger and in good health. As you get older, long-term health insurance becomes much more expensive and many seniors are either unable to afford or qualify for a policy.
2. Cash in your life insurance. Another way to pay for nursing home care is to cash in your whole life insurance policy. Certain policies allow policyholders to cash in their insurance policy for 50 to 75 percent of the face value of the policy.
Keep in mind that this is only an option for whole life policies, not term life policies where there is no cash value.
Depending on your individual life insurance policy, there are two ways that you can cash in your policy: accelerated benefit or life settlement.
If you qualify for an accelerated benefit, the insurance company will pay between 60 and 80 percent of the face value of the policy. Under certain policies, you may have to be suffering from a terminal illness in order to qualify for an accelerated benefit.
A life settlement is a policy payout that you negotiate with an outside company not the insurance company that issued the policy. These settlement companies look at the value of your policy, your age, and your health and pay you between 40 and 75 percent of the face value of the policy. Depending on the health and age of an individual, it may be possible to sell some term policies.
Before negotiating a life settlement, you should speak with an elder law attorney as there may be tax and Medicaid implications from receiving the proceeds of the policy through a settlement company.
3. Check Medicare benefits. While Medicare does not pay the cost of long-term nursing home care, you may qualify for a certain portion of the stay if you were transferred to a nursing home within several days of a hospital stay and you require skilled nursing or rehabilitative care. If you go to a Medicare-approved facility, your stay may be covered for up to 100 days.
Medicare will also pay for in-home care for a certain period as well. This coverage may help if you are trying to reduce assets or do not physically require full nursing-home care.
Question : Should I keep $200,000 available to get into a nicer nursing home before qualifying for Medicaid? Answer : If you have that kind of money and that is something you are interested in doing, then yes, you can do it.
Tips.
Do not try to transfer or reduce assets before speaking with an experienced elder law attorney.
Be wary of advisers who are not attorneys. Throughout the country, there are people and companies who exploit the elderly and their caregivers by inducements of Medicaid qualification.
This article is not providing legal advice and should not be relied on as legal advice.
When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.
Estimating Costs of Your Business.
Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.
Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.
Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).
Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.
Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)
Equity = Assets - Liabilities
Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.
Operational = net income, loses of business, sales, and business expenditures.
Investment = purchases and sales of property, assets, securities, and equipment.
Financing = cash flows of all your loan borrowing and repayment.
Borrowing Money for Your Business.
Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.
There are networks online which can set you up with a primary investor.
You can also check out private equity firms, which contain a vast array of specialized and experienced investors.
Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.
Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.
Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.
When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.
Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.
Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.
The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.
If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]
Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.
Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.
Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.
Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.
Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.
Financing Your Business.
Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.
Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.
Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.
Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.
Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).
Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.
Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.
Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.
Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.
Tips.
Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.
Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.
Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.
Warnings.
Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.
If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.
Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.
Preparing a personal finance statement is a great idea. You are trying to get an idea of where you stand financially. You are considering a major life change that will affect your finances. You will need a personal finance statement. You want to start your own business, change careers, retire or travel the world. Prepare a personal finance statement by creating a balance sheet and an income statement that reflect what you have and what you owe.
Steps.
1. Decide what format will work best for you. Most people prefer to use a spreadsheet program such as Excel.
Use a simple pad of paper and a pencil, if you are not good with computers. A handwritten finance statement will be fine if you are the only who will see it.
Consider a software program that might help you prepare a personal financial statement, such as Microsoft Money or Quicken.
2. Create a balance sheet. A balance sheet will show you how much you own and what you owe, giving you an idea of your personal net worth.
Include assets in a column on the left. These will include bank account balances, the amount of money you have in stocks and the value of any property you have.
Place your liabilities in a column on the right. Liabilities will include your mortgages, credit card debt and other loans you are repaying.
Total the amount of your assets and liabilities. Subtract your liabilities from your assets. You will have a snapshot of your net worth.
3. Create an income statement. This part of your personal financial statement will show you how much money you earned and how much you spent.
Add up all of your income, including salaries, bonuses, rental and business income.
Add up all of your expenses, including what you pay in rent, utilities, fees and other regularly occurring bills.
Keep a special column or section for extraordinary occurrences of income or expenses that do not happen on a regular basis. For example, a large tax payment, a sizeable bonus or an expensive home repair might throw off your income statement and can be recorded separately.
