Income is ticket to buying a home

Q: Is it mandatory for me to have a job to be able to buy a house. I am coming out of the military and I’ll be going to college. The military will be paying me disability and GI Bill money. Can I still get a house even though with full time college and a family I won’t have time to get a job?

-Vitaliy, Moscow, Nev.

A: Thanks for your service and sacrifice. Not everyone who buys a house has a job. However, if you want to borrow money to buy a new home, you’ll definitely need enough income to be able to make the monthly payment. So, you can certainly check with a lender or two and determine if and how much they might be willing to pre-approve you for based on your disability income. My inclination is that now might be the ideal time for you to rent. This would probably require less prescreening and perhaps alleviate some financial pressure while you’re working hard to get your degree. It will also allow you some flexibility to go where your degree will take you after you graduate. To prepare yourself for that significant purchase, be sure to carefully review your credit report to ensure it’s in ship shape. Also continue to pay bills on time (that solid payment history is crucial!) and keep credit card balances as close to zero as possible! Good luck and enjoy school!

Things to think about when buying a home

Q: I want to purchase a house in South Carolina and want to know where I should start.  I am a first time buyer, and I’m currently living in and working in Germany.  I am retired US Army. Thanks.

-Cliff

A: Retired Army, hooah and thanks for your service.  Not to put the cart before the horse, but I will mention that if it fits your timeline you’ll want to purchase your new house before December 1, 2009.  If you do that, you’ll be eligible for a 10% tax credit (up to $8,000) on the purchase.  So, any home purchase greater than $80,000 may result in $8,000 back in your pocket!  If you’re single, your modified adjusted gross income can not exceed $75,000 ($150,000 for married filing jointly) to receive the full credit.  That’s a pretty good incentive. 

However, your question as to where you should start is right on target.  A budget exercise including a detailed accounting of what will be coming in (military retirement, employment income, investment income, etc.) and going out (utilities, household expenses, food, clothing, etc.) is an excellent first step.  How much house can you afford?  Being fairly conservative, I would suggest that your payment (principal, interest, taxes, and insurance = PITI) should be less than 28% of your gross monthly income.  For example, if you’ll have $5,000 of income from all sources, you should target a maximum payment (PITI) of $1,400.  In today’s environment, this would equate to an absolute ceiling of around $225,000 for your new home.  Think hard about committing that much income to a house payment for 30 years.

The next step is to make sure you have a clean credit report.  It’s not uncommon to find errors on a report so review it closely and dispute anything that doesn’t belong to you.  If you’ve had an “oops” in the past, like an unpaid bill, make good on it now because a late payment – even if it’s really late – is better than a “charge off.”  You can get a free credit report every year from annualcreditreport.com.  Considering you’re overseas right now, you may have to give them a call to get yours.  Your score will cost an extra $8 or so.  And that number makes all the difference in the interest rate you get.  Even a quarter of a percent too much makes an enormous difference on the amount of interest you pay over the life of the loan.  It’s very important.

After determining what you can afford, you’ll want to get pre-approved for this amount through your lender.  Caution: your calculation of what you can afford should be your guideline, not what the lender is willing to lend!  There is a difference between qualifying for and affording a mortgage. Discuss using a Veterans Affairs loan with your lender.  A VA loan could certainly minimize the out-of-pocket costs to move into your new home as no down payment is required.  Now you’re ready to begin the hunt for your house.  In addition to helping you with the details, a quality realtor should be able to help you sort through neighborhoods and available properties.  This is especially important if you don’t know the area well.  Remember, real estate is a long term proposition, so do your homework and shop smart.  In the meantime, set aside funds in a savings or money market account so you’re ready for all of those expenses that inevitably come with moving into a new home.  Your emergency fund of 3-6 months of expenses should be well established before purchasing a home.  Good luck and welcome to the American Dream.

