Debt-to-Income Ratios Can Derail Your Home Purchase

162720557You’ve got your down payment. Your credit score is fantastic. You’ve even figured out your monthly budget for housing expenses.

So now you’re ready to charge ahead into the home buying process, right? Maybe not. If you’ve overlooked your debt-to-income ratios, you might not be as mortgage-ready as you thought.

What are they?
As the name suggests, debt-to-income ratios (DTIs), are ways of measuring a person’s monthly debt payments as they relate to incoming cash.

There are two main types of debt-to-income ratios used by mortgage lenders. These are known as the front-end ratio and the back-end ratio. The front-end ratio measures monthly payments for only housing-related expenses, like mortgage principal, interest, taxes, mortgage insurance, homeowner’s insurance and HOA fees (if applicable).

The back-end ratio encompasses all debts that are currently or will be paid on a monthly basis, like the housing-related expenses, home equity loans, credit card minimums, student loans, personal loans, alimony/child support and any other monthly debts.

Remember that your income figures should include not only any salary you receive, but also any alimony or child support taken in, stock dividends, profits from a side business, or regular bonuses (yearly totals divide by 12 for a monthly figure). Be sure to use gross (before tax) figures.

How do I calculate my DTIs?
Once you’ve added up your projected monthly housing expenses, simply divide them by your gross monthly income. This will give you your front-end DTI. For example, if your projected monthly housing expenses are $1,500 and monthly family gross income is $6,000, your front-end DTI is 25%.

To calculate your back-end ratio, just add your monthly debts as described above and then divide them by your gross monthly income.

Why is it so important?
Generally speaking, mortgage lenders want a potential home buyer to have a front-end DTI of no more than 28% and a back-end of 36%. While these numbers may vary from lender-to-lender or by location, it is wise to use these figures as targets when you are beginning the process of buying a home.

If you find yourself with numbers above the 28/36 thresholds, don’t despair. While it may be tough to quickly raise your recurring monthly income, it’s usually easier to examine your budget for ways to free up money to aggressively chop away at your debts. You may need to sacrifice a few luxuries for a while, but if doing so helps you get into a home you love, you will probably find it was all worth it.

Quinceanera Saving Tips

78744400Your daughter’s 15th birthday is only going to happen once and you want to make it special. But you also want to contribute to her college fund and maybe help her out with buying a car at some point. While a Quinceanera can easily run into tens of thousands of dollars, there are ways to keep the costs under control and have money left over for other financial goals.

Have a budget
When your daughter wants that special something for her celebration, it can be hard to say no. However, if you develop a budget for the Quince before you start shopping, you give yourself a better chance of keeping your costs under control. Once you have set a total dollar figure, make sure everyone knows that while you can go over budget on one type of expense, it will mean spending a bit less somewhere else.

Dress smart
Some girls want to have a Quince dress they can hold onto for the rest of their life. Others are fine with simply looking beautiful on their special day. If your daughter falls into the latter category, consider the option of renting a dress instead of buying.

Make a sponsor list
There are many potential padrinos and madrinas out there who would love to sponsor a particular item for your daughter. Include with your invitations a list of items – dress, shoes, cake, venue, etc. – that are available for sponsorship. If you have family members who love to cook, let them be food sponsors for the party. Other relatives who excel at hair and makeup can donate their services too.

No photo pro
Chances are you have a few shutterbugs in the family. By asking different family members to capture certain types of pictures (daughter portraits, crowd shots, decorations) you can cover all the photos you will want to have as keepsakes. This can save you hundreds of dollars over hiring a professional photographer.

Be your own DJ
When you hire a DJ for a Quince, you are essentially paying someone to play the songs your daughter likely already owns. Consult with her on the songs she would like to hear at her party and hook your own mobile device up to the speakers to play them.

Keep it intimate
When choosing a venue, it can make sense to keep it on the small side. That way you have a natural limit on the number of people you can invite and as a result you pay less for space and food. You can always have a party at home or in a park for the people who weren’t on the guest list for the actual Quince.

The whole venue picture
At first look, the rates offered by fraternal lodges or veterans halls can seem a lot friendlier than some of the fancier rental options. However, make sure you are comparing apples to apples. If the fancier place is going to include things like decorations, food, staff, etc., you may actually come out ahead by renting the more “expensive” option.

