First time home buyer, save for down payment or pay down debt?

Question

We make a decent income combined and have two choices, we can save for the next year for a $20k down payment or pay off some of our lingering credit card debt and personal loans, which combined equal about $10,000. Also, we make too much to qualify for any state/federal down payment aid.

We've been renting for 3 years now, so we have a good sense as to what we can afford monthly and what we can't. We're slowly paying down our debt, but we'd rather have it gone altogether and start out fresh with our mortgage.

With a lesser debt to income ratio, we qualify for a mortgage amount that's more in our target area, but we're not sure how open banks are to 100% financing. Also, putting $20k down only changes our monthly payment $50. I'd rather put the money elsewhere if possible.

What are our options? Thanks!

Answer 1

I would say it depends on if you have a timetable or not.

My wife and I were in pretty much the exact same decision.  We started with more debt but paid it down to about 1/2 of what you state you have.

We were planning to buy a house in the next year and wanted to save up for the down payment but then found out we have a baby on the way so we decided to go ahead and try and get a house now.  With the house size we're buying, the payments won't be a problem and we wanted to get into a house instead of having a baby while living on a 3rd floor apartment (no fun for the wife when she starts getting bigger).

We went FHA which allows you to do 3% down.  There are some other benefits but that is the biggest one for you, in my opinion.  A friend of our family, who we aren't even using, told us to go ahead and start saving for our down payment.  She said our debt wasn't at a point (when viewed with our entire credit situation) that it was going to make a difference worth paying off.

Again, in our situation we had a deadline at which point we needed to be out of the apartment, so it was in our best interest to save for the down payment.

Ideally, I'd say take some time and get your debt gone or close to gone and then save for the down payment, but it is hard, I agree.  Especially when you consider that every month your dopping rent money that is, essentially, wasted.

Answer 2

You’ll need to have at least 5% to put down. 100% financing is pretty nonexistent.

How much of a house are you planning to buy? If you could save $20K and owe $10K, that still leaves $10K for a down payment, which is 5% of $200K.

Answer 3

First of all the amount that you previously owed on a loan has nothing to do with the lenders decision to make you a loan. The balance really has nothing to do with how a decision is made.

In the mortgage industry your ability to purchase a house is decided by ratios. This is based on the entire amount of your monthly debts that appear on your credit report divided by the amount of your monthly earnings.

Let me go over an example. If you owed 5 debts that equaled to you paying a total of 1500 per month on these 5 debts and your monthly income was $5000. Then dividing $1500 by $5000 would give you a front end ratio of 28.8%

The lender would then add into the equation the monthly mortgage payment to include taxes and insurance which them would equal your back end ratio.

The reason I went through this exercise for you because someone on this forum stated the lender take in consideration the amount of the original loan, not the balance when neither of these two factors enter into making a decision on if a lender will lend you money for a mortgage. Ratios have been used since the stone ages and it appear as if they will continue in use for the foreseeable future.

The only thing that has changed in the past few decades is that the credit score has now taken a prominante role in the lender making a decision about whom to lend mortgage money to.  

In order to find out the type of loan programs you are qualified for you will have to fill out a loan application, with a mortgage broker, which you can find one in your local telephone book. Make sure this mortgage broker or mortgage banker is able to do government loans such as FHA and VA loans if you qualify for one.

He will fill out this application, which takes awhile so grab your favorite beverage and sit down. Once you have completed the application, he will run your credit report which will have your credit scores.  These credit scores will determine your interest rate.

The amount of your monthly debt payments you are required to pay as per your credit report and the amount of mortgage you can take on based on your income will determine the amount of house you will be able to purchase.

When you speak with the mortgage broker you will need the following documents to complete the loan application, there will be others, but this will get you started.

#1 One month of pay stubs for each person that will be on the mortgage.

#2 Six months  bank statements from each bank in which you bank as well as statements from any 401K from you place of employment.

#3 Two years of federal income tax along with the W-2 that match.

Once he has all that he need to do he can then issue you a pre-approval letter so you can purchase a home. In this pre-approval letter will be the amount of house you are qualified to purchased.

Once he gives you this pre-approval you may now find a real estate agent to find yourself a home or he might have a referral.

Now make sure before you get your pre-approval you and your mortgage broker go over all your options as to the mortgage programs you qualify for, the interest rate, monthly payments.

If you are getting a FHA, fixed rate, two loans to eliminate PMI like an 80/20 or one loan, if you are qualified for and approved for a 100% loan.

You should select the loan that best suit your financial condition at the time. That could be an adjustable rate loan. It could be a fixed rate loan for 5 or 10 years and then adjust. Some adjustable rate mortgages only adjust once.

Make sure your mortgage broker explain all your options so you may make an intelligent decision.

What might be good for one person might not be good for you, in other words just because your friends and all your real estate buddies are telling you about the great fixed rate they got, your financial situation might call for something else.

So select the best option for you and your financial situation.



You should also get a Good  Faith Estimate (GFE) which will indicate the cost you will have to pay for getting this loan. It will also indicate the amount of your down payment.



Once you have found a home the real estate agent will then prepare a contract for you and the seller to sign.

Your mortgage broker will now order an appraisal to show proof of  the property value.

The mortgage broker might ask for additional information or documentation, don't get all up tight this is normal, just supply the information or find the documents needed.

After the appraisal has been completed you will be called by your mortgage broker to sign your loan docs so you can take possession of your new home.

Before signing any loan docs make sure they say exactly what you and your mortgage broker went over when you decided on what mortgage program was best for you.

I hope this has been of some use to you, good luck

"FIGHT ON"

Answer 4

Well, decissions are hard in areas as this. Look, I'm putting me in your shoes in trying to help you decide. I would stay renting and pay off all my personal debts and then save up in putting a down payment on a house. As a renter you don't have to replace anything that goes wrong where your living and also you don't have to worry about paying property taxes or upkeeps where your living. Now, when all your debts are paid off then you'll feel better not owing all them debts and then when you got some saved up you can enter a new home with staying on a budget better without so much hanging over your head. Renting you don't have as much to worry about as homeowners does. Don't rush into making decissions and in time with patience all will work out the way you want it to.

Answer 5

Pay down the $10,000 in unsecured debt. It gives you a much better credit score and debt-to-income ratio, so you'll be qualified for better loan products. You'll also have the extra cash on hand (the money you're saving above the $10,000 to pay off the debt) for a down payment, closing costs, new household goods, etc.

One thing that lenders do when looking at your outstanding debt is to consider the original amount of the loan as the indebtedness. For example, let's say you have a $20,000 car loan, but only owe $2000 on it (it's nearly paid off). That debt counts as the $20,000 of the original loan, not the $2000 that you still owe on it. No, it doesn't make sense. But, that's how they do it. And, that's one reason why paying down debt before you buy a house is better than saving cash.

You can still find loan products where you don't have to put any money down (or very little) by taking out a first mortgage and then a second for the down payment (to keep you under 80% loan-to-value on the first to avoid PMI). When you get ready to buy, contact a mortgage broker to get prequalified. At that time, you can find out what all loan products you qualify for. But, paying down that unsecured debt is your best move.