Do I Have to Pay The TSA Hardship Withdrawal Penalty if My Wife Qualifies for The First-Time Homebuyer Exemption?

Question: My wife and I (both public school teachers) purchased a home in August 2018. I took a hardship withdrawal from my tax-sheltered annuity (TSA) to pay for closing and renovation costs. I know I need to pay the taxes on the amount withdrawn, but there’s also a 10 percent penalty I must pay tax on, unless we qualify for an exception. The exception I thought we might qualify for is the “first-time homebuyer” exception. Although this isn’t my first home purchase it is my wife’s and both our names are on the purchase of the home. So my question is do I have to pay the taxes on the 10 percent penalty? thanks! – Luke in Virginia

Laura Adams, author, and host of Money Girl podcast responds…

If you’re thinking about raiding your retirement account early, or if you already took a TSA hardship withdrawal, it’s important to understand the rules. The regulations vary depending on the type of retirement account you have. I’ll cover the basics so you can prevent unexpected tax surprises and keep your retirement nest egg safe.

Understanding retirement accounts

First, here’s a brief explainer on retirement accounts. They were designed to encourage savings and to discourage you from dipping into them before retirement — or at least before reaching age 59½.

Retirement accounts give you terrific money-saving tax breaks, and they’re my favorite way to save for the future. However, if you break account rules, you’ll have to pay expensive taxes and penalties.

Retirement accounts aren’t piggy banks you can crack open anytime you want. Some have strict regulations that make it very difficult to get money out, even if you have a devastating financial hardship.

However, there are several qualified exceptions when you can take early distributions from retirement accounts that are penalty-free. The exceptions also depend on the type of account you have — such as an Individual Retirement Account (IRA) or a workplace retirement plan — and whether it’s a traditional or Roth account. Keep reading for more clarification.

Rules for making withdrawals from workplace retirement accounts

Many companies, nonprofits, and government agencies offer retirement accounts for workers. They’re a valuable perk to have, so be sure to participate if you’re eligible.

You’ve probably heard of a 401(k), which is a popular plan offered by many for-profit companies. It allows employees to have the employer contribute a portion of their wages to an individual account held by the plan.

[Find out how you can save more in your 401(k) this year.]

If you work for a public school, church, or charitable organization, you may have access to a 403(b) plan, also known as a tax-sheltered annuity (TSA). They’re similar to a 401(k) and also allow employees to put a portion of their wages into individual accounts.

Both a 401(k) and a 403(b) allow traditional and Roth options. With a traditional 401(k) or 403(b), you skip paying tax on contributions until you take withdrawals in the future. So tapping either type of traditional account early typically requires you to pay income tax, plus an additional 10 percent penalty, on amounts withdrawn.

With a Roth 401(k) or 403(b), you must pay income tax upfront on your contributions. That means you can make tax-free withdrawals in the future. However, distributions of any investment earnings would be subject to tax and a 10 percent penalty if you’re younger than age 59½.

Early withdrawal penalty exceptions for workplace retirement accounts

As I mentioned, there are some exceptions to the 10 percent early TSA hardship withdrawal penalty. In general, you can withdraw money from a 401(k) or 403(b) penalty-free for:

  • Medical expenses that exceed 10 percent of your adjusted gross income and are not reimbursed by health insurance.
  • Costs for military reservists called to active duty.
  • Distributions made after leaving your employer after age 55.

If you have a traditional plan, you avoid the 10 percent penalty but must still pay ordinary income tax on early withdrawals. Unfortunately, there isn’t a penalty exception for using an early withdrawal from a workplace plan to purchase a home.

However, if you have an IRA, you can avoid the early withdrawal penalty for distributions up to $10,000 during your lifetime to purchase your first primary residence (or to buy a home after not owning one for two years). Again, this exception is only allowed for an IRA and not for any type of workplace retirement plan.

How Many Times can I Miss My Monthly Mortgage Payment?

Question: How many mortgage payments can be missed on a mortgage before trouble arises?

– Monte in Minnesota

Tendayi Kapfidze, LendingTree Mortgage Expert, responds…

Sometimes the shortest questions come with the most brutal answers. In Monte’s case, there’s no good answer. “Trouble arises” right away when you miss a mortgage payment.

