MONEY Ask the Expert

The Secret To Saving For Retirement When You Have Nothing Saved At All

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Robert A. Di Ieso, Jr.

A: I am a 52-year-old single mother. I have NO savings at all for any kind of retirement. What can I do? Where should I start? I also want to start something for my daughter who is 13. Please, I would really love your help. – Anita, West Long Branch, NJ

A: No retirement savings? Join the crowd. A recent survey by BankRate.com found that 26% of those ages 50 to 65 have nothing at all saved for retirement. But even in your 50s, it’s not too late to catch up or at least improve your situation, says Robert Stammers, director of investor education at the CFA Institute.

“You shouldn’t panic. People who start late have to forge a fiscal discipline, but there are lots of tools you can use to ramp up your savings,” says Stammers, who recently published a guide to the steps to take for a more secure retirement.

First, figure out your retirement goals. When do you want to retire? What kind of lifestyle do you want? What will your biggest expenses be? The answers will determine how much you need to save. If you want to maintain your current living standard, you’ll need to accumulate 10 to 12 times your annual income by 65, according to benchmarks calculated by Charles Farrell, author of Your Money Ratios.

You’ll probably end up with some scary numbers. If you earn $75,000 a year, you might need $750,000 to $900,000 by age 65. That amount would provide 80% of your pre-retirement income, assuming a 5% withdrawal rate. You probably won’t need 100% of your current income, since some spending eases up after you quit working—commuting costs and lunches out—and your taxes may be lower.

If can live on less than 70% of your pre-retirement income—and many retirees say they live just fine on 66% —you may be able to retire at 65 with a $500,000 nest egg. Delaying retirement till 67 or later can lower your savings goal further to perhaps $400,000. (All these targets assume you’ll also receive Social Security; see what you’re eligible for at SSA.gov.)

Don’t be daunted if these figures seem out of reach. Even getting part-way to the goal can make a big difference in your retirement lifestyle. To get started, find out if you have access to a 401(k)—if you do, enroll pronto and contribute the max. People over 50 are eligible for catch-up contributions, so you can sock away even more than someone younger and you’ll save on taxes. You’ll also likely benefit from an employer match, which is free money. You can use calculators like this one to see how your contributions will grow over time. Someone saving 17% of a $75,000 salary over 15 years will end up with nearly $400,000, assuming an employer match.

If you don’t have a 401(k), then set up an IRA, which will also permit catch-up savings. Still, the contribution limits for IRAs are lower than those for 401(k)s, so you’ll need funnel additional money into a taxable savings account.

To free up cash for this saving program, review your budget and find areas where you can cut. “You’ll need to make some hard decisions about your lifestyle,” says Stammers. Small moves can help, such as downgrading your cable and cellphone plans and using coupons to lower food costs. But to make real savings progress, you’ll need to go after some big costs too. Can cut your mortgage or rent payments by downsizing or moving to a cheaper neighborhood? Can trade in your car for a cheaper model?

You can speed up your progress by tucking away any raises or windfalls that you may receive. And think about ways you can bring in more income to save—perhaps you have room to rent out or you may be able to earn extra cash with a part-time job.

As for your goal of saving for your daughter, it’s admirable, but you need to focus on your own retirement. In the long run, achieving your own financial security will benefit your daughter as well—you won’t need to lean on her when you’re older. And by taking these steps, Stammer says, you’ll also be a good financial role model for her.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

MONEY Ask the Expert

The Best DIY Home Projects

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Robert A. Di Ieso, Jr.

Q: I’m pretty handy, and I enjoyed building sweat equity in our first home, but now my time is very limited. What’s the best place to focus my DIY efforts?

A: That all depends on what “pretty handy” means to you. Does it mean you have a full, Norm-Abram quality woodwork shop in your basement? Or just that you know how to oil the door hinges when they start squeaking, reboot the wireless router when it lags, and jiggle the toilet handle to stop the toilet from running?