Electronic invites
You know who the sentimental and/or traditional people are in your family. Make a list of the people you feel would like to have a paper invite to your daughter’s Quince. The rest of the folks will be fine with getting an electronic invitation, saving you on the cost of buying a load of cards, envelopes, etc.

You can give your daughter a Quinceanera that she will always look back on fondly without breaking the bank. Once you understand her wishes for the event, brainstorm ways you can help her get what she wants in the most cost-effective way.

When to Pull the Plug on your Small Business

86498765If you’ve ever operated your own business, you know how personal its success can become. Pondering the end of the endeavor can feel like preparing to end a cherished relationship. But as many successful executives will tell you, knowing how to fail prepares you to succeed. Thus, knowing the warning signs for calling it quits can help you move onto better things.

Preset limits
Ideally, you would have started your enterprise with a way of measuring when it was time to pack it in. If you didn’t do that as a part of your original business plan, you need to do it now. Otherwise, in your drive to make your business succeed, you can lose all perspective. Setting an end point – like six months in a row of losses – can help you maintain a rational outlook.

Funding sources drying up
If you are unable to get needed additional funding for your business – whether via financial institution loan, credit line, investment capital, etc. – it may not be just a case of the world failing to share your vision. It can (and probably should) be a sign that others simply don’t think your operation is viable. This lack of cash infusion can also be taken as a sign that your business has reached its natural ending point.

Debt analysis
Debt levels can be used a “canary in the coal mine” indicator of the health of your venture. That isn’t to say that all debt is bad for a business, but if your debt-to-assets ratio is consistently above 50% or climbing rapidly, it may be time to consider a new path.

The future, not the past
One of the most common things that keeps captains of sinking business ships bailing water pointlessly is the idea that they’ve invested too much time and money to quit. However, this can lead to a whole lot of the proverbial “throwing good money after bad.” Take a serious look at what will your business will need to be successful. Does it seem like a one-in-a-million shot? If so, it doesn’t matter how much sweat equity or capital you’ve poured into it. It’s time to move on.

Retooling options
Have you thought long and hard about how your business can evolve? If you are in the mindset of trying to bend the market to your way of doing things, you may be missing out on some vital opportunities to see your endeavor evolve. If this is the case, your business may not need to halt just yet. On the other hand, if you’ve exhausted all these possibilities, it might be time to say goodbye.

Advice from a veteran
The Small Business Administration – on the web at SBA.gov - has a wonderful mentor program for business owners. Getting an outsider’s perspective can help you get a true sense of what the present and future hold for your operation. Just be sure that your mentor doesn’t have a vested interest in your business succeeding or failing.

The personal test
Are the struggles of your business causing you health problems? Are your relationships with loved ones suffering because of the stress your company is causing you? If you started the venture to improve your quality of life or that of your family, consider if that is really happening. It’s OK to end your current endeavor if it isn’t increasing the happiness in your life.

The decision to terminate a business shouldn’t be made based on emotions. Instead it should be a logical estimation of the future of the enterprise. That kind of approach will allow you to make the most out of your efforts now and in the long run.

Heartbleed

Earlier this week, it was revealed that a flaw in a common piece of computer software used to protect sensitive information was actually making that data vulnerable to identity theft. Known as the “Heartbleed” vulnerability, this loophole in the OpenSSL system of data encryption has threatened to offer criminals a path to private information on:

  • Mobile devices
  • Computers
  • Email systems
  • Social media sites
  • Financial websites
  • E-commerce sites
  • Other electronic records of sensitive data

Upon learning of this potential issue, BALANCE immediately initiated an assessment of all our SSL sites and services. Our sites were scanned for vulnerability or infiltration and it was determined that none of our sites has been compromised. We will continue to regularly scan our sites and both upgrade and update our SSL systems to ensure the safety of the information you have supplied us. It is not necessary to change any of your passwords with BALANCE.

Unfortunately, the Heartbleed vulnerability has the potential for widespread impact. In general it is a good idea to:

  • Change passwords for any other websites that could contain sensitive information after security updates have been installed. Contact site managers if the timing is unclear.
  • Monitor all your financial accounts regularly and closely, including insurance policies, investments and government or employer benefits.
  • Immediately contact both the account provider and your local police if you detect any suspicious activity.

