Save for house or pay down debt?

Question

I have about $1300 in disposable income every month and am looking to potentially buy a house in the next 6 to 9 months. I have a credit score of 710 however because of my credit card debt my income ratios only allow me to qualify to borrow $200K. With the area I live in I would need to qualify for at least $230k to find something to live in. I was told by my mortgage broker that if I could save 5% for a down payment I would qualify for more. With that being said, how should I allocate the $1300...save or pay down credit card debt?

Answer 1

Paying off the debt will serve two purposes. 1. It will raise your credit score even more 2. it will lower your income to debt ratio hence making you eligible for a larger mortgage.

Pay off the debt and help yourself all the way around.

Answer 2

If you do some reading on how to prevent foreclosure you will run across "Don't borrow the maximum amount that the bank is willing to offer you". The bank does have very strict guidelines on loaning money to prevent people from borrowing too much but people who take the max amount often find that their bills get pretty hard to pay after a large mortgage is added to the mix.

What are you paying in rent now? You say you have $1300 extra a month. How much are you putting into an emergency savings? How much are you putting into retirement? How large is your debt and what are the interest rates like? Can you easily handle putting a portion of that $1300 into your mortgage payment (including what you had been paying in rent) and keep up the retirement and emergency savings?

What are the terms of the loan? Is it fixed rate or an adjustable rate mortgage? What interest rate and for how long will you be paying it? If it is greater than 30 years then run. There are a lot of factors that should be considered here. This is not just a simple choice. It is one that can make or break you financially. Look at the news. There are lots of people who are going thru foreclosure because they did not properly research their home ownership.

Also, going in with 0 down payment is a bad idea. Even going in with 5% is not too good. What if the market slumps and you need to sell? You will be stuck in a house that you cannot sell because you owe more than it is worth. I know that saving up more than that is hard. However, you could easily do it in 3 years if you save your money. By putting away your $1300 for the next 3 years into CDs and getting 4%, you could have $49,000. That is slightly over 21%. More than enough for a very good down payment. This will save you lots of money. First you are not paying interest on that $49,000 for the life of the loan. Next, you can avoid mortgage insurance (which is put on mortgages with less than 20% down). Also, this will give you breathing room for a market downturn. Also, it will mean lower payments.

While you are doing this, you ought to look into wiping out the debt and then applying what you had been paying for that towards your savings. Try to spend your life accumulating things that will make you money. Debt is not something that makes you money.

Answer 3

Both - pay down the cards and get them within the proper ratio to your income and keep them there. You should never let them get high enough to affect you income to debt ratio - never ever. But - at the same time put half of that money into a savings for a down payment to include closing costs. A homeowner who does not manage credit card debt can lose a lot of money very very quickly if you are over extended and you lose the house. It is time for some serious budgeting to stop overspending on cards. Overextended (not over limit) credit card debt means that you do not have $1300 in disposable income every month - it means you have not been making good payments on your cards. But - really - do both.

Answer 4

Pay off your credit card debt first. That's costing you a fortune in interest. Make this your absolute first priority for the next year, and then pledge yourself to ALWAYS pay off your balance in full every month. Once the debt is gone, your credit score improve even more and you'll be able to qualify for a better loan.
If it makes you feel better, put away a small amount each month (say, $100-200 of the $1300) into an aggressive mutual fund so you can start growing your "house fund." But focus on the "bad debt" first.

Answer 5

I would pay the debt a little more aggressively than saving for the down payment. I would put $800 toward the credit card and save $500 for the down payment.

I would wait until the credit card debt is retired to buy a home. It may take a while, but in this market it is unlikely that there will be extreme appreciation that would make it hard to afford.

Answer 6

First, I did not look at the other answers before typing my answer. You need a well devised budget and plan for your future.

You need: $1000 in an emergency fund
You need: six months of living expenses in a liquid account (Money to pay water, lights, electric, food, car insurance, gasoline, rent)
Pay off all of your debts.
You need 20% (Twenty percent) down
You need a 15 year, fixed rate mortgage with a payment not to exceed 25% of your take home (net) pay.

Doing anything else will only spell financial disaster. Trust me, been there and (barely) lived to tell it.

Sure, you can buy with 5% down, you can probably buy with zero down. But what happens when you need to actually buy something for your house: furnace breaks or pipe bursts (these things happen). What will you do? Whip out Mr. VISA? Yep, you'll "have to". Then you'll have to pay that back PLUS have those monies I mentioned earlier for the living expenses.

DON'T DO what broke people do! Do what people who want to build wealth do! They plan, budget, work , exercise self diciplie and actually have a nice life, which is what you want, too. Guess what, this takes planning.

Answer 7

well debt comes with more debt because of interest rate. I would say pay off what you have then save the 5% and every body wins. If you save the 5% and don't pay off the cc's will you be able to continue paying you cc's and pay a mortgage as well as continue to save incase something breaks? Trust me, something will go bad. We bought a house last year, and we came home to no water one night, had to have the well redug, and a new pump put in, the septic(drain field) has needed replacing since we moved in so we finally did that, then we had to have the lawn seeded from where they tore it up to put in the new drain field(almost the entire back lawn), while the lawn was already tore up we put in a sprinkler system, and the roof really needs to be done this year but just isn't in the budget. Oh, not to mention a flat tire and car repairs during all of this. Trust me get out of debt before digging in again. Good luck.

Answer 8

The credit card debt is going to cost you more in the long run, I suggest you pay them off first, that way you will have more disposable income each month and you will be able to save even more.

Answer 9

well, david, honestly it's up to you. you have to weigh out your pros and cons on the situation. with your score you can qualify for 100% financing but your interest rates will be higher than if you went for 95%. your income isn't an issue because you qualify for stated programs, meaning that you don't have to verify income only the job and position. and as far as paying down your debt, be careful as to how you manipulate your credit score (timing is key). generally, i tell my clients to save but individual circumstances vary greatly. and tell your mortgage broker to do his job you shouldn't have to go on the internet to get these answers. if you have anymore questions i'd be happy to them.

Answer 10

I suggest you look at Bankrate.com articles on this exact same question. I want to say that I agree with the article, I am doing what the article said, and I find that I have more favorable options when I have that 5% down. As long as you could ensure your credit card debt does not grow, and goes down slowly by paying slightly more than minimum.

http://www.bankrate.com/brm/news/DrDon/Oct06_mortgage_debt_ratio_a1.asp