What are the Most Common 401(k) Mistakes?

21 Oct

Believe it or not there are many mistakes that can be made along the way when it comes to financial retirement savings and investing. Unfortunately a good many of these mistakes center around the 401(k), which can be a tremendous boost to your retirement plans when used properly in order to build your portfolio. The problem is that the mistakes are often the only things we hear when it comes to retirement plans and investing. I suggest begin with the mistakes so that we can move along to better information and advice in the near future.

The first and perhaps largest mistakes that people make when it comes to 401 (k) plans is not signing up. Yes you heard that right. What people do not understand is that this is something your employer offers so that you can have some security for your future. It is a manner of saving money for your future that shouldn’t be overlooked or taken for granted. Even a bad 401 (k) plan is better than no 401 (k) and with strict regulations those are few and far between. More importantly, if your company offers to match the funds in your 401 (k) plan not taking them up on that offer is literally tossing money in the garbage can.

The next big mistake when it comes to your 401 (k) is risking too little. Rewards come with risk. If you aren’t taking any risks with your investment then you are by and large throwing money down the drain. In addition to that, it is nearly impossible to meet your retirement goals without taking some risks, and some hits along the way. This doesn’t mean you should be reckless but along the way you are going to need to take some calculated risks in order to receive the bigger payouts that most of us hope for when investing in their retirement funds.

Risking too much. There are many risks involved when investing in the stock market. There are a few that deserve a little more mention than others. First of all, stocks present a fairly large risk, particularly to the uninitiated. While it is true that great rewards are most often the product of great risks you do not want to risk the bulk of your retirement by investing it all in stocks. Another thing you want to avoid doing if at all possible is investing in your company stock. We’ve seen too many lives destroyed when companies go under taking the financial stability of their employees along with them. Many companies offer incentives to employees for investing in their stock, which may be tempting but I recommend investing as little as possible in your company stock whenever possible as this could lead to problems down the road.

Finally, the worst thing you can do for the health of your 401 (k) is borrow against it. There are so many ways in which this could go wrong and the penalties for this are more than a little prohibitive. They are designed to be that way so that you will use the funds for their intended purpose. If you absolutely have no other option is the only way I would recommend borrowing against your 401 (k) and I would seriously consider selling a kidney before doing that.

When it comes to your financial retirement, 401 (k) mistakes can be far more costly than you may realize. Work to avoid these common mistakes and you should be well on your way to a successful retirement.


Do’s and Don’ts on Buying Properties During a Recession

21 Oct

Purchasing real estate is no laughing matter – whether the economy’s doing well or it’s experiencing recession. It’s a well-known fact that buyers are in a better position to purchase real estate during a recession. However, there are still some risks involved. So how do you make sure you”re still getting the best real estate deal during the recession times? Here are some tips that you can make use of:

Don’t come undone with your own expectations. Determining whether you have gotten yourself a good deal in buying real estate, or simply just about anything, depends on your priorities. We all differ in priorities, that’s a fact. So if you’d like to make sure you satisfy yourself, get your own expectations in check. Creating a checklist can help you here. Finding a property to buy with a checklist handy can greatly facilitate the process.

Don’t be too you-you-you. Sure, you were advised to know your priorities and to create a checklist to boot. However, flexibility can also get you a long way. Be objective with your judgments and take a hard look at the property you are planning to buy. Think hard and see if you are actually being too choosy to the point of being impractical. Would you like fancy or functional? Is it comfy or uber-elegant? How about trying to meet in the middle? Have you asked for suggestions from experts of family or friends with experience? Do they agree with you? Although you do not need to wipe your slate clean and accommodate all their opinions, are your expectations realistic enough and what about your budget? Remember it is recession.

Don’t be over-confident during a real estate recession.  Many think that since it is recession, they can just buy and buy and buy properties. Although many property sellers are usually on the lower part of the scale during these times, not all deals are the best ones. You still need to be as careful as ever in purchasing real estate.

Before pursuing a short sale…  Many would pursue a short sale trying to grab a good deal. However, before you buy a property with a price that seems too low for the location, asking your agent to investigate if it is a short sale won’t hurt. This is important since you should not just make an offer on a pre-foreclosure, short sale property.

Beware during recession since there are not too many fish in the sea Er, properties to buy. Home sellers do know that during a recession, they may not be able to sell their properties for a better price. This means that they would have to wait longer to put their home out on the market. There may be properties for sale, but they get bought quicker, too. It would be helpful if you are prepared enough to make a purchase without dilly-dallying if you really are into it.