For more information on how to prevent or recover from identity theft, please review our Identity Theft Toolkit for all the resources you need to protect your personal data.

 

Post-Foreclosure Financial Action Plan

iStock_000005685528XSmallIf your home has been foreclosed and you’ve moved out, you may have feelings of shame and hopelessness. But you should know that there are steps you can take to start bolstering your financial life.

  • Secure housing, perhaps with an apartment lease or through an arrangement with a loved one.
  • If you are not able to find housing on your own, dial 211 or 311 for a list of local organizations that can help. You can also call the Department of Housing and Urban Development at 800.225.5342.
  • If your job requires a security clearance, talk with your superior about the impact of foreclosure to your credit.
  • Complete a new budget and consider consulting with a financial counselor.
  • Consult with tax and legal professionals to understand the potential impact of a deficiency balance. Call 877.777.4778 to see if you qualify for free help from IRS Taxpayer Advocate Service. Visit lawhelp.org for free or low-cost legal assistance in your area.
  • Take a comprehensive look at your non-housing debts and develop a plan for paying them.
  • Get copies of your credit reports by calling 877.322.8228 or by visiting annualcreditreport.com.
  • Learn how to rebuild your credit and put a plan in place to do so.
  • Save aggressively to give yourself housing security going forward.
  • Don’t neglect the emotional impact of the foreclosure to you or your family. Find someone you can talk to about the turbulent transition.
  • If children are involved, try to keep as much “normalcy” in their lives as possible and keep the lines of communication open.

After going through the trauma of a foreclosure, you may feel a strong desire to stick your head in the sand and spend as little time as possible thinking about money issues. However, by making a commitment now to rebuilding your financial life, you can help create a rosier outlook.

Special Budget Items for Military Families

177005416Because your military family faces some financial realities that are different than civilian households, careful budgeting is a must. If you use a standard budget worksheet, though, you may get the nagging feeling you are missing a few key categories. Here are some types of income, spending and saving you should take special care not to forget.

Income

  • Basic Allowance for Housing (BAH)
  • Basic Allowance for Subsistence (BAS)
  • Military Pay Allotments
  • Hazardous duty pay

Expenses

  • Uniform-related costs
  • Commissary or exchange charges
  • On-base activity fees
  • Military loans (try to avoid)
  • Equipment needed for deployment
  • Care packages during deployment
  • Services during deployment (childcare, landscaping, home repairs)

Savings

  • Savings for deployment period
  • Savings for anticipated relocations
  • Thrift Savings Plan
  • DoD Savings Deposit Program

It’s also wise to complete separate deployment and stateside budgets. That way, you can have a financial plan that will cover you for all the situations your family encounters.

Job Resources for Military Spouses

177005416Being the husband or wife of a member of the armed forces can present unique challenges when it comes to landing and keeping a job. However, you have the advantage of access to several organizations geared toward helping people just like you find work.

Military Spouse Employment Partnership
This organization partners with many Fortune 500 companies to identify jobs that will fit well for military spouses and then helps you try to land one of those positions. Many of the positions are portable, making it easier to keep your job if/when you need to relocate. There are also resources to help you build a resume, prepare for interviews, and stand out from the crowd of applicants.

Hiring Our Heroes
In addition to helping servicemen and women find career opportunities, this division of the U.S. Chamber of Commerce Foundation also offers a substantial program to help military spouses. Among the services are mentoring programs, job fairs and both online and in-person networking opportunities.

Military.com Spouse Employment Page
On top of hosting a database or jobs, this site has a wealth of practical tips for the military spouse. You can learn about the types of jobs military spouses tend to thrive in, resources available through specific branches of the armed forces, and the best ways to network.

Military Spouse Corporate Career Connection
This nonprofit goes beyond simply helping you get a job by also providing a series of free tools for enhancing your skills and career outlook. You can take advantage of virtual training, gap skills courses, train-to-hire opportunities, apprenticeships and much more.

As the spouse of a person serving our country, you are entitled to special career help. By reaching out to get that assistance, you can increase your chances of finding the job that will help your family achieve more financial stability.

Is myRA your Retirement Solution?

iStock_000000191863_L3Do you want to save for retirement but don’t have access to an employer-offered plan? Recently, President Obama announced a new retirement savings program known as myRA that could help you get started on setting aside a nest egg.