Tally the difference between your income and expenses, and you have an idea of what your net income is.
4. Update your personal finance statement regularly. You might want to do it every month or every other month. This will help you monitor any changes in your finances.
5. Include a narrative with the numbers. This will help you remember what was going on during any specific period of time.
Provide a brief description of any special expenses. Mote how you calculated some sums, such as the value of your home.
6. Work with a financial planner or advisor. Ask a professional to review your personal finance statement to see if you have missed anything.
Tips.
Download templates if you are using Excel. You can find a Balance Sheet template and an Income Statement template in the Microsoft Office template library.
Use your personal finance statement for a variety of purposes. You can share it with lenders when you want to get a loan. An attorney if you are considering a major purchase or a bankruptcy and business partners you may consider investing with.
Understanding your personal finances can be very overwhelming, particularly if you’re just starting out. It is tough to know how best to handle your money, how to go about paying off debt, and where and when to invest. By following some basic steps for doing these things, as well as saving for emergencies and retirement and insuring the assets you’ve worked hard to obtain, you can begin to understand your personal finances and become more confident in your ability to make good decisions regarding them.
Learning How to Create a Budget.
Gather your financial statements and information. Creating a budget is one of the most important aspects of personal finance. A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns. To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.
Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are. The more detail you can provide, the better your budget will be.
Record your monthly income. After gathering all of your financial data, separate out your sources of income. Record the amount of income you bring home in a month. Be sure to include any side jobs you have.
If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so.
List your fixed monthly expenses. Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.
Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage.
List your variable monthly expenses. You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies. These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.
Variable expenses can include things like groceries, gasoline, gym memberships, and eating out.
Total your monthly income and expenses. Once you have recorded all of your income and expenses, both fixed and variable, total each category. Ultimately, you want your income to be larger than your expenses. If it is, you can then decide where it is best for you to spend your excess income. If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending or increase your income.
Adjust your variable expenses to hit your goal. If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.
For example, if you are eating out four nights a week, you may have to cut this back to two nights a week. This will free up money you can put toward essential expenses like college loans or credit card debt.
In addition, you may be paying unnecessary monthly fees, like overdraft or late fees. If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.
Alternatively, you can work on earning more instead of spending less. Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month.
Review your budget every month. At the end of each month, take some time and review your spending over the past month. Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most. Reviewing your budget can also be encouraging if you find you are sticking to it. You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example.
Strategizing to Pay Down Debt..
Pay more than the minimum amount due each month. Even following a strict budget doesn’t mean you can totally avoid debt. Large purchases, like cars, school, and houses often require you to take out a significant loan. In addition, it can be easy to rack up credit card debt quickly. One of the personal finance basics you must understand is how to take care of this debt as quickly as possible. The first step to doing this is to pay more than the minimum payment as often as you can.
For example, say the minimum payment on your car loan is $50 a month. Paying even $60 a month toward this loan can help you pay it off sooner and cut down on the amount you pay in finance charges over time. The more you can pay above the minimum, the better.
Transfer credit card balances with high annual percentage rates. If you have a credit card for which you are paying a high annual percentage rate (APR), it might be a good idea to look into transferring this balance to a credit card that offers a lower APR or no APR for a certain amount of time. This way, your entire payment will be applied to your balance, not interest.
Read the fine print before transferring a balance. Most cards charge a transfer fee (3% of the balance, for example) and only offer 0% APR for a limited amount of time (12 or 18 months, for example). Make sure you understand the terms of your new agreement and shop around for the best option before transferring your balance.
Calculate the amount of debt on each credit card. If you have multiple credit cards, compare the amount of debt you have on each one. You can use this information in two different ways:
Some people believe paying off the credit card with the smallest balance first is best. The idea here is that getting the smaller amount of debt paid off will motivate you and allow you to focus on your remaining debt.
Alternatively, some people believe you should focus on paying off the largest balance because you will be paying the most in interest on this balance. To do this, you would try to make more than the minimum payment on this balance, while paying only the minimum on your smaller balance.
If possible, the best solution is to pay more than the minimum simultaneously on each balance.
Dedicate excess funds toward paying off debt. Once you are able to follow your monthly budget, dedicate any extra funds you have at the end of the month toward paying down your debt. It can be tempting to use this money to treat yourself to a fancy dinner or a new TV, but remember your long-term goals before doing this. In the long run, paying down debt will serve you better than treating yourself to something unnecessary.