Recession or not…  Your decision should not be clouded in buying a property. Always shop for the lowest price, which fortunately is more attainable during recession for buyers. However, do not forget that the lowest-priced property is not necessarily the best one.

In summary, there are some advantages to buying a home during recession. However, if you do not really have the budget or are not that well-educated in the real estate industry, do not feel pressured to jump in.

Predicting and Controlling Credit Scores

7 Dec

Credit scores tough to predict and tough to control

Q. I check my credit score every six months on Quizzle.com and I have no negative reports, yet my score has been decreasing over the past few years. It went from over 800 six months ago to 790, and now it is 768. I went from “excellent” to “very good.” Should I be concerned, especially because I have no explanation why my scores are decreasing? In the past six months, the only changes in my credit/payment history are that I have made additional payments to decrease the amount I owe on a car loan and homeowners line of credit. Shouldn’t that increase my credit score?
– Rob

A. Even if your score is not the highest it’s ever been, it’s still pretty darn good. Credit scores can fluctuate for lots of reasons, and some, unfortunately, are out of your control.

The Brain’s experts agree.

“A credit score of 768 is still very good and will keep you in good standing for almost anything you need to do,” said Sally Herigstad, a certified public accountant with CreditCards.com. “Aside from bragging rights at parties, there is little to be gained by trying to get your credit score up to over 800 points.”

Herigstad said most mortgage bankers she talks to say their best rates are available to borrowers with scores over 740.

Some fluctuation in scores is normal and means nothing, she said.

“With a drop of 32 points and no negative reports, I suspect your available credit may have gone down,” she said. “Banks have been lowering credit limits in the last couple of years, often with little fanfare and not because of anything you have done.”

Lower credit limits will impact your credit utilization ratio, which shows how much of your available credit you’re using. For example, if you had $20,000 of available credit and you had balances of $5,000, your credit utilization ratio would be 25 percent. If your lines of credit are then lowered to $10,000 and you still have a $5,000 balance, your ratio shoots up to 50 percent. No real difference in your borrowing but you’re using more of your available credit.

The extra payments you’ve been making on your car loan and your line of credit would not hurt your score, said Adam Levin, co-founder of Credit.com.

To pinpoint why your score might have dropped, you would need to determine what’s changed in your reports over the last six months, Levin said.

While reviewing your latest report, he said you should ask yourself: Have you had any new inquiries in the past six months? Are you carrying higher balances than you were six months ago when your score was over 800? Did you close an account, or did an old, closed account fall off your credit report by chance?

“All scores are returned with a set of ‘reason codes’ or ‘score factors’ that are designed to provide specific details on why your score wasn’t higher,” Levin said. “These codes are returned in the order of importance, so the first is where you lost the most points in the score calculation, the second, the second most points and so on.”

—Karin Price Mueller

E-mail your questions to askbiz@starledger.com.

Credit Score for Effective Risk Measurement

7 Dec

Credit Score Consistency Critical to Effective Risk Measurement

VantageScore Solutions’ Recently Patented Score Consistency Index Helps Lenders Limit Their Risk Exposure

STAMFORD, Conn., Dec 06, 2011 (BUSINESS WIRE) — VantageScore Solutions, LLC, the company behind the VantageScore(R) credit score model, recently received a patent for the methodology behind its “Score Consistency Index,” which is a process that affords lenders the ability to measure the consistency of multiple generic credit score models across the three credit reporting companies (CRCs): Equifax, Experian and TransUnion.

Credit score models that provide widely inconsistent scores can increase the risk exposure for a lender. That risk exposure results in less attractive products and pricing, because consumers who receive such scores are potentially not being matched with the right types of credit and at the most appropriate terms. Inconsistent scores occur largely because other credit scoring models use a different algorithm for each CRC, and because of variations in the data reported by creditors and the timing of that reporting.

“It benefits lenders and consumers to have credit scores that are as consistent as possible,” said Barrett Burns, president and CEO of VantageScore Solutions. “We developed this measurement methodology so that lenders can understand whether inconsistent scoring is obscuring their true risk profile. It is readily available in the research section of our website for all to download and use.”

The VantageScore credit scoring model is used by numerous lenders, making billions of decisions annually, including four of the top five financial institutions, the top five credit card issuers, two of the top five auto lenders, and one of the country’s largest mortgage lenders. Recent media reports disclosed that banking giant Chase adopted VantageScore in January of 2011. Secondary market participants including Fitch and S&P also rate securitized loan package issues using the VantageScore model.