Chances are, your skill set is somewhere in the middle. We’re betting you have good construction instincts, a bit of experience—and some tolerance for a few minor mistakes in the results if it means saving money.

So keep it simple: Don’t tackle a task you haven’t done several times before, unless it’s an out-of-the-way spot where it won’t get much visibility, says Pittsburgh DIY consultant Michael R. Wetmiller. Don’t reshingle the front of the house until you’ve reshingled the garage. Don’t tile the foyer floor until you’ve tiled the kids’ bathroom.

Also, stay away from any job that puts you—or your house—at risk. That means avoiding any ladder over about eight feet tall, electrical wiring, plumbing, and major demolition work.

And look for jobs where your limited schedule won’t become a major stress. “You don’t want to live without a kitchen while you’re spending only weekends and evenings remodeling it,” Wetmiller says. And you don’t want to battle bad weather or darkness when you happen to have time to invest in the job.

That’s why he suggests that DIYers renovate an out-of-the way interior space, where you can work any time of the day or night. “Finishing the basement is a perfect example,” he says. “You can do as much or as little of the work for which you have time and skills and contract out the rest.” No rush and no disruption of daily life if the project drags on for a while. Here’s what you might save by doing your own:

Drywall: $1,500 to $2,000

Flooring: $1,000

Painting: $500 to $800

Insulation: $200 to $500

Trimwork: $200 to $300

Got a question for Josh? We’d love to hear it. Please send submissions to realestate@moneymail.com. Check back in with us on Wednesdays to read his answers.

Related:

Remodeling your deck: when to DIY, when to hire a pro

This 1920s home was a mess before these guys got hold of it

 

MONEY Ask the Expert

How To Tap Your IRA When You Really Need the Money

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Robert A. Di Ieso, Jr.

Q: I am 52 and recently lost my job. I have a fairly large IRA. I was thinking of taking a “rule 72(t)” distribution for income and shifting some of those IRA assets to my Roth IRA, paying the tax now while I’m unemployed and most likely at a lower tax rate. What do you think of this strategy? – Mark, Ft. Lauderdale, FL

A: It’s a workable strategy, but it’s one that’s very complex and may cost you a big chunk of your retirement savings, says Ed Slott, a CPA and founder of IRAhelp.com.

Because your IRA is meant to provide income in retirement, the IRS strongly encourages you to save it for that by imposing a 10% withdrawal penalty (on top of income taxes) if you tap the money before you reach age 59 ½. There are several exceptions that allow you to avoid the penalty, such as incurring steep medical bills, paying for higher education or a down payment on a first home. (Unemployment is not included.)

The exception that you’re considering is known as rule 72(t), after the IRS section code that spells it out, and anyone can use this strategy to avoid the 10% penalty if you follow the requirements precisely. You must take the money out on a specific schedule in regular increments and stick with that payment schedule for five years, or until you reach age 59 ½, whichever is longer. Deviate from this program, and you’ll have to pay the penalty on all money withdrawn from the IRA, plus interest. (The formal, less catchy name of this strategy is the Substantially Equal Periodic Payment, or SEPP, rule.)

The IRS gives you three different methods to calculate your payment amount: required minimum distribution, fixed amortization and fixed annuitization. Several sites, including 72t.net, Dinkytown and CalcXML, offer tools if you want to run scenarios. Generally, the amortization method will gives you the highest income, says Slott. But it’s a good idea to consult a tax professional to see which one is best for you.

If you do use the 72(t) method, and want to shift some of your traditional IRA assets to a Roth, consider first dividing your current account into two—that way, you can convert only a portion of the money. But you must do so before you set up the 72(t) plan. If you later decide that you no longer need the distributions, you can’t contribute 72(t) income into another IRA or put it into a Roth. Your best option would be to save it in a taxable fund. “Then the money will be there if you need it down the road,” says Slott.

