Advice for buying a home - The Finance Forums: Financial planning, debt help, loans, mortgages, retirement and 401k, investment, and general finance discussion forums

tbc32 · #1 (**permalink**) 04-21-2008, 02:45 PM

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, 11:11 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**) 08-19-2008, 03:07 AM

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.