Are we in the right position to buy?

Iron Chef · Joined: 27 Mar 2009 Posts: 5 Location: Cleveland, Ohio

My wife and I have never owned a home, and will qualify for the $8,000/10% stimulus tax credit. Basically we want to take advantage of low home prices, mortgage rates, and the tax credit, but are we in a good enough position?

My credit score is 749 and my wife's is 648. Our combined gross income is about $71,000 per year. We'd basically have to free ourselves of credit card debt to be able to afford a mortgage payment over $1,200 (tax and everything included). Together we currently have about $23,000 of debt and $3,500 set aside for a down payment. This is a plan I devised, but bear in mind, I'm not a professional on this subject so please tell me if this is feasible.

1. Borrow $8,000 from my parents, which will be paid back upon receiving the tax credit. We'd basically just be having the tax credit forwarded to us.

2. Pay my wife's credit card debt in full with the $8,000. This will free up $350 per month and improve her credit score within 30-45 days when it is reported to the credit bureaus. With approximately $15,000 of remaining debt, our combined monthly minimum credit card payments drop to about $400 per month. That $400 makes a big difference still though, so...

3. Get a mortgage pre approval and buy a house (that's a lot for one step haha).

3. Hang in there and pay our mortgage, along with our $400 per month credit card payments.

4. After a couple months, apply for a $15,000 home equity loan and use that to pay off the rest of our debt and live very comfortably.

If there was no $8,000 credit available, then we would not even be thinking about buying a house. Since it is available, I just can't let an opportunity for a free $8,000, which can go toward our debt, pass us by.

m2c · Joined: 03 Aug 2005 Posts: 937

Beware of our government bearing gifts! $8K sounds great but it may sucker you into something that may turn into a disaster.

General warning aside, you need to sit down with a LO with whom you are comfortable. There is a way to cut through the foliage but make sure you will comfortable with the result.

My quick observations:
• Your wife’s FICO is an albatross. If you need her income to qualify, no way to “ditch” her and her score. Raise her score beforehand? Look at the “reason codes” for her low score. Yes, these actually used to be numeric codes but even LOs grew tired of using the secret decoder ring to translate. Now they’re in English and appear under the numeric FICO number in the order of the most important reason score was not higher. Think FHA.
• $3,500 saved for downpayment? Sorry, I’m not impressed. 5% down is basically the minimum for conventional even if you can find (you won’t) to insure the loan with a 648. Again, think FHA. This would fly but remember downpayment on FHA is now 3.5%
• Exactly how are you going to put $3,500 and “after a couple months” get a $15,000 HELOC? No way … even in the rah rah days of a couple years ago. With 648, not even sure someone will call you back.

Sorry for the “tough love” but you really need to start working with someone to structure yourself for a FUTURE purchase and you need to be convinced you’re ready to make the jump without the lure of $8,000 “free” money. You’re much more attractive on the FHA side and I’d look for “extra” money under state FTHB programs or a lender who has access to flub grant programs. Latter is somewhat suspect this year; they’re been delayed with somewhat vague reasons but it would be an extra “free” $5,000 in the pot.

Iron Chef · Joined: 27 Mar 2009 Posts: 5 Location: Cleveland, Ohio

No reason to apologize, thanks for being straight forward. This is some of my initial research so I know I have a lot to learn.

With home prices being so low, I figured it was possible to get a $15,000 equity loan relatively quickly since the house would probably appraise for much more then we paid.

After crunching some more numbers and updating our balances owed, I think that as long as we can pay off her debt we might be okay. It turns out that she was estimating her balance due and now that she actually checked it, it's about $2,200 less... yeah, wow. If we pay that off with the $8,000 then we should have some money left to spill over and pay some of my own debt. I also updated my balances due and that subtracted another $400. Yeah, not a lot, but on top of the $2,200 it makes a big difference.

I've done a lot of research on the tax credit and it turns out that it really is a no questions asked 'gift' if you will. No strings attached and it doesn't have to be paid back. That Obama sure is a "spender."