Most mortgage companies offer a grace period, sort of like a credit card. Unlike your plastic, the grace period isn’t a month but usually between 10 and 20 days. If you still don’t make a payment when the grace period ends, you’ll be hit with a late penalty. That often totals between 2 and 5 percent of your monthly payment. Given that your home is likely the most expensive item you’ll ever buy, such a late fee can easily top $100, depending on your mortgage terms.

Not only that, but interest will still accrue on a daily basis for the outstanding balance. So paying your mortgage after the due date might inflate your balance and delay your payoff date.

Your missed mortgage payment is reported

What happens after that? I asked Amy Myers, a senior director at Lending Tree, an online lending exchange.

“Once your mortgage payment is 30 days late, this is when the trouble begins,” she warns. “At this point, your mortgage company will most likely report your delinquency to Equifax, TransUnion and/or Experian credit bureaus as delinquent.”

According to Equifax and FICO, a 30-day delinquency could cause your credit score to plummet as much as 90 to 110 points – even if you’ve never missed a payment on any other credit account in the past.

That’s horrible, but Myers says it gets worse from there.

“It’s important to know that once you make your payment and are no longer considered delinquent, you score will not immediately rebound,” she says. “A late payment can remain on your credit reports for up to seven years from the original date of delinquency.”

Here’s a graphic example: If your mortgage went delinquent in December 2018, it can stay on your credit report until December 2025 – even if you make every one of your mortgage payments on time between those two dates.

The most serious “trouble arising” is foreclosure. Typically, your mortgage company starts the foreclosure process once your payments are 120 days delinquent.

“Your specific mortgage company may have their own terms outlined in your mortgage agreement, so it is always best to speak with them directly,” Myers says. That’s because mortgage companies can have very different ways of dealing with late payers. Each one has a “hardship policy,” and some offer what’s known as forbearance.

LendingTree

What is a mortgage forbearance?

Think of a mortgage forbearance like an extended grace period. Your mortgage company agrees to temporarily reduce or even suspend your monthly payments for a set number of months. In exchange, you might have to pay a higher interest rate once the forbearance ends.

While the forbearance agreement is in place, your lender agrees not to foreclose. Not all lenders offer forbearance and the ones who do don’t offer it easily. Then again, why would they offer it at all? What’s in it for them?

“Mortgage companies do not want a homeowner to default on their loan,” Myers says. “Up until a home is scheduled for auction, most lenders would rather work out a compromise that would allow you to get back on track with your mortgage than take your home in a foreclosure.”

So the real answer to Monte’s question is: When you see trouble arising, get on the phone to your mortgage company now.

Will I Qualify for a Mortgage if I Have Student Loan Debt

Question: My husband and I want to buy a home. I have over $100,000 in loans, but I’m on Income Based Repayment and pay $0. Do lenders accept that amount? How can I make my loans not hinder me from buying or building a home?

– Jessica in Kentucky

Tendayi Kapfidze, LendingTree Mortgage Expert, responds…

Student loans can make buying a home more difficult – but it is possible, Jessica. There are multiple factors to consider here.

First, since you’re on an Income-Based Repayment plan with a $0 monthly payment, that suggests your discretionary income is relatively low. So you may have trouble qualifying for a home loan.

You must also consider what type of mortgage loan you are eligible for. There are several ways the different agencies calculate debt-to-income (DTI) ratio for student loan borrowers on Income Based Repayment plans.

Qualify for a mortgage with these programs

Buying a house with student loans is possible with the help from any of the below. See if you qualify for a mortgage and apply if you meet the requirements.

Fannie Mae (conventional) loans

In 2017, Fannie Mae changed their guidelines to allow mortgage lenders to use $0 as a monthly student loan payment when calculating DTI. There are slight differences based on how your payment appears on your credit report…

  • If the credit report shows a $0 monthly payment, then Fannie Mae will allow the $0 monthly payment to be used for qualifying purposes.
  • If the credit report does not show a $0 monthly payment, but you can provide documentation from the student loan servicer confirming the $0/month payment, then the $0 payment can be used.

You can learn about this, and Fannie Mae’s other student loan solutions, here.

LendingTree

FHA loans

It gets more complicated with loans from the Federal Housing Administration (FHA). They consider additional factors:

If the $0 monthly payment shows on your credit report, then $0 is the amount used in the DTI calculation. Otherwise, the monthly obligation is calculated by one of the following: The greater of 1 percent of the outstanding balance, or the monthly payment reported on a credit report, or the actual documented payment, assuming the loan balance will fully amortize over the term of the loan.

You can read the exact language from the U.S. Department of Housing and Urban Development here.

