Tag Archive | "home buying"

Getting divorced? Financially preparing for what’s to come

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Getting divorced? Financially preparing for what’s to come

As I prepared to write this post, I wasn’t sure of the tone that I should take since I feel that I should offer my condolences to half of you while congratulating the other half. And although I believe that divorce is sometimes the right choice, I rarely try to advocate it. So I have to wonder if I am enabling divorce by creating a how-to list. Either way, if you are getting divorced, then you need to financially prepare for what is to come.

Sitting by a pondIf at any point you feel that my tone is not appropriate considering the emotional turmoil that accompanies divorce, then simply understand that my purpose in writing this post is to help you with financial decisions. I am not a therapist or a shoulder to cry on. Please take no offense if I am to the point with my comments.

Complete and accurate financial records

Unfortunately, many divorce cases are fraught with deception. Further, it is not uncommon for the wage earner to have been hiding funds for years in secret accounts. Tax filings and W-2s help to establish how much money is coming in. Buy a banker’s box, hanging folders, and file folders (for organization) and make copies of everything. Hopefully, you and your spouse have been maintaining good financial records and all you’ll need to do is go to Kinko’s and start making copies. If you don’t have good financial records, then start going through old boxes or contacting employers, banks, etc.

Recording expenses during the divorce proceedings

You need to demonstrate what level of income is necessary to continue your normal lifestyle. This is very important if you are not the wage earner. For example, if you regularly buy gifts for family or enjoy eating out, then you need to establish a record showing that that is your lifestyle. If you go into the courtroom and just say, “I want $5000 a month,” without receipts that show that’s how much you normal spend, then you will have a difficult time getting that number.

Open new bank accounts and credit cards

As soon as the decision is made to get a divorce, then you need to open your own bank accounts and credit cards. This task may be especially daunting if you’ve never been very involved in your finances. As a side note, please always be involved in your finances. I’ve compiled a list of good articles and posts to read about banks and credit cards.

Bank Accounts

Credit Cards

One last note about your financial accounts. Make sure that you have designated primary and contingent beneficiaries on your investment accounts and where possible, have a someone else on your bank accounts. If you were to suddenly pass away without adding beneficiaries and co-owners, then your money may find itself stuck in probate for a very long time.


During the divorce and afterwards, you will be solely responsible for handling your finances. Budgeting entails categorizing the areas where you spend your money and then setting a specific amount of money that you are allowed to spend each month within the various categories. Do not mistake accounting, which is just keeping a record of where you spent money, with budgeting. Budgeting is an active process where you limit your spending, thus requiring discipline.

There are a variety of online and desktop applications that help you create a budget and then track your expenses. I do not intend to list them all here since there really are quite a few options. However, let me strongly recommend using Mint.com, which is free. Mint is owned by Intuit and is therefore, well-funded and supported. For more info, read my review of Mint.com.

If you want to evaluate more options, then please read Budgeting Software: 13 Free Alternatives.

Your credit score and credit monitoring

In order to secure new credit accounts or a home, you will need to have a good credit score. Unfortunately, many Americans are unaware of what their credit score even is. First, a credit score and credit report are different. A credit report shows your credit history and a credit score is an indicator of how well you are able to manage debt or credit. You will need to review both.

Once a year, you are entitled to a free credit report from each of the three major credit bureaus. To obtain your report, simply visit AnnualCreditReport.com. Pull all three reports and make sure that everything is correct. Checking for errors is very important since your spouse’s bad habits may be credited to you.

If you have a particularly vindictive ex-spouse, then strongly consider signing up for a credit monitoring service that alerts you when something changes on one of your credit reports.

To obtain your credit score, create an account at CreditKarma.com. You can check your credit score as often as you like. For more information about Credit Karma, read Review of Credit Karma – 3 Essential Questions Answered.

Should you Rent or Buy?

If you are able to stay in your current home, then you can probably skip this section.

Many divorcees are forced to sell their home and relocate as part of the divorce settlement. If you are forced to move, then you will face the age old question – Should I rent or buy? The answer depends on a lot of factors, such as how much of a down payment do you have? do you have good credit? do you have a steady and stable income? how long do you plan to be in this location?

For some help navigating this tough decision, you can use the resources below (all three include a financial calculator).


Divorce is miserable. I don’t care if you are the one leaving or not. Divorce is just not pleasant. That’s not to say that you may not be better off, but anything that involves lawyers is bound to keep you up at night. Therefore, it is essential that you take care to financially prepare yourself for what’s to come and not spend additional sleepless nights worrying about areas of your finances over which you have control.

