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.

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!

When the unsat contractor wins...what now?

Q:  Hi June,

What advice would you give to someone who’s been sued regarding where to come up with money to pay a settlement and legal fees, especially in this time of financial crisis?  I got in this situation for non-payment of a subcontractor who didn’t perform, and I was the one who was found at fault, so according to the law, if you agree to pay, you pay -- regardless of the outcome.  Boy, do I feel stupid for not just paying the guy whatever he wanted in the first place!  The lawyer is the only one winning.

Most of the advice I find is related to reducing debt. Some situations, like mine, require a person to come up with a large sum of money that they just don’t have, or else.

Do you have any thoughts on that?  Thank you.

--Gina, San Antonio, TX

A:  You are indeed in a pickle, but I understand. It is difficult to cowboy up and pay for substandard work. I would certainly consider turning your contractor into the Better Business Bureau to help warn off others who may be considering using this guy for their project. First, I would check with your attorney (or get a second opinion) regarding the judgment - can they get blood out of a turnip? Will the opposition settle for less than the judgment? Is your lawyer willing to negotiate legal fees or work out a payment plan with you?

Here's what I recommend (flying somewhat blind and assuming you have great credit) in the order of priority:
1. Tap your emergency fund as this truly is one.
2. Liquidate non-retirement investments. This is a tough time to sell but you could benefit from capital gains tax rates or if you have losses you can deduct up to $3,000 per year from ordinary income.
3. Take out an unsecured loan. These are usually for minimal amounts of money and interest rates can be high.
4. Leverage your home equity. Just be sure the monthly expected payment is affordable.  While you are putting your home at risk, at least you can benefit from tax-deductible interest.
5. Borrow up to $50,000 from your 401(k). You'll pay yourself interest on a set time schedule, but should you change firms you'll be expected to pay it all back at once or it's considered an early distribution (taxes and penalties).
6. Borrow from friends and family. This has obvious pitfalls.
7. Take an early distribution from retirement accounts. This will generally be subject to income taxes and penalties if younger than 59 and ½ (except Roth IRA contributions can be withdrawn anytime tax and penalty free).
8. Default on the judgment. Ask your attorney for info regarding the ramifications.
9. File bankruptcy. I'm not a big fan of this tactic as it will haunt you for years and years.

I really can't stand the idea of robbing your future by tapping investment accounts, but sometimes when your back is against the wall it's all you can do. Have you considered calling one of the local TV stations to do an “On Your Side” piece?  Most of them have a consumer reporter that looks into “unsat” stuff like this. I hope this helps and I wish you the best of luck.

Another entrepreneur!

Q:  I am trying to find the information on the VA
$50,000 business loan program with no collateral
required. Can you tell me how to get to that application on this
website? Thanks.

-- Howard, Louisville, Ky.

A:  The Small Business Administration (SBA) recently introduced the Patriot Express program.  Checkout the link for a host of information on the new program and the October 17th posting on this topic.  Ultimately you will apply through a bank or lender that offers SBA loans.  The loans are guaranteed by the SBA and may not require any collateral.  Good luck with your endeavor.

SBA offers business help to veterans

Q:  Hello June, I have a vending business that I would like to expand.  I want to know if there is any truth to the government-backed business loans available to veterans?  And, if so, how do I go about getting one?  Thanks.

--Michael, Texas

A:  Yes, there’s help out there for entrepreneurs like you!  The U.S. Small Business Administration has a program called the Patriot Express Pilot Loan Initiative which might be just what you’re looking for.  These loans are guaranteed by the SBA and have favorable interest rates.  Here’s a link to more information: http://www.sba.gov/patriotexpress/index.html.  There never seems to be a vending machine close at hand when I’m having chocolate attacks!  So good luck with your expansion.

Payday Loan Pitfalls

Q:  My husband keeps taking out pay day loans even though I have done everything but leave him to make him understand they are BAD. The last one he took out, he gave them a check from my account. I read that Bush passed a new law so they can't connect anything to an account, especially mine. It doesn't even have his name on it. I feel like I am never going to get out of this hole he put us in. What can I do to get rid of these loans instead of getting rid of him?

- Tera

A:  Bad is right!  And you are right!  For years I’ve been an outspoken critic of payday loans and you’re now living the vicious cycle nightmare – borrowing to pay off one loan and then borrowing to pay off that loan too.  I am so sorry to hear that and I understand your frustration.  As part of the 2007 Defense Authorization, a 36% rate cap was placed on payday loans to military servicemembers.  The same legislation forbids the use of personal checks to access the borrower’s bank account.  If you have concerns of non-compliant loans, I would recommend you contact your state’s attorney general. 

