Advice for buying a home

tbc32 · #1 (**permalink**) 04-21-2008, 10:45 AM

Here's the situation that we're in. I am a doctoral student with:

little debt (car loan and 35k in student loans),
little assets (3k in an index fund, 7k in a target retirement fund/Roth IRA, 1k in individual stocks, 5k in cash),
little income (just my student stipend of less than $20,000/year and another $2-3000 from web design and illustrating jobs on the side),
and a little family (wife and two kids).

We've decided to buy a townhome (we'll be here for at least three more years) and found one at a great location for an amazing price. Our offer was accepted and the bank will pre-approve a loan for us provided we pay our car loan down from $8,500 to $2,500. We really like this bank because they will work with multiple first-time home buyer programs (HANDS and HOP), programs that will match our down payment and then some, giving us an additional $8,000 to put down on our home (with our $5,000 cash). We've contacted a dozen or so banks and mortgage lenders in our area and this is by far the best option we have. So we have to figure out how to pay down our car loan without using the cash we have saved for a down payment and hopefully keeping as much money as we can in our meager retirement account. Here are a few possible scenarios. We could:

1) Cash out our $3,000 index fund and $1,000 in individual stocks, taking a loss (this loss won't help us with taxes, our income is so low we get everything back anyways), and scrounge up loose change for the rest.

2) Ask our bank to lower the interest rate on our debit card credit line (currently 9.75%), extend our credit from $1,000 to $5,000 and live off credit this summer until we can take out more student loans in the fall. If they won't lower our rate we could get a second credit card and use it.

3) Try to get some extra work pronto. I do a little web design but don't have a ton of free time (between my research and school). My wife is an illustrator, already extremely busy on a project that won't pay her until the summer time.

4) some sort of combination on the previous three.

So, what do you think? What would be our best option or is there something I haven't thought of? (I have no rich uncle).

AllThingsPersonalFinance · #2 (**permalink**) 04-21-2008, 07:11 PM

Quote:

Originally Posted by tbc32

Here's the situation that we're in. I am a doctoral student with:

little debt (car loan and 35k in student loans),
little assets (3k in an index fund, 7k in a target retirement fund/Roth IRA, 1k in individual stocks, 5k in cash),
little income (just my student stipend of less than $20,000/year and another $2-3000 from web design and illustrating jobs on the side),
and a little family (wife and two kids).

We've decided to buy a townhome (we'll be here for at least three more years) and found one at a great location for an amazing price. Our offer was accepted and the bank will pre-approve a loan for us provided we pay our car loan down from $8,500 to $2,500. We really like this bank because they will work with multiple first-time home buyer programs (HANDS and HOP), programs that will match our down payment and then some, giving us an additional $8,000 to put down on our home (with our $5,000 cash). We've contacted a dozen or so banks and mortgage lenders in our area and this is by far the best option we have. So we have to figure out how to pay down our car loan without using the cash we have saved for a down payment and hopefully keeping as much money as we can in our meager retirement account. Here are a few possible scenarios. We could:

1) Cash out our $3,000 index fund and $1,000 in individual stocks, taking a loss (this loss won't help us with taxes, our income is so low we get everything back anyways), and scrounge up loose change for the rest.

2) Ask our bank to lower the interest rate on our debit card credit line (currently 9.75%), extend our credit from $1,000 to $5,000 and live off credit this summer until we can take out more student loans in the fall. If they won't lower our rate we could get a second credit card and use it.

3) Try to get some extra work pronto. I do a little web design but don't have a ton of free time (between my research and school). My wife is an illustrator, already extremely busy on a project that won't pay her until the summer time.

4) some sort of combination on the previous three.

So, what do you think? What would be our best option or is there something I haven't thought of? (I have no rich uncle).

Yes, there is something that you haven't thought of...

You are too overstretched to buy a house. Do not make your answers more complicated than the question.

Pay off all of your debts before you buy a house. Continue to rent until this happens.

Stop making retirement contributions until you are free of debt.

Do not cash out your retirement plans. You will tax yourself on the money at about 40%.

At an outstanding balance of $8500, you almost have too much car for your income.

Do not live off your credit cards this summer/fall until you can take out more loans. Live off what you earn.

Keep your student loans to a minimum to cover your tuition and directly associated expenses (books, fees, etc.). Student loans should not be used to cover costs of living.

Could your wife work also? Is this a possibility? Maybe not?

Basically, my advice is that you not do anything at all that you are planning to do.

1. Retire your debts.
2. Get some savings as a safety net.
3. Get a down payment together.
4. Apply for a loan at this point.

Part of your interest rate calculation is figured on the amount that you borrow vs. the value of the home. The more that you can put down, the less your interest rate will be.

