Jason, this is a very common question these days as we have all seen how tenuous income ultimately is and how financially difficult something like an economic downturn can be.
As you probably know, an emergency fund is cash set aside in the case of financial hardship, such as job loss, medical emergencies, or car and house repairs. While the rule of thumb for emergency funds used to be that you should have three-to-six months’ income set aside, many experts are now suggesting that you save anywhere from nine months to one year worth of dough. Why? Because of the extended period of joblessness experienced by many during the recession and its aftermath. According to the Bureau of Labor Statistics, roughly 5.5 million people have been unemployed for slightly longer than six months weeks or more as of Feb. 2012, and the average duration of unemployment for everyone out of a job is 40 weeks (roughly 10 months).
So, the easy answer is that you should aim to stash away at least nine months’ take-home. While you might consider this to be excessive, too many people underestimate just how much money they’ll need in case of an emergency. We tend to consider only large fixed costs like our mortgages and car, while forgetting those little, yet wholly necessary expenses that can add up quickly. Just tally your total expenses from last month and see for yourself.
Now, there are certain factors that can affect recommended emergency savings, namely who your income supports and how old you are. Single people and retirees obviously don’t need to save as much as people who are married with kids, especially if they depend on a single income.
Finally, it’s important to realize that you likely won’t set up a sufficient emergency savings fund in one fell swoop. You should simply strive to deposit as much as possible each month into a savings account designated for emergencies. However, make this a higher priority than discretionary expenses, such as expensive television packages or dining out, because the downside of being caught off-guard is significant.
Before talking about who can get an FHA loan, it is important to clarify what one is because a lot of people aren’t quite sure. (Doing so will also help make clear who qualifies). FHA loans are mortgages backed by the Federal Housing Administration and issued by FHA-approved mortgage lenders that can be used to purchase or refinance new or existing 1-4 unit homes. The federal government backs, or insures, these loans in order to lower the down payment requirements, interest rates, and fees that would otherwise serve as built-in risk protection for lenders. In other words, it’s a way for the federal government to encourage lending to first-time home buyers who might have affordability concerns.
Now that you have a general sense of what FHA loans are and who they’re for, there are certain qualification criteria about which you should be aware.
• Borrowers with credit scores equal to or greater than 580 are eligible for maximum financing and therefore may be able to place down payments as low as 3.5%
• Borrowers with credit scores between 500 and 579 are eligible for a maximum of 90% financing, which means they will have to place a down payment of at least 10%
• Borrowers with credit scores below 500 are not eligible for FHA loans
• Borrowers must have income stability (reasonably expect current income to continue through at least first three years of loan)
• Home payments (i.e. mortgage payments, homeowner’s insurance and property taxes) cannot account for more than 29% of a potential borrower’s income
• Total monthly payments – on all loans and obligations– cannot comprise more than 41% of their income
Contrary to popular belief, there is no maximum income for FHA loan eligibility. However, if you make too much, you might be unable to get down payment assistance or supplemental financing.
Finally, all potential applicants will, of course, have to find FHA-approved banks and compare the terms they can offer. In addition, keep in mind that the amount of financing you get depends on your entire consumer profile (i.e. credit score, payment history, income/assets, debts/liabilities), the state of the economy, lender policies, and local FHA loan limits.
I wish I could give you a definitive answer, but it would be irresponsible to do so in light of the sheer number of different types of auto insurance policies and providers that exist. In other words, I wouldn’t want to make a sweeping statement that leaves you vulnerable due to the specific language and nature of your policy.
In most cases, however, the types of coverage, liability limits and deductibles associated with your policy will extend to rental cars. That means if, for example, you only have liability coverage as part of your current auto insurance plan, you won’t have any collision coverage for physical damage that may occur to a rental car. Likewise, if you have relatively low collision coverage and you end up totaling a rental car, you’ll likely have to cover the difference between your coverage limit and the cash value of the rental.
The best thing to do is call your insurance provider and ask what you’re covered for and what kind of additional rental coverage you’ll need. It’s really worth doing so because they supplemental coverage rental car companies try to sell you can get quite expensive.