Consolidate your debt. If you have multiple credit card accounts, student loans, a mortgage, a car loan, or any combination of these debts, consolidating them into one payment may help you manage them more easily. Typically, when you consolidate debt, you’ll get a debt consolidation loan. These loans usually have a lower interest rate and require lower monthly payments.
While consolidating your debt can make it easier to manage, it may also increase the amount you’ll pay in the long run because it extends your payments over a longer period of time.
If your credit score is not good, you may need a co-signer to be able to get a debt consolidation loan.
You can also consolidate your credit card debt by transferring all of your balances to a 0% APR credit card. If you think you can pay off your debt within 12 to 18 months, this might be a good option. However, if you think it will take you significantly longer to pay it off, this might not be a good option because the 0% APR is usually only good for 12 to 18 months.
Refinance your loans. Refinancing is generally a good option if your financial situation has improved since taking out your loan. Similar to consolidating your debt, refinancing your loans also consolidates your debts and may allow you to make lower monthly payments on your loans. Refinancing might also allow you to shorten the term of your loan to pay off your debts more quickly. In addition, depending on your financial situation, you may also be eligible for a lower interest rate.
Choose a student loan repayment plan. If you can afford it, the standard repayment plan is your best option for repaying federal loans. A standard plan requires you to pay the same amount every month over a ten year period. If you can’t afford the payments on a standard plan, however, the government offers two alternative categories of plans—income-driven and basic.
Income-driven repayment plans extend the terms of your loan to 20 or 25 years and require you to pay a certain percentage of your income toward your loan each month, rather than a fixed monthly payment. In addition, any amount still owed at the end of your loan term is forgiven.
Basic plans include standard, graduated, and extended repayment options. Standard is the best option if you can afford it, but graduated or extended plans may be right in some situations. Graduated plans start you off with low payments and gradually increase them over time. This plan can be good if you expect to make more money over the years. Extended plans extend the terms of your loan to 25 years, allowing you to make smaller payments each month, but pay more in interest over time.
Saving for Emergencies and Retirement.
Set up automatic deposits. It can be tough to commit to putting money into your savings account every month, but it is important to do so to ensure you have enough money for emergencies and for your future. If possible, make automatic payments into a saving account each month.
For example, set your bank account so it automatically transfers $50 from your checking account to savings account at least once a month.
Or, if your paycheck gets deposited directly into your account, you can usually set it up so that a certain portion (either a dollar amount or a percentage) is deposited straight into your savings account. Most professionals recommend putting 10 to 20 percent of your income towards savings each month.
Contribute to a retirement savings plan. You should start saving for retirement as soon as possible to ensure you’ll have enough money to live comfortably when you are done working. The amount you need to contribute to this savings account monthly depends on a number of different factors, like when you start saving, how much you are starting with, and whether or not you’re going to receive any kind of employer contribution.
Many employers offer a 401k, or a retirement savings plan, of some kind to their employees. A lot of companies will also match a percentage of the employee’s contributions into this account over time. If your employer offers a plan of this sort, start contributing to it as soon as you can, even if it is just a small amount.
If you are self-employed or your employer does not offer any kind of retirement savings plan, you can set up your own plan through investment websites or many banks.
Consult a financial advisor to figure out how much you should be putting away for retirement to reach your goals.[19]
Build an emergency fund. In addition to saving for retirement, you also need to save for emergencies, like losing a job, costly car repairs, or unexpected medical expenses. You can use your bank’s savings account for this emergency fund.
Financial professionals recommend you have enough in your savings account to cover a month and a half of living expenses for each person you claim as a dependent. For example, if you are married with one child, you should have enough to cover four and a half months of living expenses.
Investing for Beginners.
Invest in a Target Date Fund (TDF). Figuring out where to invest your money is one of the hardest parts of personal finance basics. Essentially, you want to invest in a variety of stocks, bonds, and treasuries—but which ones? Target Date Funds make this a little easier for you. A TDF is basically a hands-off retirement account. You enter the age you want to retire and the TDF will automatically spread the money you put into this account across a wide variety of stocks, bonds, and treasuries.
Some of the recommended companies through which to do this are Vanguard, Fidelity, and T. Rowe Price.