Does it make sense to take 72(t) distributions? Only as a last resort. It is true that you’ll pay less in income tax while you’re unemployed. But at age 52, you’ll be taking distributions for seven and a half years, which is a long time to commit to the payout plan. If you get a job during that period, the income from the 72(t) distribution could push you into a higher tax bracket. Slott suggests checking into a home equity loan—or even taking some money out of your IRA up front and paying the 10% penalty, rather than withdrawing the bulk of the account. “Your retirement money is the result of years of saving,” says Slott. “If you take out big chunks now, you might not have enough lifetime to replace it.”

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

MONEY Ask the Expert

Why You Might Want More Than One College Savings Account

Robert A. Di Ieso

Q: I have college savings for my children in both education savings accounts (ESAs) and 529s. Is there a difference in the way those accounts are calculated for potential financial aid? Would there be any benefit to consolidating into one type of account? — Mike Spofford, Green Bay, Wisc.

A: The good news: There is no difference in how Coverdell ESAs and 529 savings plans factor into your child’s student aid, says Mark Kantrowitz, publisher of Edvisors.com, a website that helps people plan and pay for college.

Both of these education accounts are considered qualified tuition plans. So as long as they are owned by a student or a parent, the plans are reported as an asset on financial aid forms and have a minimal impact on your aid eligibility (federal aid will be reduced by no more than 5.64% of the value of the account). What’s more, your account distributions are not considered income, Kantrowitz adds.

Education savings accounts and 529s share other appealing features: Your savings grows tax-deferred and withdrawals are tax free as long as the money goes toward qualified education expenses. If you spend it on anything else, you will be hit by income taxes on the earnings as well as a 10% penalty.

One of the biggest differences is how much you can put in. ESA contributions max out at $2,000 per child per year, while 529s have no contribution limits. However, if you put more than $14,000 a year into your child’s 529—or $28,000 as a couple—the excess counts against your lifetime gift tax exclusion and must be reported to the IRS. You can get around that by using five-year tax averaging, which treats the gift as if it were made over the next five years.

Coverdell ESAs give you more investment options—from certificates of deposit to individual stocks and bonds to mutual funds and ETFs; you’re usually limited to a small number of mutual funds in a 529 plan. But you don’t need that much investing flexibility, Kantrowitz notes, since you want to keep risks and fees to a minimum over the short time you have to save for college.

Another key difference is that ESA funds can be spent on K-12 expenses; 529s must wait until college. ESAs also come with age restrictions. You can contribute only while the beneficiary is under 18, and to avoid penalties and taxes you must spend the funds by the beneficiary’s 30th birthday (with a 30-day grace period).

You can get around this age limit by changing the beneficiary to an under-18 close relative of the beneficiary. Or you can roll it over into a 529 plan with no tax penalty. (You cannot roll your 529 into a Coverdell ESA, however.) In fact, later-in-life education is one of the only reasons to consolidate plans. Otherwise, says Kantrowitz, there is no compelling reason to combine your two savings accounts into one.

MONEY Ask the Expert

One Thing Dog Owners Shouldn’t Waste Money On

Chocolate lab puppy in browning lawn
Even adorable dogs may turn your lawn brown. John Crum—Alamy

Q: We love our dog, but she’s wrecking our lawn. It’s totally brown in the area where she “goes”—right next the patio, of course. Is there anything we can do that doesn’t cost a fortune?

A: Let’s start with a little, ahem, urine science. Your pooch’s pee is extremely high in nitrogen. And although nitrogen is an ingredient in lawn fertilizer, at intense doses, it’ll chemically burn the grass. There’s nothing your $800-a-year lawn fertilizing company can do about it. Brown-outs can be particularly problematic with female dogs, since they typically release a single, huge puddle each time they go outside, whereas male dogs often like to relieve themselves in many small batches on trees, fences, and any other vertical surface they can find.