AD, reserve retirement pay considered marital property

Q: I am getting a divorce after 17 years of marriage. I served 27 years in the military.  I spent four years on active duty and 23 in the reserves.  The reserves use a point system and you don't collect retirement pay until you are age 60.  I had 10 years of service before my marriage which included four years of active duty where I earned most of my retirement points. Is my soon to be ex-spouse entitled to any of my retirement when I turn age 60?

-David, Elk Grove, Calif.

A:  As a reservist and a financial planner, I’m very familiar with the reserve retirement system of which you write…not that I’m counting my points.  When it comes to divorce, most things, including a portion of your military retirement, are up for grabs.  Make sure you enlist the services of an attorney that is experienced and knowledgeable in military divorce arena.

 Just to give you an idea of what might be fair and how the calculation might work, I’m going to assume you earned 100 points during each of your 23 years in the reserves and last year transferred to the retired reserves as an E-8 at age 45. Here are the numbers:

Total Points: 3,760

Points earned while married:  1,700

Percentage of retirement earned while married: 45%

Ex-spouse’s projected share of 2009 retirement value:  45% * ½= 22.5%

 

Using the Army Reserve Retirement Calculator, I calculate a total retirement benefit of about $1,325 in today’s dollars.  So, your ex-spouse would be entitled to $298 per month ($1,325 * 22.5%) when you turn age 60.  Notice, I did not use the age 60 values that include inflation adjustments to calculate your ex-spouse’s share.  In my mind, these inflation adjustments are earned by continued availability and service in the retired reserves.  In this scenario, if we assume 3% inflation, your pay at age 60 would actually be around $2,000/month…of which she would receive the roughly $300/month.

 

Obviously, this is relatively complex and you should, as I mentioned earlier, focus on getting a quality lawyer in your corner.  Thank you for your service and best of luck.

 

Attention: Garage Band contest underway!

Summer fun is here. The kids aren't bored yet, but why wait till they start complaining? USAA wants to spice things up with a Garage Band contest for any military kids who fancy themselves musicians. Who knows, you might be helping discover the next breakthrough band. Military kids are well-versed in hitting the road and those who do have a band or are interested in forming one could be big winners. Did you know that members of the folk rock band "America" were military brats? Sons of American fathers and British mothers, they were stationed at RAF West Ruislip, London during the mid-1960s where they met while playing in two different bands.

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USAA and U-TURN are looking for The Next Great American Road Song The call for entries has begun for U-TURN´s annual Garage Band Playoff ´09, a national battle-of-the-bands competition sponsored by USAA and open to aspiring musicians and songwriters ages 13-21. This year - in the tradition of immortal songs like Steppenwolf´s "Born to Be Wild", and Rascal Flatts´ "Life is a Highway" - U-TURN is looking for The Next Great American Road Song.

 U-TURN´s judges are seeking original compositions that celebrate cars, driving and the freedom of the open road. Song entries can be something the artists have previously written and recorded, or a completely new creation. If a song makes the cut, it´ll face off in a series of online, head-to-head  match-ups against others... until only one song is left to be named The Next Great American Road Song.

 THE GRAND PRIZE INCLUDES:

·        $2,500 cash

·        a professional photo and video shoot

·        an in-depth interview on U-TURN´s audio podcast

·        tons of free buzz on MySpace, Facebook and more!

RULES OF THE ROAD:

·        Open to solo artists, groups and bands of any musical genre

·        Song must be original (no covers)

·        Song topic must be about cars, driving or the freedom of the open road

·        (instrumentals OK if evokes a driving feel)

·        Song must be clean/radio-friendly

·        Solo artist or at least one band member must also be a USAA member

·        Solo artist or all band members must be ages 13-21 (as of July 31, 2009)

·        DEADLINE TO ENTER AT GARAGEBANDPLAYOFF.COM IS JULY 31, 2009. VOTING BEGINS

·        OCTOBER 16, 2009. FOR MORE INFORMATION, E-MAIL UTURN@USAA.COM.

 No purchase necessary to enter or win. A purchase will not increase your chances of winning.