VA loans

The Department of Veterans Affairs (VA) has yet another calculation.

If you or your husband are active duty or veterans of the military, you may be eligible for VA financing. For student loans in repayment, or those scheduled to begin repayment within 12 months from the date of VA loan closing, the monthly payment must first be calculated by finding 5 percent of the total balance divided by 12 months. Then, there are two additional considerations…

  1. If the payment on the credit report is greater than the calculation above, the reported amount must be used.
  2. Or the payment on the credit report is less than the calculation above, documentation from the student loan servicer indicating the payment is lower and the terms of repayment is required.

If the veteran provides written evidence that the student loan debt will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered.

Learn more from the VA here.

LendingTree

Other ways to qualify for a mortgage

If your husband qualifies with just his income and he is taking out a conventional mortgage loan, your student loan debt (or any of your other debts) would not be counted against him.

Unfortunately, the same is not true if you are applying for an FHA or VA loan. Even if you don’t apply for the mortgage with your husband, these government loan programs require that your debt be counted against him since you are married.

Denny Ceizyk is a staff writer for LendingTree. He contributed to this report.

 

 

 

How to Buy a House with Bad Credit

Buying a home with bad credit is possible, even if you have a FICO score that’s under 600.

What credit score do you need to buy a house?

Learn how to buy a house with bad creditMost people think that you need good credit to buy a house. But that’s really only true for traditional, fixed-rate mortgages. If you want a 15-year or 30-year fixed rate mortgage, then you generally need a FICO score of at least 620 or above. More high-end lending tools, like balloon mortgages and jumbo mortgages, generally require even better credit.

However, on the other end of the spectrum, there are loans specifically designed to help bad credit homebuyers achieve homeownership. You can use lending tools, like adjustable rate mortgages, to buy a home with a lower credit score. This is especially true if you are a first-time homebuyer. In this case, you can qualify for home loans with a FICO score as low as 560.

Type of MortgageCredit Score Needed
Traditional, fixed-rate home loan620 and above
Adjustable rate mortgage (ARM)Above 600
FHA Financing560-600

 

How to buy a house with bad credit, step by step

  1. First, you generally need to contact a HUD-approved housing counseling agency for a one-on-one consultation with a housing counselor.
  2. A housing counselor will be familiar with all the special financing programs available for people with bad credit in your area.
  3. They will also help you find a homebuyer workshop; taking this course is often required to qualify for bad credit loan options.
    1. If you take the course in person locally where you live, you can usually find a free course.
    2. You can also take the course online on your own time, but usually for a fee; online course fees usually run around
  4. Once you complete the course, you receive a certificate that you can provide when you apply for financing.
  5. Now you can begin shopping for FHA loans; these are loans financed through Federal Housing Authority.
    1. Your loan will not come directly from the FHA; instead, you get an FHA loan through the private lender of your choice.

In general, FHA loans only require a FICO score of 560 or more. That’s considered a “poor” FICO score. In addition to allowing you to qualify for loans with weak credit, a homebuyer course completion certificate can also help you qualify for first-time homebuyer assistance programs, such as down payment and closing cost assistance.

What do I need to qualify for an FHA loan?

Even with bad credit, you can move into a new home

  • An FHA-approved lender
  • FICO score of at least 560
  • Down payment of at least 3.5% of the home’s purchase price
  • Extra money to cover mortgage insurance

Anytime someone puts down less than 20% on the purchase of a home, the lender will add Private Mortgage Insurance (PMI). This is basically extra money added to your monthly mortgage payment. You pay until you’ve paid off 20% of the home’s value; then PMI drops off and your payments will be reduced.

What to do if you still don’t qualify to buy a house?

If you still can’t qualify, even for an FHA loan, then you need to take steps to make yourself more “creditworthy.” This means taking steps to improve your credit score and decrease your debt-to-income ratio. And, if your FICO score is below 550, it may take as little as six months or less to get where you need to be.

  1. First your review your credit report to see what negative information is decreasing your score.
  2. If there are report errors that are contributing to your lower score, you can repair your credit to get them removed within 30 days.
  3. Then you can implement a strategy to build credit. When you have bad credit, this usually produces results within 6 months.

Often, it’s good to have a tool that tells you where you stand. Credit monitoring and ID protect tools give you access to your three credit reports, plus credit score tracking. This can make it easier to know where your score is, so you know exactly when it’s the right time to apply for a mortgage.