Any supplement or medication that promises to resolve your dog-induced lawn problem—and there are many available, from $12 boxes of treats to $30 bottles of vitamin supplements—is either not going to work or not going to be healthy for the dog. “High nitrogen content is a sign of a healthy dog,” says New York City veterinarian Ann Hohenhaus. Thus, don’t waste your money trying to change the composition of your dog’s waste.

Some vets suggest adding water to your dog’s food in order to get her to drink more and dilute her urine, a perfectly safe approach, but Dr. Hohenhaus says it’s often impossible to get a dog to drink more water than it wants to. Adding it to her food, or giving her fun-to-chew ice cubes, is likely to just make her drink equivalently less from her water bowl. Still, there’s no harm in trying to lead your dog to water, so to speak, just be prepared to let her out more often if it works.

For most mutts, though, the best solutions happen outside the house. Some of Dr. Hohenhaus’s clients—who tend to have small, urban lots—keep a watering can in the backyard and immediately rinse the grass right after their pets do their business, an effective way to dilute the nitrogen before it does any damage, as long as you’re on scene to do it every time.

A better solution for the larger yards of suburbia is to train your dog to go in a designated, out-of-the-way spot, such as behind the garage or on an open mulch bed. Like any training, this is a matter of positive reinforcement. Walk the dog on a leash to where you want her to go, and immediately give her verbal encouragement and a treat when she does. Keep it up, eventually without the leash, and then from across the yard, and you may just teach your old dog a great new trick—keeping your lawn lush and green.

Related:
Smart money advice for rookie gardeners
Get your laundry room out of the basement without spending a fortune

 

 

MONEY Ask the Expert

Here’s How to Protect Your 401(k) from the Next Big Market Drop

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Robert A. Di Ieso, Jr.

Q: Bull markets don’t last forever. How can I protect my 401(k) if there’s another big downturn soon?

A: After a five-year tear, the bull market is starting to look a bit tired, so it’s understandable that you may be be nervous about a possible downturn. But any changes in your 401(k) should be geared mainly to the years you have until retirement rather than potential stock market moves.

The current bull market may indeed be in its last phase and returns going forward are likely to be more modest. Still, occasional stomach-churning downturns are just the nature of the investing game, says Tim Golas, a partner at Spurstone Executive Wealth Solutions. “I don’t see anything like the 2008 crisis on the horizon, but it wouldn’t surprise me to see a lot more volatility in the markets,” says Golas.

That may feel uncomfortable. But don’t look at an increase in market risk as a key reason to cut back your exposure to stocks. “If you leave the market during tough times and get really conservative with long-term investments, you can miss a lot of gains,” says Golas.

A better way to determine the size of your stock allocation is to use your age, projected retirement date, as well as your risk tolerance as a guide. If you are in your 20s and 30s and have many years till retirement, the long-term growth potential of stocks will outweigh their risks, so your retirement assets should be concentrated in stocks, not bonds. If you have 30 or 40 years till retirement you can keep as much as 80% of your 401(k) in equities and 20% in bonds, financial advisers say.

If you’re uncomfortable with big market swings, you can do fine with a smaller allocation to stocks. But for most investors, it’s best to keep at least a 50% to 60% equities, since you’ll need that growth in your nest egg. As you get older and closer to retirement, it makes sense to trade some of that potential growth in stocks for stability. After all, you want to be sure that money is available when you need it. So over time you should reduce the percentage of your assets invested in stocks and boost the amount in bonds to help preserve your portfolio.

To determine how much you should have in stocks vs. bonds, financial planners recommend this standard rule of thumb: Subtract your age from 110. Using this measure, a 40-year old would keep 70% of their retirement funds in stocks. Of course, you can fine-tune the percentage to suit your strategy.

When you’re within five or 10 years of retirement, you should focus on reducing risk in your portfolio. An asset allocation of 50% stocks and 50% stocks should provide the stability you need while still providing enough growth to outpace inflation during your retirement years.

