Expert Q&A Archive
Is it wise to buy a home when you have outstanding debt?
I am in the process of deciding if I should be buying a house or not. I am married and have no children, and am 27 years old. Both my husband and I spent four years at college and have college loans to pay off. We also have about ten credit cards with perhaps 10-15,000 dollars of debt all together. Unfortunately, most of the debt on the credit cards was a result of not having a sufficient income to get all of our needs met. My husband is a manager at a retail store and I work for a non-profit organization. We are making the most we ever have since graduating from college, but we are still barely getting by, due to trying to pay our credit cards off and not getting the results we would like. My husband is also going to quit his job in January to pursue freelance writing and other part time work. I also get laid off in January for a couple of months due to the seasonal nature of my work.
My question is, should I be getting a house right now? My husband would prefer to wait until more debts are paid off, and we both have more secure jobs. I would prefer to look now, because interest rates are going up and the area where I live is getting more desirable due to overpopulation in other towns. I have also been told that if I bought a house, it would save me more money in the long run. With our small savings (about $300) we are not sure if we will even be approved for a house loan, even if it is with a low income plan. We have been assured that there is money out there, in the form of more loans, to pay for closing costs and a down payment, but I'm not sure it is worth it to put ourselves into further debt that way. That said, it still might be a good idea to have something which could bring us income in the future.
I would appreciate any guidance on this question, because my apartment lease also runs out at the end of November and I will need to decide if I should sign another year's lease. As you can see, I am at a pivotal point right now, and this seems to be one of the most important decisions I have ever had to make.
Gail V. Marquet:
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With $15,000 in credit card debt, student loans and neither party gainfully employed in a few short weeks, now is not the time to consider buying a house. You don't have any significant savings and relying on credit cards to make ends meet just puts you deeper in debt.
I would definitely renew the apartment lease. Then get a job that isn't seasonal, Your husband might consider writing part-time but keeping his full time job otherwise you won't have any income at all. Given your current financial situation, your marriage is probably under stress. Start a committed savings plan to have at least $1000 in savings in the next several months. Then put everything extra on the credit card with the smallest balance, paying it off as quickly as possible. Add that and any other extra to the next one and keep going until they are all paid off. But before that, cut them up and close them and don't open any others.
If you were to apply for financing for a house, with the outstanding debt you have, you would not qualify for a low mortgage rate and would only find yourself in a worse financial situation.
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Wait. You don’t want to risk a foreclosure. Sign another year lease. Pay off your credit cards. Then look for a house. To qualify for a decent interest rate you will need to have a consistent job for at least 1 ½ years (6 months gives you too many points against you) The credit card debt will not help you there either. Student loans are ok.
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It sounds like you need to sit down and do some budgeting. If you do decide to buy a home, you need to make sure that you can afford it and make the payments, even while out of/in between jobs. What you should look for is a total mortgage payment (including all taxes/insurance, etc...) similar to what you would be paying in rent. If you are able to afford your rent payments, the house payment should be fine too. Just make sure that you will be able to make your payments on time; for you don't want your credit report showing late payments on a mortgage. That makes things difficult in the future. You do get a tax benefit from owning a home because you get credit for the interest you pay on the mortgage. This lessens your tax burden come April.
Other than that, owning a home can be very beneficial, especially if you plan on staying in the area for a while. It will payoff later with market appreciation, and you can move up to a larger house.
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Thanks for your message. Please look at the following:
1. Compare your monthly rent to a likely mortgage payment including taxes and insurance. If the house payment is less, then
2. Get a pre-approved mortgage amount through a potential lender/mortgage professional. Ask to be pre-approved for a 100% mortgage.
It's more complex than this, but it will be a good start.
Gary Silverman, CFP®:
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Determining whether or not to purchase a house is the least of your financial problems.
Let's see if I've got this right:
1) You don't really know how much debt you have ($10K-$15K is a rather large band),
2) You've got quite a bit of debt (your minimum estimate is $10K...then add to that you're school loans),
3) You've got the debt because you do not have sufficient income for your needs,
4) Your husband is about to quite a steady job for the opportunity to earn nothing for a long time,
5) You get laid off 20% of the time.
Forget about a house right now. Get to a financial counselor quickly. Your situation sounds critical now and it's about to get worse.
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Congratulations on considering buying a home. It will always be an investment and provide you with future equity. Do not get too caught up in the “frenzy” that real estate agents (I am a realtor myself but I also care about helping my clients manage their financial lives and not be in so much debt that they cannot sleep at night) or mortgage brokers may present. Yes, in some areas, even where I live homes are selling fast and prices are going up. Mortgage rates are going up but they are still the lowest in years. Another 6 – 12 months may not be the worse thing for you to wait. Perhaps you can rent from month to month or just sign up for 90 days or six months instead of a full year. Since you already live there, they may be happy to let you stay a little longer but not the full year.
Perhaps by waiting even 3 to 6 months, you should put a plan together to reduce your debt, save some money for a down payment. While you are doing this, look at communities within your area where you like the homes, like that community and the people in the community, and will meet your future needs as well as your current needs. You do not need to buy but will be prepared to know what areas meet your needs AND offer a good return on your investment. Then, once you are prepared to buy, contact a mortgage broker, ask them to pre-approve you for a mortgage. Then, you are armed with the amount you can afford, and when you see the house you like, you can make an immediate offer.
I know the market is good now, and it will probably e good in 90-120 days from now. My barometer for incurring more debt, especially a mortgage is, “will I be able to sleep at night.” Good luck.
Delores Lenzy - