How much of your debts should you clear before getting a house?

[Qacer]

I'm not sure how long it'll take me to save up. But I really would like to own my own house. Currently, I'm looking at about 20grand of debt. It's mostly from a car purchase, but included in that are credit card debts for tuition.

Anyway, should I pay off all my debts before getting a house? Or should I save up the money for a down payment and consolidate my debts into one mortgage?

 

[xgsound]

You'll get a lot of opinions on this, so here's mine. Start by living on less money than you have coming in. Consider a lesser car or a lesser place to live for a while if necessary. First establish a $1,000 fund for (you know they'll happen) emergencies. Don't cancel your Credit Cards, but do pay them down to nothing.

Lower your debts by paying off the lowest balance debt first and as soon as possible. Without that payment and with your first succesful step you now move on to the next lowest balance and attack that. Rinse and repeat until you get to the big debts. When you get to the car start saving for a lesser car (if you can stand it) you can buy for cash. Five thousand gets a pretty good car. Now you can sell the expensive one even if you need to add a little to pay it off.

Even if you don't pay off the car, your FICO score should be improved which will give you a better rate for a mortgage. If you do pay off the car (even by selling it) that should increase your FICO score even more. From that point on increase your emergency fund and save towards the house.

By this time the banks would almost be fighting over you.


Jim

 

[Savarak]

can you try to get a bigger mortgage and use some to pay off all your other debts?

 

[Journer]

Originally posted by: Savarak
can you try to get a bigger mortgage and use some to pay off all your other debts?

i wonder if that would work...i'm guessing as long as the amount didnt offset your debt to income ratio...maybe?

 

[Qacer]

I like all your advice xgsound except for selling the car. The car was one of my goals that I wanted to accomplish. The next one is the house. I'm really hoping to pay off the credit card debt with my tax refund. I can qualify for the tuition deduction, so pretty much most of my debt then will be the car.

Hmm... Maybe I can do an 80/20 type mortgage. The 20% part will be an 3-year adjustable rate mortgage (ARM), but this would actually be paying the car loan. I figured if I can get a rate lower than 5.7%, then I'd be better off paying a lower interest rate. By the third year, I should have my car paid off.

 

[compuwiz1]

Find out what your lender requires, both front end, and loaded debt.
What I mean by that is, your total culmulative debt is one thing.
Your house payment PTI, should be another thing.

Here is an example:

You have a $6000 per month income.
You have $1200 per month, in car payments, credit cards, etc. Not bad.
Your debt to income ratio is 20%
Acceptable, by most lender's standards.
Now here is where it get's tricky.
Add your $1200 per month existing debt payments, to your new mortgage payment of $2200. Now you have $3400 going out. Your are now at almost 57% DTI.

This is fine, until you consider your income tax, about another $1200 per month, your electricity bill, about another $100 per month, and your phone, cable bills, etc, of total $300 per month.

So you have your $1200 in existing debts.
Your $2200 mortgage payment
Your $1200 in taxes
Your $300 in electric, cable, garbage, etc.
Factor in $800 for food, clothes, entertainment, and gas.
You've spent $5700.
Wonderful! You have managed to save $300
But...you forgot, your medical and dental insurance...another $200 per month, if you have a family.

Get your total PTI, including mortgage under 40%, if you can. Otherwise, do not buy a house.

 

[kami333]

Originally posted by: xgsound
Lower your debts by paying off the lowest balance debt first and as soon as possible. Without that payment and with your first succesful step you now move on to the next lowest balance and attack that. Rinse and repeat until you get to the big debts.

Financially it makes better sense to pay off the higher APR debt first regardless of balance since you save on interest. However mentally (one less bill to stress out about) and organizationally (one less bill to keep track of) it's easier to pay off the lower balances first.

 

[sao123]

The common debts most people pay off to buy a house...

Credity Cards... this is the most important. Have 0 credit card balance.
Auto Loan... having this debt paid off will help you afford a larger house, but will not prevent you from buying. Its expected to have an auto loan.
School Loan... Same as auto loan.

Have 6% of the loan in cash to cover closing costs... and try to have cash to make a 20% down payment. Also, you'll possibly need about 3-5K to cover other expenses if this is your first house... Things like, a washer/dryer, a range, refridgerator, lawnmower,

Do not consolidate your debts into your mortgage, youll pay them off faster, and pay less interest.

 

[oboeguy]

Originally posted by: kami333

Originally posted by: xgsound
Lower your debts by paying off the lowest balance debt first and as soon as possible. Without that payment and with your first succesful step you now move on to the next lowest balance and attack that. Rinse and repeat until you get to the big debts.

Financially it makes better sense to pay off the higher APR debt first regardless of balance since you save on interest. However mentally (one less bill to stress out about) and organizationally (one less bill to keep track of) it's easier to pay off the lower balances first.

It bothers me that is true for a lot of people. If I were in that situation, I'd realize that throwing money away isn't worth some notion of organization. Keeping track of bills is not exactly rocket science! I'd be more stressed-out knowing that I'm wasting money. But that's me. And simple math.

 

[xgsound]

Originally posted by: Qacer
I like all your advice xgsound except for selling the car. The car was one of my goals that I wanted to accomplish. The next one is the house. I'm really hoping to pay off the credit card debt with my tax refund. I can qualify for the tuition deduction, so pretty much most of my debt then will be the car.

Hmm... Maybe I can do an 80/20 type mortgage. The 20% part will be an 3-year adjustable rate mortgage (ARM), but this would actually be paying the car loan. I figured if I can get a rate lower than 5.7%, then I'd be better off paying a lower interest rate. By the third year, I should have my car paid off.

You seem to have the #1 asset ... You're interested. If the car keeps you excited about getting to more goals, it's just as important as the larger goals (?house, doctorate, business) will be. Just don't be in a hurry. It always costs extra to be in a hurry. If you're saving towards your goal every month, the longer it takes to find the right house, the better position you'll be in. Some people need debt to stay excited, some find debt drives them crazy, still others have to pay the least possible amount of interest along the way. Any of those ideas work if you stay focused and excited.

As far as paying off the car with the mortgage goes, you still owe the money either way, so whichever way keeps you excited the most.


Jim

 

[kami333]

Originally posted by: oboeguy

Originally posted by: kami333

Originally posted by: xgsound
Lower your debts by paying off the lowest balance debt first and as soon as possible. Without that payment and with your first succesful step you now move on to the next lowest balance and attack that. Rinse and repeat until you get to the big debts.

Financially it makes better sense to pay off the higher APR debt first regardless of balance since you save on interest. However mentally (one less bill to stress out about) and organizationally (one less bill to keep track of) it's easier to pay off the lower balances first.

It bothers me that is true for a lot of people. If I were in that situation, I'd realize that throwing money away isn't worth some notion of organization. Keeping track of bills is not exactly rocket science! I'd be more stressed-out knowing that I'm wasting money. But that's me. And simple math.

Can't really help it when one of the most popular books on getting out of debt, Dave Ramsey's book, is giving out that system as a way to get out of debt. But I can understand the reasoning behind it, for most people paying back the debt isn't a final solution, changing their lifestyle that got them into the debt in the first place is. And probably a portion of that is the result of feeling overwhelmed with payments that seem to make no effect on the principle.