Once you have your strategy set, try to ignore daily market moves and stay on course. “You shouldn’t apply short-term thinking to long-term assets,” says Golas.

For more on retirement investing:

Money’s Ultimate Guide to Retirement

MONEY Ask the Expert

When Parents Can Say No to Picking Up the Tab for Insurance

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Robert A. Di Ieso, Jr.

Q. My ex-husband has been responsible for providing health insurance for our kids until the age of majority. My sons are now 21 and almost 18. My ex has family coverage for himself and his new wife, but he wants me to put the kids on my insurance now that they have reached the age of majority. Covering the kids doesn’t cost him anything extra, but for me to switch from a single plan to a family plan is an extra $175 a month and I can’t afford it. Since the age of majority for health insurance is now 26, is it possible he still is required to keep them on his insurance?

A. No, he’s not obligated to keep them on his health plan. Under the health law, insurers must offer to cover young adults up to age 26, but parents aren’t obligated to provide it, says Timothy Jost, a law professor at Washington and Lee University and an expert on the health law.

Further, the requirement to offer coverage isn’t related to the age of majority, which is defined by individual states and is generally between 18 and 21, says Randy Kessler, an Atlanta divorce lawyer and past chair of the American Bar Association’s family law section.

The health insurance coverage arrangement that you describe is pretty typical, says Kessler. You could go back to court and try to get your child-support payments increased to cover the cost of providing health insurance for the kids, but “it would be unusual for the courts to be helpful,” says Kessler. Absent some significant change in your or your ex-husband’s finances, or unforeseen and costly medical expenses for your children, in general “you can’t have another bite at the apple.”

With no legal requirement to compel either of you to cover your kids, it’s something the two of you will just have to work out, says Kessler. In addition to covering your children on your own or your ex’s plan, it’s also worth exploring whether they might qualify for subsidized coverage on the state marketplaces or for Medicaid, if your state has expanded coverage to childless adults. If they’re in college, student health coverage is worth investigating as well.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.

MONEY Ask the Expert

How to Tell if You Can Afford to Have a Baby

Pregnancy test with dollar sign
Sarina Finkelstein (photo illustration)—William Andrew/Getty Images

Q: “I’m a 38-year-old female, who has been focused on paying down student loans, currently at about $58,000 (my initial amount was $98,000). Minimum monthly payments are about $650, but I pay about $1,000 a month. I’ve paid down my loans by living very modestly, and at the expense of saving for retirement or planning a family. But now I’m afraid that if I don’t start having children now, I won’t be able to. Can I afford to start a family?” ‑ S.C., Brooklyn, N.Y.

A: “Having a child is an exciting but scary step, and money can be a big part of that worry,” says financial planner Matt Becker, father of two and founder of the blog Mom and Dad Money. “I wouldn’t dive in without considering the financial consequences, but I also wouldn’t let them scare you off.”

Considering the average cost for a middle-income couple to raise a child for 18 years comes in at just under a quarter of a million dollars, excluding college costs, according to the U.S. Department of Agriculture, you may never feel like having a baby is in the budget. But keep in mind that four million babies are born in the U.S. each year, and most of their parents adjust just fine to the new costs.

Even with your student loan debt, starting a family should be do-able for you, says Becker. You’ll just need to make room for in your budget for baby.

First step, get a handle on how you are currently allocating your income. (Mint.com can help you track your spending.) Then consider how your income might change after the baby, says San Diego financial planner Andrew Russell, who’s also a dad of two. For example, will you or your partner stay home part time or full time? Will you take any unpaid parental leave?

Once you know what your post-baby income will look like, get a rough estimate of the new expenses you will be footing, both one-time (like maternity clothes, hospital costs, car seat, crib) and ongoing (childcare, food and diapers). Becker recommends using Babycenter’s child cost calculator.