About VantageScore Solutions

Stamford, Conn.-based VantageScore Solutions, LLC ( http://www.vantagescore.com ) is an independently managed company that holds the intellectual property rights to VantageScore, a new generic scoring model introduced in March 2006. Created by America’s three major credit reporting companies (CRCs) — Equifax, Experian and TransUnion — VantageScore’s highly predictive model uses an innovative, patented and patent-pending scoring methodology to provide lenders and consumers with more consistent credit scores across all three major credit reporting companies and the ability to score more people.

SOURCE: VantageScore Solutions, LLC

Residential Mortgage Opportunities

7 Dec

Residential Mortgage Opportunities Are Currently Being Explored by Clopton Capital

Clopton Capital is announcing plans to possibly enter the residential mortgage industry by the year 2013.

Clopton Capital is a commercial lender, provider of many financial services and is located in Chicago, IL. They primarily focus on commercial mortgages, SBA loans and niche financing mechanisms such as gas station loans and owner operator financing. The founder of Clopton Capital is Jake Clopton and this press release is part of Clopton Capital’s consistent effort to remain involved with the public, namely their future clients. Clopton Capital can be contacted at CloptonCapital.com.

Clopton Capital is announcing plans to possibly enter the residential mortgage industry by the year 2013. “Although our roots will always be in commercial lending, certain successful factors of our operation have led me consider the prospect of engaging in reverse mortgages and premium financing”, said Jake Clopton, the founder of Clopton Capital. The firm has not definitely decided yet on whether or not it will enter the consumer marketplace, but will know within the coming months if this proposition is feasible. Their primary concern is the liability and licensing that exist within the residential lending market that is currently lax in their belief within the commercial lending sector.

Clopton Capital’s future plans involve expanding their reach into fixed annuity investments and in house commercial mortgages regardless of their pending decisions regarding residential lending. “Regardless of future prospects to capitalize on homeowners, we have to maintain our current focus on the commercial marketplace as it is where our foundation exists”, said Matt Reed, an associate of Clopton Capital.

If their plans to divert into residential lending come to fruition then Clopton Capital expects to employ a larger workforce and expand their current marketing strategy into a more consumer-based sphere as well. Currently, no specific actions have been taken to accomplish these hypothetical goals.

Clopton Capital can be contacted at their website CloptonCapital.com or at 866.647.1650 during regular business hours central time. Their website contains more specific information about their commercial loans. Their website dedicated entirely to semi truck financing is SemiTruckSource.com. To join CloptonCapital.com’s link exchange visit CloptonCapital.com/link.

Short Sales and Its Taxing Consequences

7 Dec

Taxing Consequences of Short Sales

Tips for homeowners forced to sell at a price below what is owed on the mortgage.

Four years after the residential real estate bubble began to burst, most markets are still depressed.

If you borrowed heavily to buy at the top of the market or overindulged on home equity loans while prices were increasing, you may have mortgage debt in excess of your home’s current value.

If you are then forced to sell your property in what is known as a short sale, you could face an income tax hit too–or maybe not. This article covers the basic tax implications of personal residence short sales.

Short Sale with Recourse Mortgage Debt

A sale when the mortgage debt exceeds the net sale price (after subtracting commissions and other selling costs) is called a short sale. The easiest way to explain the tax implications is with some examples.

Example 1: Principal Residence Short Sale for Tax Gain: Say you paid $190,000 for a home you could currently sell for $250,000. However, the first and second recourse mortgages total $280,000. If you sell, you’ll have a tax gain of $60,000 because the sale price exceeds the property’s tax basis ($250,000 sale price $190,000 basis = $60,000 gain). Will the IRS cut you any slack since you’re $30,000 in the red ($280,000 debt versus $250,000 sale price). Nope. The sad truth is you can have a tax gain without any cash to show for it. That’s because the amount of recourse mortgage debt doesn’t affect the tax gain/loss calculation. The good news: the $60,000 gain is probably federal-income-tax-free, thanks to the principal residence gain exclusion break. An unmarried person can exclude up to $250,000 of gain, and married joint filers can exclude up to $500,000. To qualify, you generally must have owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date. Assuming you qualify for the exclusion, the $60,000 gain won’t trigger any federal income tax hit. Depending on your state of residence, there may or may not be a state income tax bill.

Example 2: Vacation Home Short Sale for Tax Gain: Same basic situation as Example 1, except this time assume the property is a vacation home instead of your principal residence. Now you have a $60,000 tax gain that you can’t exclude even though you get no cash out of the deal. Tough break.

Example 3: Short Sale for Tax Loss: Say you paid $310,000 for your principal residence that you could now sell for only $250,000. The first and second recourse mortgages total $280,000. You’ll have a $60,000 tax loss if you execute a short sale ($250,000 sale price $310,000 basis = $60,000 loss). Does the IRS let you to deduct the loss? Nope. You can only claim a tax loss on business or investment property. In most states, the same principle applies for state income tax purposes.