Is a low credit score keeping you from getting approved for a mortgage? Try Self Lender!

Learn More

Homebuying Credit Score FAQ

Q:
Can I buy a house with a 600 credit score?

1
500

A:

If you have a 600 FICO credit score, then you may not need to go through FHA to get a loan. In this case, you may be able to qualify for non-government-insured financing. Loan qualification varies by lender. Some lenders have stricter standards than others. In some cases, you may be required to use a product like an Adjustable Rate Mortgage (ARM).

Some lenders have also relaxed down payment requirements. If you buy a Fannie Mae backed home, new rules started in 2017 allow you to buy a home with as little as 5% down. Again, you must pay PMI until you’ve paid off another 15% of the mortgage, but it drops off. You can also qualify with a higher debt to income ratio. The previous cut off was 41% or less. Now you can qualify as long as your DTI is between 45% and 50%.

Q:
Is 700 a good credit score to buy a house?

1
500

A:

A 700 FICO score is the bottom of the good credit score range (it goes from 700-749). This puts you in an excellent position to buy a home. With a good credit score, you can qualify for fixed-rate mortgages and adjustable-rate mortgages. You can basically choose the home loan that fits your needs and budget.

You should also be able to get a better interest rate with a good credit score. The higher your score, the lower the rate. That means lower interest charges over the life of your mortgage; you essentially pay less to borrow than someone with bad credit.

Q:
What credit score is needed to refinance a home?

1
500

A:

In general, refinancing requires the similar scores to loan origination (when you first buy a home). The key is that you need a better credit score than when you first took out the mortgage.

If you qualified for an FHA loan at a 560 FICO, then a few years down the road your credit score has improved to 700, consider refinancing! You are likely to qualify for a lower interest rate, which could also lower your monthly payments. Just be aware that other factors affect mortgage rates, such as prime rate changes by the Federal Reserve.

If you’re in doubt, ask a lender for a quote or use an online quote comparison tool to get several quotes. This will help you judge where rates are and what you can qualify for now that your score is higher.

Should I Refinance My Mortgage to Pay Off My Credit Cards?

Question:  I’m carrying about $12,000 on nine credit and store cards, and the interest rates are killing me. I already rolled over the balances a couple times to low-interest and zero-interest cards, but I blew through the introductory offers. But I own my condo, and if I refinance it, I can probably cover what I owe. Should I refinance my mortgage?

— Debby in New Jersey

Tendayi Kapfidze answers…

There are several things to consider. Let’s start with the easiest and proceed from there.

On the surface, this is a simple question to answer. Interest rates on a home refinance are much lower than those on credit cards — around 5 or 6 percent versus 16 or 17 percent average for credit cards. So taking a cash-out refinance to pay off the credit cards would certainly lower your interest costs. Another alternative would be to get a personal loan, which has rates from 7 percent and up. That’s higher than the mortgage, but it could still be lower than the credit card rate, depending on your credit profile.

A particular concern, Debbie, is that you said you “blew through the introductory offers.” So you have already attempted to lower your interest cost, which was smart. However, for this strategy to be most effective, it’s important to not add new debt, but instead, work toward paying off the debt. With nine cards in total, it may be that you have been rolling over balances to new cards and then building up more debt on both the new and old cards. Hence, you are not making progress on lowering debt.

Nine accounts is a lot to juggle, and you could benefit from a tool like myLendingTree, which uses algorithms to suggest debt consolidation strategies. This could help you find the best options for your particular personal financial situation. There is also a wealth of educational material that will help you improve your credit score and debt management.

Just to confirm my information, I asked my friend Matt Schulz about your situation. Matt is chief industry analyst at CompareCards.

“Plain and simple, you need to pay that card debt down,” he says. That’s because credit card APRs are as high as they’ve ever been, and they’re just going to go higher. “Zero-interest balance transfer cards are a great way to help knock that interest down, and even if you blow through the introductory periods and don’t pay the balance off in full, you’ve likely still saved yourself a fair amount of interest.”

Matt is also wary about refinancing your home, but he can see a scenario where it works.

“When you have $12,000 in debt, sometimes you need to make a big change,” he says. “If you do all the math and find that refinancing your home will free up a ton of money that you can use to pay down your credit card debt, then it’s certainly worth considering. A personal loan might be useful as well. Just make sure that you do your homework and know exactly what you’re getting into with either of these options and that you understand all the fees and costs that come along with them. The last thing you want to do is make things worse on yourself because you made a rushed and uninformed choice.”

For further information read Debt.com’s education section on “Should I Refinance my My Mortgage?”

Tendayi Kapfidze is chief economist for LendingTree.

Will A Debt Management Program Hurt My Chances To Buy A House?

Question: Hi, I am currently finishing a Debt Management Program I have been in for the last 3.5 years. We currently own an FHA-financed home and have used the DMP to manage some out-of-control credit cards and reduce our debt ratio.

We are now looking to sell our current home and make a large profit, which would also help eliminate any other debts. We would be looking to purchase a newer home, which would be easier now with no credit debt and a 20 percent down payment.

Would it likely hurt our chances of securing a new loan once the DMP is finished? Our credit is back into the 700-plus range, and we have a large down payment for a conventional home loan. Thanks so much.

— Jeff in Texas

Howard Dvorkin CPA answers…

In the world of personal finance, the answers to even the most basic questions can be complicated. Happily, this isn’t one of those times…

No, Jeff, successfully completing a DMP will in no way hurt your chances of securing a good mortgage!

Now let me explain why.

First, let’s review just what a debt management program does. Called a DMP for short, it significantly lowers your monthly payments. How? Well, you work with a nonprofit credit counseling agency that negotiates with your creditors. Very often, you pay 35 to 50 percent less, and all late fees and penalties stop.

Whenever I tell people this, they look at me skeptically and say, “Yeah right! Why would my creditors give me a break? This sounds too good to be true.”

Actually, it’s both good and true.

Think about it from your creditors’ point of view. They trust the nonprofit credit counseling agency because they’ve worked with them for years — in some cases, decades. They know you’re in trouble and might declare bankruptcy, which means they not only lose money, they lose a customer.

So these creditors allow you to pay back a percentage of what you owe over time. As with anything in life, there are drawbacks. As you can read in the Debt.com report Debt Management Program Pros and Cons, you can’t open a new credit card while you’re paying back your old ones. Also, at the beginning of the DMP, some people notice a small dip in their credit scores.

However, once you complete a DMP, you have nothing but clear skies and green pastures ahead of you. DMPs aren’t automatically reported to the Big Three credit bureaus (Equifax, Experian, and TransUnion), and eliminating your credit card debt improves your credit utilization ratio, which is 30 percent of your credit score. You also improve your payment history, which is another 35 percent.

DMPs resemble gym memberships: In the beginning, you’re working out hard but not seeing any results. Later on, however, you see big results and want to work out even harder. You’re at that point, Jeff. You’ve paid your dues — literally. Now you can buy your home and enjoy what financial freedom really means.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

We Might Win $100,000. What Should We Do With It?

Question: My husband is now part of a class-action lawsuit. It looks like he’ll win around $100,000. He wants to use it to buy a $92,000 condo near us and then spend $8,000 fixing it up so we can rent it.

He says this way, we can make much more than $100,000. I want to use the money to pay off our mortgage and maybe even our credit cards, since we have around $10,000, I think, on five or six cards.

My husband says this is short-sighted, and that every rich person has debt, and that wealth is simply juggling your debts. We’re at loggerheads. What do you think? 

— Marilyn in Lousiana

Howard Dvorkin CPA answers…

If you really want to know what I think, Marilyn, here it is. You both need to take a deep breath and consider what you’re proposing.

Here are the troubling signs I see from your email…

  • Lawsuit settlements are often taxable. This being taxes, it get complicated. For instance, if the settlement includes money for “pain and suffering,” that’s not usually taxed because the IRS might consider it a reimbursement for your injuries. However, the point is: You need to ask before you count on the money.
  • Lawsuits are rarely slam dunks. Right up to the end, not only can the verdict change, but so can the terms. I’m concerned that you might be counting your settlement before it’s sealed.
  • Credit card debt is one figure you can know for sure. You say you “think” you’re carrying $10,000 on “five or six” credit cards. Before you decide what to do with new money, you need to be sure what’s happened to your old money — right down to the penny.

For the purposes of illustration and education, let’s assume you get a cool $100,000.  If the condo costs $92,000, I’m assuming your husband hasn’t factored in closing costs, insurance, and other expenses. Just selling a home can add $15,000 in hidden fees. Even if buying this condo is half that, you’re already over budget if you need to make $8,000 in renovations.