Is it true that they will take the higher credit score when determining your qualification? My wife's dad told her that but I've never heard that before. If so, my 749 should be pretty good.

m2c · Joined: 03 Aug 2005 Posts: 937

Sorry on the FICO -- it's middle for each borrower and then lower of the "middles".

Yes, good buys are out there but don't count on a HELOC based on appraised value versus a lower purchase price a couple of months before. You might find the "greater fool bank" but HELOCs are tight right now.

The $8K is real but look at the ongoing mortgage payment numbers AND maintenance to make sure you're comfortable. Seen many marriages break apart with sudden expense jolts. Think of the $8K lure as akin to those car salesmen hawking "$X,000 cash back" and "no payments for x months". A car is a car; a house is "real" money, i.e. debt. Just make sure you understand what you're getting into. The proportion of credit card debt to gross income I would find uncomfortably high. OK, there's career stage considerations. Just be careful.

FHA I think will be your answer. Sit down with a LO who will look out for your interests LONG TERM. From the limited information you've provided, there is a high probability I would encourage you to wait awhile. Yes, it's no money in my pocket right now but you likely will but a higher priced home in a year or so. More money in my pocket then and you'happier ... and come back to me in another five years when you buy your second and more expensive home.

Iron Chef · Joined: 27 Mar 2009 Posts: 5 Location: Cleveland, Ohio

And yeah FHA is the route we plan on taking with the 3.5% down payment. We can get a more-than-adequate house for $100,000 here in Cleveland, Ohio thus making our $3,500 saved pretty sufficient. We'd have a pretty manageable mortgage payment for a house at that price too.

Also I didn't give a lot of information to determine our debt to income, but my monthly is 30% and my wife's is 25% so they're reasonable.

m2c · Joined: 03 Aug 2005 Posts: 937

Iron one, "you've got mail".

I was going to send detailed costs, etc. but sites "pm" system doesn't permit attachments. Anyway until I get back to the office I won't know exact real estate taxes. Also you can do "mix and match" on closing costs and rate.

AnnAnderson1015 · Joined: 30 Mar 2009 Posts: 46

"1. Borrow $8,000 from my parents, which will be paid back upon receiving the tax credit. We'd basically just be having the tax credit forwarded to us.

2. Pay my wife's credit card debt in full with the $8,000. This will free up $350 per month and improve her credit score within 30-45 days when it is reported to the credit bureaus. With approximately $15,000 of remaining debt, our combined monthly minimum credit card payments drop to about $400 per month. That $400 makes a big difference still though, so...

3. Get a mortgage pre approval and buy a house (that's a lot for one step haha).

3. Hang in there and pay our mortgage, along with our $400 per month credit card payments.

4. After a couple months, apply for a $15,000 home equity loan and use that to pay off the rest of our debt and live very comfortably. "

Base on reading the above comments, I think you're buying a house for the wrong reasons. I've had clients in similar financial circumstances do the same thing as you and fail. And here's why.

a. You have no cushion, no savings, no back up money, you're living pay check to pay check. And god forbid if something were to happen to either one of you. You're SOL.

b. There will be addition expenses like home owner's insurance, furniture, and other stuff that will be require when you move into a new home. Are you going to finance those , too.

c. The RE market is not going up and it may even go down more. There's a lot of homes sitting for months on the market and as prices fall, so does your chance of getting that 15k HELOC.

I would advise you to work at paying off your debt, put some of that 8k away and use the rest to pay down your debt.

Real case example: Todd and is wife Kathy came to me to get a mortgage. And just like you they had debts, no savings, etc. Well, I manage to get them into a home. A year later I came by to visit only to find that they were losing their home because Todd had hurt this back at work. And because he was an independent contractor, he was still in court over the injury with his employer. I'm sure you can figure out the rest of the story.

Ps.

If you meet either a RE agent or a LO who says that you have a great plan, then know for sure that person is thinking about the commission and not your "great" plan.

Jenie0109 · Joined: 27 Jan 2009 Posts: 307 Location: chicago IL

thanks for the info.