What about the Excess Debt?

The next question is what happens to the $30,000 of excess mortgage debt (the amount in excess of the net sale price) in the preceding examples? Usually, lenders will not grant any relief to short sellers. If that’s your fate, you’ll have to find a way to pay off the excess $30,000, and you won’t get any help from the IRS for doing so. However, if the lender decides to forgive some or all of the excess $30,000, the forgiven amount constitutes cancellation of debt (COD) income for federal income tax purposes. (see Tax Rules for Cancellation of Debt below)

Short Sale with Nonrecourse Mortgage Debt

In some states, some personal residence mortgages can be nonrecourse. With a short sale of a property burdened by one or more nonrecourse mortgages, the lender cannot go after you for any deficiency (negative difference between the sale price and the loan balance). Even so, the lender might agree to a short sale in order to collect what can be collected now before the property’s value declines any further.

When property subject to a nonrecourse loan is sold in a short sale, the transaction is treated for federal income tax purposes as a sale for a price equal to the nonrecourse loan balance. The actual sale price is irrelevant. This conclusion is based on a 1983 Supreme Court decision in Commissioner v. Tufts.

There cannot be any COD income because the nonrecourse mortgage obligation is deemed to be fully satisfied in the short sale. Therefore, the short sale can only result in straightforward tax gain or loss without any COD issues.

A tax gain is triggered if the nonrecourse loan balance exceeds the property’s basis. However with a principal residence short sale, the entire gain may be federal-income-tax-free thanks to the aforementioned gain exclusion break.

If the basis of a personal residence exceeds the nonrecourse loan balance, a short sale will trigger a nondeductible tax loss.

For More: SmartMoney Real Estate Calculators


Tax Rules for COD Income from Personal Residence Short Sales

The general rule is that any cancellation of debt (COD) from a forgiven personal residence mortgage balance must be reported as income on the borrower’s Form 1040 for the year the forgiveness occurs. However, Section 108 of the Internal Revenue Code provides several exceptions to the general rule. Here are the three most important exceptions in the context of personal residence short sales:

  • Bankruptcy Exception: If the borrower is in bankruptcy proceedings when the COD occurs, it is federal-income-tax-free.
  • Insolvency Exception: If the borrower is insolvent (debts in excess of assets), the COD is federal-income-tax-free as long as the borrower is still insolvent after the COD. If the COD causes the borrower to become solvent, part of the COD is taxable (to the extent it causes solvency).
  • Principal Residence Mortgage Debt Exception: Through 2012, COD from up to $2 million of principal residence acquisition debt is generally federal-income-tax-free.

Bullish Business Model for Commercial Lending Firm

7 Dec

 Commercial Lending Firm Announces Bullish Business Model for 2012

Commercial lending firm, Clopton Capital, announces strong plans for 2012.

Clopton Capital is a commercial lender, provider of many financial services and is located in Chicago, IL. They primarily focus on commercial mortgages, SBA loans and niche financing mechanisms such as gas station loans and owner operator financing. The founder of Clopton Capital is Jake Clopton and this press release is part of Clopton Capital’s consistent effort to remain involved with the public, namely their future clients. Clopton Capital can be contacted at CloptonCapital.com.

In 2012 Clopton Capital intends to find more solutions for credit challenged applicants of semi truck financing. Currently, they are able to approve nearly any applicant with a FICO score above 650, but they want to find more competitive and expedited solutions for those with credit below 600.

The firm is also putting more emphasis on the importance of commercial bridge loans that are issued on interest only terms. They believe these bridge loans can save many commercial property owners and business owners from an impending default. “I can’t stress enough how much of a win-win these transactions are. We’ve saved so many properties and given the owners of those properties two years of time to solve their financial problems by utilizing these very arrangements”, said Jake Clopton, the founder of Clopton Capital.

Clopton Capital recently announced that they will be offering commercial mortgages through direct Wall Street conduits and therefore able to issue commercial loans faster and at more competitive terms. They are going to spend more resources recruiting other commercial lenders in 2012 to offer Clopton Capital’s services on referral agreements. “The way I see it, those without these direct conduits can not compete with us so they might as well join us”, said Matt Reed, an associate of Clopton Capital.

Clopton Capital can be contacted at their website CloptonCapital.com or at 866.647.1650 during regular business hours central time. Their website contains more specific information about their commercial loans. Their website dedicated entirely to semi truck financing is SemiTruckSource.com. To join CloptonCapital.com’s link exchange visit CloptonCapital.com/link.