Now let’s turn to paying down your existing mortgage. You don’t mention what your interest rate is, but let’s assume it’s 5 percent. You also don’t mention what the interest rates are on your credit cards, but the national average right now is hovering around 15 percent.

I’m sure you see where I’m going with this. Paying off your credit cards will save you around 10 percent more than paying off your mortgage. If you really want to know what I think, Marilyn, I suggest paying off your credit cards with whatever money you may be awarded.

Next, I’d make sure I had at least three months of living expenses in an emergency fund. If hurricanes Harvey and Irma have taught us anything, it’s that a natural disaster can cost a lot of money.

Finally, with whatever settlement money is left, I would look at other debts I have: an auto loan, student loans, personal loans. These I would pay off from highest interest rate to lowest. Finally, I might indeed pay down some of the mortgage.

Whatever you do, Marilyn, I urge you to gather facts and make dispassionate decisions with your husband. Facts like I’ve outlined here can help avoid a fight over this windfall — if it becomes a reality.

Even if it doesn’t, you can use this experience to still do the things I’ve outlined here.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Where Is the Safest Place To Live In The United States?

Question: So Hurricane Harvey and Hurricane Irma trashed two of our biggest states. Wildfires are doing the same in California, which is our biggest state. Last winter, there were blizzards where I lived that killed people.

Every time there’s a big natural disaster, the news shows homes that are destroyed. I hope these people had insurance, but even if they did, the deductibles are sky-high. My homeowner’s insurance deductible is $10,000 because I can’t afford any less than that.

I’m a computer programmer who works remotely. So I can work anywhere. I want to live somewhere where I don’t have to spend a lot of money fixing up after Mother Nature gets mad. Any ideas?

— Mac in Vermont

Howard Dvorkin answers…

Natural disasters are one of the leading causes of catastrophic debt. The others are divorce, illness, and accidents. If they all have one thing in common, it’s this: They can happen to anyone at anytime.

As a financial counselor for more than two decades, I’ve spoken with Americans who have been wiped out in natural disasters all around the country. So I had the same question you did, Mac. I asked Debt.com researchers to answer it.

They came up with this animated map…

An animated map of extreme weather events in the United States from 2005-2015

As you can see, there’s really no place safe from hurricanes, blizzards, tornadoes, wildfires, earthquakes, floods, avalanches, mud slides, and sinkholes. Any of these can destroy a home.

Even if you could find such a place, you might end up paying more to live there in other ways. Debt.com has written about the most expensive ZIP codes in every state in the nation, and if one of them should have no natural disasters, you may not come out ahead.

Better than trying to avoid natural disasters is preparing for them. While the federal government has helpful information on how to physically get ready for each type of disaster — see Prepare for Disasters and Emergencies — preparing financially is much simpler.

Basically, you need an emergency fund. Ideally, it should have three months of living expenses. Realistically, that’s not possible in a nation where the total credit debt is nearly $1 trillion. That’s $16,245 per cardholder.

That’s why Debt.com ran this brazen, definitive headline earlier this year: None of Us Are Ready for an Emergency.

Mac, I don’t know what your debt situation is, but if you don’t have cash laying around to create an emergency fund, read this: How to Prepare for and Deal With an Income Emergency.

Finally, let me talk you off the ledge. Financial counselors like me talk so seriously about all debt disasters because we want Americans to be prepared. Perhaps we’re trying to scare them into action. However, we don’t want to paralyze you, either.

The statistical odds of your home being wiped out by a natural disaster are slim. More likely is some damage at some point during your life. So don’t give up by telling yourself, “I’ll never save three months of living expenses, so why bother?”

Anything you sock away for later can help you ease a debt disaster. If you start now, by the time bad luck catches up to you, it won’t keep you down for long.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Is a Mortgage Really Considered “Good Debt”?

Question: My husband and I are looking for our first house. Of course, the prices are outrageous. Yet our rent is outrageous, too. So we’re seriously looking.

I don’t mind moving into a small “starter” home, but my husband wants us to “buy as much house as we can afford.” He says our money is better spent on a mortgage than sitting in a savings account earning less than 1 percent.

I’m nervous about sinking all our money into a house, but he says mortgages are considered “good” debt. We don’t have any “bad” to speak of, since our credit card balances are never more than a few hundred dollars and one of our cars is already paid off, with the other having just six months to go.

Is my husband right? I figure a place called Debt.com can tell me if mortgages are “good debt” and therefore a good investment.