You’ll also want to factor in the cost of basic protections like life and disability insurance, which can help ensure your child will still be provided for if a parent dies prematurely or is seriously injured. “These will add to your monthly budget, but are well worth the cost for the financial security they provide,” says Becker.

With your big student loan payments, you may find through this exercise that your future expenses with baby exceed your income. So what next? See if you qualify for any loan forgiveness programs. Also, look for any fat in your budget to cut out—particularly recurring expenses that require a one-time effort to change like switching to a cheaper cell phone plan, cutting cable, or moving to an area with less expensive rents.

“Obviously this is a big life goal with a certain time frame, and if there is not that much room to cut back on spending, then you need to minimize the amount you pay back on loans,” says Russell, who adds that it’s okay for you to dial back to the minimum payment. “The debt is too large for you to take a good chunk out of it in the next few years, so you’re going to have to move forward with it.”

While the lower payment will add to your interest over time, the federal tax deduction on student loan interest—if you qualify—will offset some of the cost. Plus, every time you and/or your partner receive pay raises and bonuses, you can funnel that additional income toward the debt.

Once you’ve figured out your post-baby budget, start living on it—even before you get pregnant, Becker advises. And put the money you would be spending into a savings account. Besides helping you see if you can handle the budget, “this helps you build up a savings cushion that will relieve a lot of the financial anxiety that can come with a growing family,” says Becker. You will need to plump that cushion before the baby’s arrival anyway: With the general rule being to have cash reserves equaling six months of living expenses, you’ll need to make sure your emergency fund now reflects all the new costs you’ll be covering.

Related:

MONEY Ask the Expert

Here’s One Good Reason To Borrow From Your 401(k)

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Robert A. Di Ieso, Jr.

Q: Should I use my 401(k) for a down payment on a house?

A: Let’s start with the obvious. It’s rarely a good idea to borrow from your retirement plan.

One major drawback is that you’ll give up the returns that the money could have earned during the years you’re repaying the loan. Your home isn’t likely to give you the same investment return, and it’s difficult to tap real estate for income in retirement. There’s also a risk that you’ll lose your job, which would require you to pay back the loan, typically within 60 days, though home loans may have a longer repayment period.

Still, 401(k) borrowing has undeniable advantages. For starters, “they’re easy loans to get,” says Atlanta financial planner Lee Baker. You don’t have to meet financial qualifications to borrow, and you can get the money quickly. Interest rates for these loans are generally low—typically a percentage point or so above prime, which was recently 3.25%. Another big plus is that you pay yourself back, since the rules generally require you to fully repay within five years; 10 years if you buy a house. (Otherwise, the amount will be taxable, plus you will pay a penalty if you’re under 59 1/2.) So you eventually do replace the money with interest. Be aware, most plans limit your borrowing to $50,000 or 50% of your account balance, whichever is less.

Given how easy it is to get a 401(k) loan, it’s no wonder many workers tap their plans for home buying, especially Millennials. About 10% of home buyers borrow from their 401(k) and another 4% use funds from IRAs, according to the National Association of Realtors. And overall some 17% of Millennials report borrowing from their company plan, according to a 2014 Ameriprise study, Financial Tradeoffs. “It is where they have accumulated most of their savings,” says Baker.

All that said, when it comes to buying a home, a 401(k) loan can make sense. If you can put together enough cash for a 20% down payment, you may able to avoid avoid mortgage insurance, which can your lower monthly bill. And with interest rates still low, having a down payment now can enable you lock in a good rate compared with waiting till you have more money when mortgage rates may be higher.

If you go this route, though, take a close look at your financial resources both inside and outside your plan. Will you have to tap all your savings, leaving you vulnerable if you have a financial emergency? Do you have enough cash flow to meet your monthly payment and pay the loan? Is your job relatively secure or do you have to worry about a layoff that will trigger the automatic repayment provision?