 BACKGROUND INFO:

This is U-TURN´s third Garage Band Playoff competition, but the first with a theme.  In 2008, the competition involved 16 bands from across the country, ranging in style from country to metal.  Voters from around the world voted more than 150,000 times through 8 head-to-head matchups, 2 semi-final rounds, and the finals.  Grand Rapids, Mich.-based indie rock group Coronete was crowned U-TURN´s Garage Band Playoff ´08 champion. (Their song can be streamed at myspace.com/usaauturn.) They beat Southern California-based Invictus (note: currently defunct) in a tight finals matchup. The 2007 champion was San Antonio-based A Kid Named Thompson.

Use deployment to deal with debt

Q:  I am recently married and wondering if getting a debt consolidation loan for my debts that I have accrued would be a good Idea. I was thinking so because I am getting deployed next month and my debt is only about 2,000 dollars.

-James, Kearney, Neb.

A:  If you’ve read my column before, you’ve seen that I try to put a positive financial spin on deployment.  In my view, the additional allowances, tax-free pay and reduced expenses often afford us an opportunity to eliminate debt, build savings, and start or grow your investment program.  Do a “deployment budget” and figure out how quick you can eliminate that $2,000 debt.  That should be your first priority!  My guess is that it’s not worth the hassle to consolidate…just knock it out.  Not only is it a hassle, but you’d be applying for more credit.  That application will be noted on your credit report and typically represents a short term ding on your score.  You should never apply for more credit than you really need.  For more info, check out myfico.com and more of my columns under the “credit” heading.  And congratulations and best wishes on your new marriage!

Let them repossess it...that's the question

Q:  Hello June, I have this problem and I really need some advice.  The payment on my car was due plus I am behind for two months.  Should I let them repossess the car instead of paying?  Because I just started working, I won't be able to come up with the amount I owe.  Please.  I really need some advice.  Thank you.

-Monica, San Diego, Calif.

 

A:  I’m glad to hear you’re working—that’s a key first step!  Congratulations!  I know life can sometimes dog pile us, but we still must be financially responsible.  After all, you’re likely going to want to borrow money again someday for another big purchase like a car or perhaps a house?  But a question you really need to ask yourself is: Can I really afford that car?  Sometimes it makes sense to “trade down” to a more affordable mode of transportation.  I know that’s not easy, but reality can be tough – particularly if you owe more than it’s worth.  If you’ve decided with your new income that you can indeed afford the car, then put on your big girl shoes and call the company/bank that has your car loan and talk with them.  Explain that you’re interested in meeting your obligations, but that you just recently got a job.  They’ll truly be happy for you as this is a tough job market!  Ask if they’d be willing to negotiate your interest rate to lower the payment?  Or might they be willing to recoup the missed payments over the next few months (and possibly without adding more dings to your credit report)?  I’m sure they would rather work with you than repossess your car.  Good luck!

Creditors can't tap Social Security or disability pay

Q: June, I am a disabled veteran.  I served with the Marines in Vietnam, spent 21 years in the Marine reserves and was activated for over eight months during 1991 (first gulf war).  I retired from the reserves as a master sergeant (E-8) in 1992.

I have heard that credit card companies cannot access your Social Security, veteran's disability pay or 401k/403b/IRA distribution.  Is this true? What are the mechanics of it?  Does it hurt your credit rating etc....any info would be appreciated.

-Mike, Dickinson, Tex.

A: Thank you for your service and sacrifice to and for our great country.  Credit card companies can’t directly access anyone’s Social Security, disability, or retirement plan distributions.  However, they certainly have an expectation of being paid for items and services purchased using their cards.  If you are unable or unwilling to make the required payments it will most definitely be reported to the rating agencies and negatively impact your credit score.  If you are having problems making ends meet, I would suggest taking some time to develop a bare bones budget—look for opportunities to reduce spending to free-up resources to apply to your financial obligations, such as credit card debt.  If you need a helping hand putting all the pieces together, contact an organization affiliated with the National Federation for Credit Counseling (www.nfcc.org) to help you develop an action plan to get back on top of things.  Thanks again for all you have done.  I wish you the best.