I don’t know how you can fix your husband. Borrowing that money has become an easy fix for him and he needs to understand the long term ramifications of those decisions.  By continuing to borrow at super high interest rates, he is possibly robbing your family of the opportunity to own a home, educate children, retire later down the road. He also needs to know that the military my revoke, suspend or deny a security clearance based on personal debt. Family and financial counseling may be in order. You may consider starting at the chaplain’s office. USAA does offer free financial advice as well. Best wishes to you both.

VA Loan Eligibility

Q: My husband was in the Vietnam War and was honorably discharged. He died almost seven years ago from a heart condition. I have not remarried and would like to know if I still can quality for a VA loan as his survivor.
-June, Wheaton, IL

A: I'm so sorry for your loss. Generally, Department of Veteran's Affairs (VA) Loans are available to active duty servicemembers after 180 days of service or six years in the Selected Reserve. There are a host of other eligibility criteria and dates that you can view at www.va.gov. As an unmarried surviving spouse of a veteran you could be eligible if your husband passed away from a service-connected disability. I recommend you contact the VA eligibility center at (888) 244-6711.

Best Plan for Paying Off Loans

Q: My wife has $100k in student loans, which was a huge surprise to me! The current payment on this is $1000 a month, which we cannot afford. It has been in deferment for seven years (principal doubled). What options do we have if we cannot place in deferment? We are paying $125 per month. Will this affect her credit? I have heard horror stories about individuals defaulting on student loans and this is not our intention. We both have Master's degrees and are researching a home business. Do you have any thoughts or ideas?

 

-Eduardo, San Antonio, TX

A: It sounds like it’s a great time for you and your wife to put your education to work! You should explore the home business opportunity while you are both “bringing home the bacon” through full-time employment! Increasing your income will certainly help your overall financial situation!

The type of student loans (federal or private) that your wife has will influence your options, but you should look into consolidating the loans. By doing this, you may be able to extend the repayment time line and also reduce the payment. You may even have the option of paying only interest for a few years. Obviously, these strategies will cause you to pay more, but they can reduce the immediate stress on your financial situation. Visit the Sallie Mae website to learn more (www.salliemae.com) about your options.

You need to contact your lender and look hard at consolidation.  And through a combination of hard work (jobs and home business) increase your income while reducing your expenses to fulfill your obligation!

Best Loan Options

Q: I need $7000 to purchase a car. Would you suggest that I go to the car dealership or through my 401K plan to get a loan?

 -Anthony, Browns Mills, NJ

A: In my opinion, one overused “benefit” of many 401(k) plans is the ability to take a loan. I recommend you avoid taking such a loan unless you are really in a bind! Although, it may seem like a good deal, it will stunt the growth of your retirement portfolio and hinder your long-term plans.

 
So, before going in that direction I would check your credit score and shop around. The car dealership may be a good option, but you should also check with local banks, credit unions, and even online to find the best loan. When evaluating your options, you will want to look at the interest rate, term, and any conditions. For example, there should not be a prepayment penalty. Keep that savings and investment momentum going!

Student Loan Pay-Off

Q: My wife has $100k in student loans, which was a huge surprise to me! The current payment on this is $1000 a month, which we cannot afford. It has been in deferment for seven years (principal doubled). What options do we have if we cannot place in deferment? We are paying $125 per month.  I have heard horror stories about individuals defaulting on student loans and this is not our intention. We both have Master's degrees and are researching a home business. Do you have any thoughts or ideas?

-Eduardo, San Antonio, TX

 

 

A:It sounds like it’s a great time for you and your wife to put your education to work! You should explore the home business opportunity while you are both “bringing home the bacon” through full-time employment! Increasing your income will certainly help your overall financial situation!

The type of student loans (federal or private) that your wife has will influence your options, but you should look into consolidating the loans. By doing this, you may be able to extend the repayment time line and also reduce the payment. You may even have the option of paying only interest for a few years. Obviously, these strategies will cause you to pay more, but they can reduce the immediate stress on your financial situation. Visit the Sallie Mae website to learn more (www.salliemae.com) about your options.

You need to contact your lender and look hard at consolidation.  And through a combination of hard work (jobs and home business) increase your income while reducing your expenses to fulfill your obligation!