And if you borrow, don’t forget to keep saving. A common mistake people make is halting regular contributions during the pay back period, which puts you further behind your retirement goals. At the very least, says Baker, contribute enough to get your employer match.

More on Home Buying:

Should I Pay Off Loans or Save for a Down Payment?

Single and Thinking of Buying a Home? Here’s Some Advice

“At 27, I’m the First of My Friends to Own a Home:” A Buyer’s Story

MONEY Ask the Expert

How to Find a Mortgage When Your Credit is Bad

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Robert A. Di Ieso, Jr.

Q: “What’s the fastest or easiest way to rebuild my credit? I want to buy a house, and I can’t get approved.” —Tracy, Fargo, N.D.

A: “The bad news is you really do need a good score to get a home loan today,” says Keith Gumbinger, vice president of HSH.com, a website that tracks the mortgage and consumer loan industry.

If your credit score is below 700, you’ll be hard pressed to find a lender willing to give you a conventional home loan, and if you do, the interest rate and fees are likely to be far too high. So you may want to take the time to rebuild your credit before you shop for a home.

“Before you decide you should you jump in, maybe you want to step back and look at the circumstances that lead to your current credit score,” says Gumbinger. “Look at your bills. You don’t want to put yourself in a position where you could lose the home. It’s expensive to maintain a mortgage.”

To boost your credit score, first get a free copy of each of your three credit reports from annualcreditreport.com. Scan them for mistakes that could be dragging down your score and fix them. After that, repairing your credit comes down to having credit and making your payments on time.

“You can’t improve your score if you don’t have debts, so you will need a credit card or new credit line where your payment history can be recorded,”says Jack M. Guttentag, a finance professor at the University of Pennsylvania’s Wharton School and founder of The Mortgage Professor website.

You also need to avoid maxing out the cards you have. “If you have a credit card that allows you to draw up to $10,000, having a $9,500 balance will hurt you,” says Guttentag. “Having a $2,000 balance will help you.” For more on improving your credit score, check out our Money 101 guide.

Your other option if you want buy now is to get a loan through a government program designed to help less creditworthy borrowers.

The Federal Housing Administration backs loans that have more relaxed qualification standards (including down payments as low as 3.5%), and the Department of Veterans Affairs has a program that helps members of the military borrow. If you happen to live in certain rural areas, you might qualify for a U.S. Department of Agriculture lending program designed to entice people to settle in less-developed parts of the country.

For a full FHA loan, the agency says you typically must have a minimum credit score of 580. With a 10% down payment, the FHA will insure loans for borrowers with scores between 500 and 579 (below 500, you you typically won’t qualify). The VA and USDA do not set minimum credit standards.

However, these minimums can be misleading. The private lenders who actually make these loans typically have higher standards. Most FHA, VA, and USDA-approved lenders look for credit scores between 620 and 660, and your best chance for getting approved will be to have a score at the high end or above this range, says Gumbinger. If you’re close, being able to show a healthy bank balance or a monthly rent bill that’s higher than your future mortgage payment may help.

Wells Fargo, the country’s biggest mortgage lender, said earlier this year that it would accept credit scores of 600, down from 640, for FHA and VA loans. Bank of America said that it may also accept certain cases with credit scores in the low-600 range, depending on that borrower’s ability to repay the loan.

Keep in mind that these loans carry additional fees. FHA loans require an upfront mortgage insurance premium of 1.75% of the loan value, as well as an annual premium based on your loan-to-value ratio, loan size, and length of the loan. USDA loans carry an upfront premium of 2% and an annual fee. VA loans have a funding fee that varies based on factors such as the type of loan and the size of the down payment.

Even if you qualify for one of these loans, Gumbinger cautions about getting in over your head. These programs are best if your credit problems are due to a job loss or medical bill. “If this was a one-time event and you’re getting past it, then no problem,” he says. “But if you have perpetual problems that are affecting your credit score, maybe you’re not well-aligned for home ownership.”

 

 

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