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Should You Buy A House If You’re In Debt?

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Being in debt when you want to buy a house can be overwhelming. After all, you know it’s going to be tough getting money out of a bank. For starters, even if you get past the security guard, you’ve all those security cameras …

OK, hopefully you aren’t feeling that desperate. And you shouldn’t. Many people can buy a house if they’re carrying debt. But should you buy a house if you’re carrying debt?

Look, everybody’s financial situation is different. Buying a house when you’re in debt may be a perfectly smart idea for you and the dumbest thing ever for someone else. Which is why if you’re living with debt and would also like to live in a house or perhaps a nice condominium, you’ve got some issues to mull over.

The debt, obviously

How much do you owe? If you’ve got a few years to go before you pay off your car but you’ve had no trouble with the payments and that’s all you owe, that’s clearly different from and far better than one in which you’re paying off a car, carrying $12,000 of revolving credit card debt and polishing off $76,000 in student loans.

Generally, the federal qualified mortgage rule states that the safe maximum debt-to-income ratio is 43 percent, says Greg Palmieri, a certified financial planner at online lending company SoFi. That is, if you take out the mortgage, the debt you pay every month — the house, car, credit cards and so on ― won’t be more than 43 percent of your income.

That said, Palmieri suggests there’s no need to push it. He says that while 43 percent DTI is the highest the government typically feels comfortable with, most lenders would rather see someone with no more than about 35 percent DTI. He would prefer even lower.

“As a financial planner, I would want to see someone at a much lower debt-to-income ratio. While the general rule of thumb is 35 percent debt-to-income ratio, I personally wouldn’t purchase a home with more than a 30 percent debt-to-income ratio,” he says.

But even then, Palmieri says there are some circumstances in which you can probably feel you’re making a good decision buying a house, even if your DTI ratio is higher than 30 or 35 percent. For instance, if you have student loans, you’ve had no trouble paying them off, they’re scheduled to be paid off within five years and you have a financial cushion in the bank (like three months’ living expenses after you make the down payment), he says you probably would be fine getting a house.

Bottom line: While it’s fine to have debt, the lower the percentage of your money that goes toward debt, the better.

You probably already know if this is a smart move or not

Many of us make or have made dumb financial decisions in our lives, so there’s no guarantee that listening to your gut is a good idea. And just a few paragraphs ago, you had that crazy idea of robbing a bank. But deep down inside, you probably know if this house buying decision is smart or not.

As David Carey, a vice president and residential lending manager at Tompkins Mahopac Bank, headquartered in Ithaca, New York, says, you are the person to decide if you can afford a home.

“Don’t leave this up to your mortgage lender,” he says. “Most lenders will responsibly process, underwrite and approve your mortgage, but they will never know your finances or lifestyle choices as well as you do.”

So think about your debt and where you are in life. You probably have a pretty good idea of whether buying a house is something you want to do but shouldn’t or if it’s something you want to do and actually can do.

Do you feel your debt is under control?

This goes back to knowing your situation. But if you really aren’t sure and think you could handle buying a home despite your debt, ask yourself whether your debt is manageable, suggests Kyle Winkfield, a managing partner at OWRS Firm, a wealth management and retirement planning company in Washington, D.C.

“If you are comfortably meeting all of your monthly financial obligations without stress or hardship, you might be in a good position for a larger commitment. That would include comfortably managing current debt payments, perhaps in the form of a car or student loan or small credit card balance,” he says.

It’s even better, Winkfield says, if you’re already putting money away in a savings and retirement account.

“That demonstrates that despite having some debt, you’re in control of it, and it isn’t controlling you. That’s an important factor when deciding how much debt is too much ― who is in control?”

He says that if your debt is running your life and your financial decisions are often limited because of all your debt, then, obviously, there’s your answer: Don’t make your debt worse with a home loan.

But don’t get too hung up on numbers, Winkfield suggests. “What might be a stressful debt load for one person can seem like nothing to another person,” he says.

Have you crunched the numbers?

If you haven’t started looking for a home, you can start looking online at places and get a sense for what type of home you might want to buy and how much it’ll cost you. There are online home buying calculators that can give you an idea how much you’ll pay and what you can afford.

What you don’t want to do is come up with a monthly mortgage payment that you can pay off every month, but just by the skin of your teeth.

“If you’re just barely able to afford the monthly mortgage payment, you’re not ready,” Winkfield says.

Sure, you may make the numbers work, but for how long?

“This is why many homeowners can end up cash strapped, in foreclosure, behind on HOA payments and so on,” he says. “Homes are an expensive purchase, and they consistently cost money to maintain, so if you enter that sort of commitment already saddled with debt, you might be making your situation worse overnight.”

And Carey points out that it’s not only the mortgage payment that you have to think about but also all the costs that come with owning a home.

“Things like electric bills, cable, natural gas, public water, sewer, homeowner’s insurance, home heating oil, rubbish removal and internet service are typically new expenses for a first-time home buyer and can often be overlooked when establishing a budget,” he says, adding that most lenders aren’t considering any of that when deciding if you qualify for a mortgage loan.

That’s why you need to rely on yourself to make this decision to buy a home rather than decide that if a lender will give you the money for a house, you must be able to afford it.

How do you feel about debt?

That may be the most important question you can ask yourself. If debt freaks you out, maybe you are better off staying put and not buying a home. But Winkfield points out that a student loan may take 20 years to pay off completely.

“And if you wait to purchase a home until after that debt is eradicated, you may have lost 20 years of great interest rates, mortgage tax advantages, the opportunity to build equity and some of the intangible benefits that come with homeownership,” he says.

He also points out that not all debt is created equal and that lenders recognize that. So yes, try to kill off that $12,000 in high-interest revolving credit card debt. Besides, eliminating that should improve your credit score and get you a lower interest rate, which will save you money on your loan. But your student loans probably aren’t going to demolish your credit score or make you look like a terrible risk in the eyes of a lender, according to Winkfield.

“A high credit card balance is looked at differently than a student loan for that master’s degree,” he says.

CORRECTION: A previous version of this story misstated the city in which Tompkins Mahopac Bank is headquartered. It is based in Ithaca.

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4 things kids need to know about money

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(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity

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Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard

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Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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