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Loan Modification Program: My resignation from financial responsibility

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Loan Modification Program: My resignation from financial responsibility

Our nation has been facing for more than a year now, one of the worst housing price decreases in history. Yet for some reason, many people seem to be confusing how this happened.

Giving up on being responsibleLet me give you an example. Obama has structured a Loan Modification program for individuals suffering “financial hardship” but desire to keep their home. U.S. News last March aptly described 7 key facets of the program. Apparently, homes worth up to $729,750 are eligible for the program. Last time I checked, a 3/4 of a MILLION dollars home is only a home that someone with a large, stable income should purchase.

But for some reason, that isn’t part of the American Dream. The American Dream has become to acquire big homes and toys incurring insurmountable debt. The Loan Modification program adjusts the interest rate on homes facing default down to 2%. If that is not enough, then the term of the loan is extended to 40 years. If that is still not enough, then the bank stops charging interest.

The goal of the program is to lower the monthly payment to 31% (actually 38% and the government, i.e. taxpayers, pay down the other 7%) of the individual’s gross monthly income.

How did we actually end up with this problem?

I recognize that regardless of how we arrived here, we are here either way. But let’s be honest for a moment. The interest rate is not the problem, neither are falling home prices. Irresponsible and hasty adults purchased homes that they could have never feasibly afforded and greedy banks made the loans.

Warren Buffett echoed my sentiments when he stated, “Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay.”

I once heard a banker describe the situation from the banker’s perspective. He explained that banks made the loans based on two erroneous assumptions. Assumption #1 – Owning a home is the American Dream and no one would ever default on the American Dream. Assumption #2 – Even if the value of the home is less than the size of the loan, home prices always go up and the home won’t be under water for long.

Well my friend, Americans are just mini-businesses. When expenses exceed income, then home owners chose to close up shop and foreclose.

ScreamingThis is the point where I say, “Is this a sick joke?!”

Let me make sure I understand this correctly. I carefully analyzed my financial situation and purchased a home that I can afford without financial stress. Now, 1000s of irresponsible home owners are going to financially benefit from being careless, greedy, or both.

For example, one of our neighbors qualifies for the Loan Modification program. In fact, it will lower their monthly payment so much, that they are going to buy and move into a second larger home and profitably rent out the first. Now do not forget that we are paying for that 7% decrease. I’m pretty sure that’s just not right. (Caveat: I don’t think they’ll ever qualify for the second mortgage)

The Real American Dream – We started a business

Last year, my wife and I were facing some unexpected bills. Instead of turning to the government and taxpayers, we started a business. We were able to pay for all of our needs and are expecting a good second year. That’s the American Dream – the ability to change your situation if you work hard.

So this is my resignation from responsibility. Why should I work hard, pay my taxes, make good decisions, and watch while others benefit from irresponsibility?

Isn’t this eerily like middle school?

I feel like I’m in middle school again. I was always amazed that the delinquents, the kids skipping classes and starting fights always had privileges and praises that the good kids never received. I recall a program that allowed poor performing kids to slightly raise their GPA and then receive public awards and rewards for mediocrity. Or remember the rebel or football player with a D average that always dated the cheerleaders. He used each one of them and then moved onto the next.

Why is our welfare system structured after the social intricacies of pubescent 15 year olds?

So I’m done. I’m done producing. I’m done being responsible. Why not simply do whatever I want and then wait for a social program to be structured to remove the consequences of my actions? Welcome to the new American Dream.

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Why Parker Bros Monopoly should save the housing market


Why Parker Bros Monopoly should save the housing market

For years, I have played Parker Bros Monopoly. We all have. And yet, too many of us did not learn the most basic real estate principles that this children’s game is teaching. So it’s time to be a kid again.

Monopoly is straightforward. Your goal is to strategically purchase properties, build houses and hotels, and then charge other players rent. In order to consistently win, you need a strategy. Unlike a game of Chess or Risk, Monopoly does not require a complex strategy, just a thorough understanding of the rules of the game and a plan of which properties best position you to have an advantage over the other players.

The same is true for home buying. Although the paperwork is certainly complex, your home buying strategy need not be complex. Simply have a good understanding of the financial impact that home buying incurs and a plan to meet those financial obligations.

Cash is King

I cannot count the number of times this mantra was repeated while I was in business school. Businesses fail when growth exceeds the company’s ability to fund the growth.