 

If I could turn back time...

Q:  This is not a financial question but hope that you can point me in the right direction.  I was married for over 20 years to a career army man and divorced him in 1978 at which time I opted "no" on applying for a portion of his monthly retirement (much against my attorney's advice).  I am now almost 70 years old and unable to find employment given the current economy and am living on less than $1200 Social Security per month (which I supplement with my savings).  He is still alive and I wondered if there is any hope that I could possibly file against his retirement.  It is listed on my divorce decree that I did not want to apply for any money from him.  Neither one of us are married.  Any help would be so much appreciated.  Thank you.

-Diane, Newnan, Ga.

A:  I’m sorry to hear about your tough times.  Your best option is to seek legal counsel.  Here are a few things to consider.  First, if you were married to your husband for 20 years of qualifying service (in other words, if 20 years of your marriage were during his military service), you should be eligible for full medical, commissary, and PX privileges.  That could possibly help to cut expenses. Additionally, I’m not sure what you mean by “I opted no” regarding his military retirement, but you could certainly talk with an attorney about submitting a claim for your portion of the military retirement based on the Uniformed Services Former Spouses Protection Act.  This 1982 law made it permissible to divide military retirement as property during a divorce.  A non-attorney friend of mine once said “a divorce is never final!” Check out your options.  Remember, you can’t get a “no” without asking and this is worth asking about.  Best of luck to you. I hope this helps.

Child support, alimony may get bigger share of retired pay

Q:  I am the soon-to-be ex-spouse of a Coast Guard member after 14 years of marriage. He will retire in 5 months; we have 10-year-old triplets together.  My question is about the retirement pay.  My husband is trying to convince me that I can only receive up to 50% of the retirement pay including child support and alimony.  I thought that it was that I could only get up to 50% of the retirement pay come direct deposit.  Am I totally lost here?

 

-Tammy, Hanscom AFB, Mass.

 

A:  Triplets!  Wow, I admire your stamina.  First piece of advice: Make sure you get a good lawyer that is very familiar with military divorces.  As far as your specific question, the limit your ex is referencing is that no more than 50% of the military retirement payment may be made directly to you from DFAS. That does not apply in this situation.  Because in the case where there is child support or alimony, 65% of the disposable retirement pay could be sent directly.  Be sure that you are set with a hefty emergency fund and health insurance. Also, ensure there is adequate life insurance with you (or a trust for the kids) as beneficiary.  If something should happen to him the kids still need food, shelter, clothing and education.  Good luck in this new chapter of your life.

 

SBP - it's good news

 Q:  My husband is retired. We were married after he retired from the military. I did sign up to receive survivor benefits and have been making the payments for eight years.  My husband and I have thought of getting a larger life Insurance policy and cancelling my survivor benefits.  Can we do that?  How do you cancel your Survivor Benefits?  I cannot find this information on any web site.

 

-Kellie, Palm Coast, Fla.

 

A:  What do you want first, the good news or, well, the bad?  Let’s get (what you will consider) the bad news out of the way first:  You’re probably stuck with SBP.  There is a window between the 25-36th month following receipt of retired pay to terminate the coverage, otherwise the decision is permanent (barring a death or divorce).  The government has rules, you know.  Personally, I really don’t think that’s bad news!  I believe SBP is the deal of the century.  And a great benefit of military service.  It’s a cost effective way to ensure you have a reliable income stream should something happen to your husband.  From a cost perspective, it’s hard to beat.  Paid for with pre-tax money, it provides a cost-of-living-adjusted lifetime benefit.  It’s hard to duplicate – even with life insurance.  Rather than cancelling SBP, I’d suggest that you visit the VA website or usaa.com and use a life insurance calculator to determine if you need to supplement your SBP with a commercial life insurance policy.