Consider a single family home instead of a townhome. Your borrowing power will be reduced by a factor of the home owner's association fees that you will have to pay. Your home owner's insurance will be higher in a townhome. Your townhome will appreciate slower than in a single family dwelling - more difficult to sell, slower appreciation means higher transaction costs relative to the price of the home when you do sell.

Not what you wanted to hear, but this is what I would recommend.

terry16844 · #3 (**permalink**) 08-18-2008, 11:07 PM

Thats all good points but heres what you can do too. web design if you can manage to do this as a part time job. there are plenty of jobs available with good pay.

Gizmo · #4 (**permalink**) 10-17-2008, 02:28 PM

how much money should you save up before buying a home?

jadalan · #5 (**permalink**) 10-17-2008, 08:13 PM

Quote:

Originally Posted by Gizmo

how much money should you save up before buying a home?

I always advise first time homebuyers that are short on savings to be patient, and certainly in this market that is the case more than ever. The best experiment that I have seen work repeatedly is simple.

First, obtain a very conservative rate quote and add 0.5% to the rate and calculate your principal and interest payment, taxes, insurance, mortgage insurance and any HOA dues that might be assessed. Say, for example, that this totals $1500 (a bargain in California for sure, but just for the sake of national numbers). If you are currently renting for $1,000 a month, and you haven't been saving very much money, then you should test your ability to have this extra $500 increase come out of your budget each month. Do this for 6 to 12 months, and by that time, you will either find out that it is too much of a stretch, or you will know that you can afford it AND have between $3,000 and $6,000 extra in savings.

Further, you will have changed your habits and behaviors enough to feel comfortable and less surprised by the bill each month.

jadalan · #6 (**permalink**) 10-17-2008, 08:15 PM

One other thing to remember - there are a lot of "bargains" right now, but it is all relative to our memories of the peak prices. Just like I feel like $3.45/gallon is somehow cheap now in southern California for gas, I see $500k townhomes going for $350k and it seems cheap, but it still has room to drop, and there should be no sense of urgency or attempt to time the bottom of this market.

Ann · #7 (**permalink**) 04-17-2009, 06:39 PM

Really good advice.

Ann · #8 (**permalink**) 04-17-2009, 06:39 PM

Really good advice

financegenie123 · #9 (**permalink**) 01-12-2011, 01:55 AM

Many people are having trouble getting up the down payment . and even if it is a buyers market , buyers will be careful since the job market stinks ... the unemployment rate is going up.

Thanks

ralphegermain · #10 (**permalink**) 02-07-2011, 12:47 PM

That is just right. We all wanted to get our own home but the unemployment rate is just not helping. But if we try to find ways, this can stil be doable. The tips given up there (in here) are very good tips. Very useful and gives a sense of hope for us. Yes to that too, DP is one of the first problems usually.

NolaP · #11 (**permalink**) 02-18-2011, 11:16 AM

Thank you for all the really great advice in the thread. I am about to take the plunge and buy my first condo, and I figure since the mortgage payments and condo fees together will equal about the same as my current rent, it is much better to buy than to keep throwing money away on rent. It is still a very scary thing to do though, especially since not much has been selling in the area I live in. I just got a great new job though, and I plan to stay in the area for the next 5 years at least. I do need to have the mortgage lender and the condo association approve the property as a FHA-qualifying property. Is there anything I need to look out for in doing this?

Thanks!

Nola

emjo · #12 (**permalink**) 02-28-2011, 10:18 PM

AllThingPersonalFinance took the words out of my mouth...er, hand.

Buying a house with debt (how is $35K + on less than $20,000 a "little" debt?) is asking for trouble.

Take a cold shower to get rid of your house fever (DW, too) and do everything the the first poster said.

dalemdunn · #13 (**permalink**) 02-28-2011, 10:39 PM

Like I always say, Live within your means. That would never hurt if you can actually accept the standard of living depends on what you are earning. Never go beyond what you cannot afford (at the moment) and just live for today. When one debt is cleared, then you can proceed with the plan. And yes, the car was way beyond your means. Think it over.

Gabber20 · #14 (**permalink**) 07-15-2011, 10:58 PM

Really a good advice . tahnks

kate032 · #15 (**permalink**) 08-02-2011, 09:26 PM

The fact is that not everyone should buy a house, no matter how great the deal is. That's why, in part, we have the terrible economy we do. Especially with children, a family desperately needs an emergency fund and then savings to even begin thinking about buying. When that security is not in place, you're just asking for major financial difficulties.

I really wish the US government would let banks fail, and then maybe they'd wake up to some of the terrible decisions they're making, especially giving mortgages to people who cannot afford them.

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