Who qualifies?
If your household makes less than $191,000 per year, or you as an individual make less than $129,000, you are eligible to take advantage of the myRA program. You will need to make an initial investment of at least $25 and you will need to continue to make regular contributions.

What are the limits?
Like a Roth Individual Retirement Account (IRA), contributions to a myRA are limited to $5,500. Also, when your balance reaches a total of $15,000 you are required to transfer money to a Roth IRA.

What are the potential advantages?
In a myRA, your investment is guaranteed to never go down. Plus, you will earn more than you would by putting the money into a regular savings account. While you will be able to set up automatic contributions from your paycheck into a myRA, the plan won’t be tied to a particular employer, so you won’t have to worry about extra paperwork or tax consequences if you change jobs.

What are the potential disadvantages?
The investment choices will be nonexistent for myRA accounts and your growth potential will be small. For that reason, it is better thought of as a savings vehicle rather than an investment account.

Since the myRA is structured similarly to a Roth IRA, your better option may be to contact your financial institution to set up an IRA account and gain greater growth potential and more investment choices.

How do I get started?
Details on how you will be able to open a myRA will be released later in 2014.

It’s important to know that because of the limited growth potential for your investment, a myRA plan shouldn’t be thought of as a primary retirement vehicle. Instead, think of it as a way to jumpstart savings with the goal of eventually transferring the funds into a more appropriate retirement savings vehicle, like an IRA.

Creating a Charitable Giving Budget

186059084When you give money to a charitable cause, do you get in return a series of nagging questions reverberating inside your head? Like…Did I give enough? Or…Was it too much for my budget to take? If you find yourself pondering these questions, you may feel more comfortable creating a set budget for your donations. This can help you shake the feeling that you are just randomly deciding on your philanthropy.

There are a few different ways to arrive at your regular giving figure.

Include it in your monthly budget
While you may not make a donation each month, you can save up money so that when you do make a gift you are getting the most bang for your buck. Once you have completed the necessary expense categories in your budget, decide how big of a chunk of your discretionary expenses you would like to go to good causes.

Commit a percentage
You may find it easier to stick to your giving goals by automatically setting aside a certain percentage of your monthly income to go toward charitable causes. For example, if you wanted to commit 2% of your monthly take-home income to philanthropy, you could have your employer or financial institution deposit that amount into a special checking or savings account each month.

Set up a recurring gift
Don’t feel bad if you can only give a small amount each month. Setting up a monthly withdrawal to a charity each pay period can really help your contribution add up over time. It may not seem like a lot to give $5 every two weeks, but there are many nonprofits out there who would be thrilled to have $130 from you a year from now.

Share your good fortune
Do you work in a job where bonuses make up a major part of your income? If so, you may find it hard to commit a certain amount of money each month to a charity because of the uncertainty of your pay. In this situation, you may find it easier to commit a certain percentage of your bonus to a charity rather than a guaranteed dollar amount.

Be prepared to adjust
Is the amount you would like to contribute feeling like it would be cutting too much into your fun money? Try it out for a month. Many people find that with a little bit less money in their checking account, they naturally cut back on certain unnecessary spending and don’t feel deprived in the least. Give it a shot. You can always adjust your giving if you feel you need to cut back.

Narrow the recipients
Consider what types of causes you feel most strongly about, like education or vaccinations. Next, research the organizations that are considered most effective in accomplishing their goals in these areas. For help with this, visit www.charitynavigator.org. By picking 2-3 causes or groups that you give money to regularly, you can make targeted donations that feel more like a concentrated effort. There’s no reason why you can’t also set aside a certain amount of money each month to help with disasters or other causes that arise.

Consult with a tax pro
Odds are you don’t make your donations thinking primarily about your tax burden. That said, you may be able to get a few breaks for being such a generous person. Talk with a tax professional to understand the best ways and times to give.

You may find that you aren’t in a position right now where giving monetarily is an option. That is 100% OK. If you would still like to give, search out causes you would like to contribute to and see if there are ways you can donate a set amount of time instead. Your efforts will likely be greatly appreciated.

It only takes a little time to craft your strategy and make the most of your contributions. Having a plan in place for your donations can help you feel fulfilled while also easing any worries about the level of your giving.