I need some help about what to do with savings.

My husband and I bought a double in 2007 and took a 100% mortgage. We rent the upper for $600/mo and originally used that amount to pay off all of our credit cards and now have been using it to make an extra principal payment each month. The current loan balance is 87.5% of the origianl balance.

I currently have ~ $32k in student loans, all gov't loans. The student loans are our only debt other than the mortgage and we have 6 mos net pay in savings.

We would like to have children and would like to buy a single family house before doing so. I have a couple of questions about what lenders look at when applying for a mortgage on a second house when renting the first.

Do we need to have a certain percentage of our first mortgage paid off before we would even be considered for another mortgage?

(The price range we are looking for would keep the combined mortgage pymts under 28% of our gross pay before considering rent)

Should we be using the rental income for an extra mortgage payment or should we be saving it for a down payment on a new home?

We are pretty agressive savers. Now that we have 6 mos in savings should we shift the savings amount to pay down the student loans or should we use that money to save for a down payment?

Any help or direction would be appreciated. Thanks!

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