That concept is the same for individuals, which are actually pseudo-businesses. So for example, in order to buy property or a house, you need cash. You need a down payment and more importantly, you need the financial ability to meet each month’s mortgage PLUS utilities PLUS property taxes PLUS an HOA fee if applicable PLUS a number of other expenses you probably have not anticipated yet.

There are a large variety of online calculators that help you “determine” how much house you can buy. But they all fail to take into account your charitable donations and savings. For example, CNNMoney.com and Yahoo! Real Estate both offer online mortgage calculators. Even though Yahoo offers a more comprehensive approach and includes the front and back end ratios, it still fails to account for crucial keystones to a solid financial plan.

Often, using a front end ratio (monthly housing expenses / monthly income) of 28% is recommended. Depending on how much you contribute to charities and are saving for retirement, education, vacations, etc, you many want to consider a rate between 20-25%.

Remember, just as in Monopoly, if you don’t have the cash, then you lose! The bank will foreclose.

Life is a game of Chance

My wife hates that I always pick-up the good Chance cards and that she always ends up in jail or paying me money. But isn’t that just how life is? The other guy always seems to have better luck, while you are stuck with unforeseen bills and expenses.

In Monopoly, if you are not prepared for unexpected expenditures, then you end up mortgaging your properties. Consider a home equity line of credit to pay for the repairs on your commuter car the equivalent of mortgaging your property. When a player begins mortgaging properties, he or she often loses the game.

Therefore, you should always maintain an emergency fund of at least $1000 and preferably 3-6 months of expenses.

Are all of your ducks in a row?

In order to begin buying homes to place on a given property in Monopoly, you need to own all three (this excludes Park Place and Broadway) of the properties of that color. The same principle applies to your home purchase. You need to have the following three pieces in place before you purchase a home:

  1. Save at least 10-15% as a down payment. This may require that you purchase a more modest home. But it also means that you will stop paying Private Mortgage Insurance that much sooner.
  2. Do a lot of research and be patient. Know everything you can about the area around the home you are considering. Ask the neighbors with comparably sized homes what they pay in utilities. If it’s a long distance move, research the weather and local school systems. Unless you have to move today, wait until you find a great deal. Be patient and you can save a lot of money.
  3. Have a home inspection performed (this is assuming you are buying used). Even though the owner may offer you an inspection report, have your own performed. I have known individuals who received bad inspection reports (some intentional) from home sellers.

Conclusion: Plan before you buy

Winning Monopoly often involves having a bit of good luck, but the winner also has a plan. If you plan correctly and well in advance, if you do not allow yourself to make a poor decision no matter how much you like the home, and if you manage your finances using a budget and savings plan, then home buying will be the American Dream instead of the American Nightmare that so many are experiencing right now.

P.S. Amazon.com has a Nintendo version of Monopoly. Check it out!

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Home Buyers Tax Credit Extension

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Home Buyers Tax Credit Extension

If you’ve been wanting to take advantage of today’s historically low mortgage rates, now is definitely a good time. The popular home buyer tax credit has recently been extended by Congress.

87604688 The program is now being offered to all eligible home sales occurring between January 1, 2009 and April 30, 2010. In addition to the previous $8,000 refundable tax credit available to first-time home buyers, the extension includes a new provision offering a $6,500 credit to homeowners looking to relocate provided that they have lived in their current residence for a minimum of five years. It is important to note that the provision for the $6500 tax credit only applies to homes purchased after Nov. 6th 2009 and is not retroactive.

Income limit provisions

In addition, Congress has increased the income limits for the program. To qualify for the full $8000 credit, individual taxpayers cannot make in excess of $125,000 and joint filers cannot make more than $225,000. The limits under the previous credit were $75,000 for single filers and $150,000 for joint filers. However, there is still a possibility for you to qualify for a partial credit if you make slightly above these amounts. The credit is ruled completely out for single home buyers with incomes above $145,000 and $245,000 for joint filers as well as for homes bought in excess of $800,000.

In addition, applicants cannot have owned a home as a primary residence within the last 3 years and are required to stay in the home that you are purchasing for an equal amount of time. If you sell your home within three years of the date of purchase you will be required to repay the full amount of the received credit. Also, you cannot claim either credit if you inherited or were gifted a home from a family member or loved one.

Necessary paperwork

Receiving the credit is easy- simply claim the eligible amount via form 5405 on your tax return for 2009 or file an amended return for 2008. No additional forms or paperwork are necessary. Also, depending on the lender, you can now apply the credit as a down payment on a mortgage loan.

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