With that said, your auto insurance isn’t the only source of potential rental car coverage you likely already have. Most credit card networks (i.e. Visa, Mastercard, American Express and Discover) and credit card issuers (e.g. BofA, Capital One, etc.) automatically provide some form of rental car insurance.
For example, all Visa cards provide a rental car Collision Damage Waiver as long as you pay for the entire rental transaction with your Visa card and decline any coverage options offered by the rental company itself. This protects you for physical damage and/or theft of your rental up to the actual cash value of the vehicle, reasonable towing charges, and loss-of-use charges assessed by the rental company.
MasterCard, American Express and Discover all seem to have similar policies and at the very least provide some sort of rental car coverage. Again, the best thing to do is call your card’s issuer and ask what kind of coverage your particular card gets you, what types of cars it covers (Amex’s standard coverage only applies to standard rentals), and what, if anything, you need to do to benefit.
Finally, for some people it might make sense to simply purchase an add-on to their auto insurance policy that covers them for all non-owned cars. This is called Unlimited Non-Owned Car Coverage (UNOC) and depending on the company, you may be able to get it, cancel it whenever you so choose, and only have to pay a prorated charge.
While I cannot give you an exact answer without knowing your existing disposable income, excluding things like your current rent (which will be no longer relevant if you buy a new house), there are some widely accepted guidelines that may be helpful to you. Most experts recommend a housing payment-to-income ratio of 28% and a total debt-to-income ratio of 36%. In other words, you should only spend 28% of your monthly income before taxes on housing and 36% of it on your total debt obligations. Using this rule of thumb, if you do not have any other debt (e.g. from credit cards and auto loans), then your housing costs can obviously increase up to 36% of your income.
If, for example, your annual income before taxes is $100,000, you can spend around $28,000 per year on housing, or $2,333 per month. Remember, housing costs don’t just refer to your monthly mortgage payment; they include things like property taxes, homeowner’s insurance, and homeowner’s association dues. Your best bet is therefore to check out the property taxes in your area as well as the average price of homeowner’s insurance/dues and subtract them from your monthly housing budget. Assuming that they combine to $333 per month, you can afford to pay $2,000 per month ($24k per year) toward your mortgage.
With both this number and the down payment you can afford to make in mind, you’ll be able to easily determine the mortgage and total price of a house you can afford. One additional constraint to take into consideration is savings. No one wants to live paycheck to paycheck, so you should strive to save at least 10% of your monthly after-tax income after all of your expenses are accounted for.
As to the issues that befell so many homeowners during the Great Recession, they were largely due to people overextending themselves beyond the above guidelines, betting that home prices would appreciate. As long as you stick to the 36% and 10% guidelines mentioned above, you shouldn’t have anything to worry about because this basically ensures home loan affordability.
Certificates of Deposit (CDs), U.S. Treasury Bills, and savings accounts are generally regarded as the least risky investments, given that they are backed – at least up to a certain limit – by the U.S. government. They are therefore about as risk-free as you can get.
CDs are essentially fixed-term savings accounts, which means you must deposit your funds for a set amount of time, until the account reaches what is called “maturity.” Withdrawing funds before this point typically leads to a fee. In return for sacrificing liquidity, CDs tend to offer higher interest rates than normal savings accounts. These rates are most often fixed, though they sometimes come with a feature that enables you to readjust your interest rate once over your account’s lifetime. Bank-issued CDs are also insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, though this figure will drop to $100,000 on January 1, 2014. Credit Union-issued CDs are insured by another government agency, the National Credit Union Administration (NCUA), which provides the same coverage as the FDIC.
U.S. Treasury Bills are sold by the government to investors as a way to fund short-term government debts. If you purchase a U.S Treasury Bill, you are basically loaning the government a certain amount of money in return for the government’s promise to pay you back with a predetermined higher amount when the bill reaches maturity. U.S. Treasury Bills are typically issued with maturity terms of one month, three months, six months and 1 year.
As we all know, savings accounts are offered by banks and credit unions and provide variable interest rates, which means their rates fluctuate in accordance with the Prime Rate. While there is no time requirement for a savings account, as there is with a CD, the law only allows consumers to make up to six transfers or withdrawals from a savings account per month (not including in-person ATM or branch withdrawals). Savings accounts offer the same insurance protections as CDs.