— Anita in New Hampshire

Howard Dvorkin CPA answers…

Your question reminds of the sultry movie star Mae West. She famously said, “When I’m good, I’m good. But when I’m bad, I’m better.”

Mortgages are the opposite of Mae West.

Mortgages are often called “good” debt for three reasons…

  1. Very few Americans can afford to plunk down $189,000 (the median price for an existing home) without getting a loan.
  2. Unlike, say, running up your credit card to buy fancy dinners, you spend more time in your home than anywhere else.
  3. Historically, home prices go up, making it the most profitable investment for average Americans.

None of those reasons matter, however, if you can’t afford the monthly payments. This was the very essence of the housing bubble that burst in 2007.

Let me hit you with something else that your husband probably isn’t considering: The cost of home ownership is more than just a mortgage.

Of course, everyone knows you have to maintain your house once you buy it, but now there’s a fresh new dollar figure provided by the real estate company Zillow…

Nationally, U.S. homeowners can expect to spend $9,080 a year on average in hidden costs related to owning and maintaining a home.

Zillow divides “hidden costs” into two categories: “unavoidable” ones such as homeowners insurance and property taxes, and “maintenance expenses” that aren’t just fixing squeaky doors. It includes five-figure expenses like a new HVAC unit.

Interestingly, those hidden expenses fluctuate wildly depending where you live. Check out this map…

For argument’s sake, let’s suppose your husband factored in these surprising costs. My other concern is tying up all your disposable income in one place. Debt.com has previously reported that Americans are stressing out about their retirement savings, and other countries are doing even worse. The scariest headline I saw in some time was this: The World Is Running out of Retirement Money.

I haven’t even mentioned what happens if you don’t have an emergency fund. I’ve been a financial counselor for more than two decades, and I’ve seen bad things happen to good people with “good” debt. How will you afford to recover from an accident or an illness if every penny is paying your “good” mortgage?

I agree with you, Anita. Dream big, but buy small. Live frugally, and your next home may be the home of your dreams.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Should I Pay Off Debt Before Buying a House?

Question: My husband and I got married two years ago next month, and we’d like to buy a house. We’re not ready to start a family just yet, but it seems like home prices are just going to go higher. My husband thinks now is the time to strike. Plus, we’ve seen ads for some really low mortgage rates.

The problem is this: We have, between us, about $14,000 on eight credit, store, and gas cards. I’m wondering if we should use some of the money we’re saving for a house and pay off some of those cards. But then, home prices might go even higher, and we’ll have missed our chance.

Is there a math formula for figuring this out? 

— Hope in Pennsylvania

Howard Dvorkin CPA answers…

Here’s the only math formula that matters: Do you earn enough money to pay both your debts, closing costs, and a monthly mortgage?

The reason this country faced a housing bubble and a terrible recession a decade ago was simple: For many Americans, the answer was “no.”

Four years ago, I wrote a book called Power Up. This part speaks directly to your situation, Hope…

In the past, millions of Americans got themselves into some nasty predicaments because they bought homes they couldn’t afford. They took out exotic mortgages and decided not to analyze the downside to these mortgages, which were costly and have a negative impact on cash flow.They were so enamored of what they thought they could buy (note, I said buy, not afford) that they decided to ignore the fatal risks.

The real question here is, “Do you need a house right now?” Interestingly, Hope, I was just recently reading about a study by the Pennsylvania Association of Realtors that shows, “One in 3 new homeowners are categorized as want to buy customers, while more than 1 in 4 are need to buy customers.”

What’s the difference? Well, think of it like buying a car. When you need a car right now because yours finally died, you’ll overpay. You certainly don’t want to do that with a house.

Bottom, line: Pay off your debts first.

You mentioned math, Hope, so let’s do some. You have around $14,000 in credit card debt.  The average credit card interest rate is about 15 percent a month. So you’re being charged nearly $600 a month just in interest.

Imagine that $600 going to toward a monthly mortgage payment!

If you and your husband can pay off your credit cards, you can then take the money that formerly went to debt and put into a savings account for your house.

As for worrying about “missing the market,” let me reassure you: Buying a house before you’re ready, even if it’s for a great price, is likely to end in disaster. You might save $10,000 if you rush into things, but you’ll spend far more than that trying to catch up to a purchase you weren’t prepared to make.

Let me quote myself one more time. In my book, I concluded, “Just use common sense when purchasing anything from a home to a lawnmower.”

I doubt you’d buy a lawnmower you didn’t need just because it was on sale.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

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