Diversify your investments. If you choose a more hands-on approach to investing, it is important to diversify your portfolio to reduce risk. Diversifying means that you choose a variety of stocks, bonds, and treasuries in which to invest. You should make sure your investments are spread over a number of different companies and industries. This way, if one company or industry suffers a financial downturn, you will only lose a portion of your investment, not the whole thing.
Invest in your 401k. As mentioned above, investing in a 401k provided by your company is a good idea. There are a couple really good things about this option. First of all, most of the time, the money you put into a 401k is deferred on your taxes until you take it out of the account. Some 401ks are taxed before investing, however, so check with your employer to find out which one you have. Second, your employer will often match the amount of money in your 401k (up to a certain amount) so you are, essentially, getting free money just for investing.
You should invest in a company match 401k even if you are in debt. The return you receive on this type of investing is often more than what your debt is.
The amount of money your company will match often depends how much you invest in your 401k. Usually, you have to hit certain investment thresholds, which will then determine the percentage your company will match.
Invest in a Roth IRA. Another investment opportunity offered by many employers is a Roth IRA. In a Roth IRA, you pay taxes up front on your investment. Investing in a Roth IRA is an especially good idea for young people with low incomes, considering the tax rate will likely increase in their lifetime. This type of investment can be very helpful because it will provide you with a pot of money for your retirement that won’t shrink due to taxes.]
Understanding Why to Insure Your Investments.
Get property insurance. You should invest in property insurance to protect your home, which is often one of your biggest assets. Property insurance is actually required if you have a mortgage. This type of insurance will protect you from having to pay out-of-pocket for any major unforeseen home repairs.
If you rent, it is just as important to invest in renter’s insurance. Your belongings can add up to a significant investment and getting renter’s insurance will help protect you in the event of a burglary, fire, flood, or other disaster.
Buy life insurance. Getting life insurance is especially important if you have a family or are married. Life insurance makes sure your income (or at least part of it) is supplemented in the event that you pass away. This is important because your family could face very tough financial situations if they are unable to make up for the portion of income you brought to the table.
Get health insurance. Health insurance premiums can be a small price to pay if you find yourself sick or seriously injured. Medical bills alone can put you in serious debt if you don’t have some sort of insurance policy. In addition, you’ll likely miss a significant amount of work if you are seriously injured, leaving you no way to pay these bills.
Many employers offer health insurance to their employees at a discounted rate. Usually only full-time employees are eligible to receive health insurance through the company, but some companies may offer it to part-time employees as well.
Buying health insurance independently, without the help of an employer, can be expensive. However, it is worth investing in to make sure you are not crippled by debt in the event you become sick or injured.[28]
Buy automobile insurance. Finally, you should invest in automobile insurance. In fact, it is required of anyone who owns a car in the United States. Auto insurance helps cover the cost to repair your car after an accident and medical bills for you and others involved. A major car accident can put you in debt from car repairs and time off work if you’re injured. It is also possible your assets can be seized to help pay for the other driver’s medical bills if the accident is your fault. Having automobile insurance can help diffuse some of these costs and help keep you out of debt.
Working with a Financial Planner.
Start now. One of the most important things you can do for your personal finances is to start thinking about them and working on them early. It may seem like you have plenty of time to save for retirement, but you can actually lose a lot of money in interest if you wait too long. Make financial planning a regular part of your life—like going to the doctor—and get started as soon as possible.
Get your significant other involved. If you are planning a future together, make sure to include your significant other in your planning. Talking to your partner and including them in the process will ensure you are both on the same page with your spending and saving habits and allow you to develop a plan that meets both of your needs.
Be proactive. Some people assume that everything will work out in the long-run and ignore negative cues about their finances. If you do this, however, you could set yourself up for a major loss. Instead, think about how negative financial situations, like severe drops in the stock market, might affect your financial security and plan alternative options.
Plan out the details. Many people see saving for retirement as a race to reach a certain amount of savings before the date they retire. This approach can be misleading, however. Instead, think about the things you’ll need to pay for, like housing, healthcare, eldercare, hobbies, transportation, and so on. Do your best to figure out how much these products and services will cost you and how you’ll finance them.
Tips.
Figuring out how to handle your personal finances can be very confusing whether you’re a beginner or not. It is a good idea to consult a financial planner to help you decide how to best handle your money.
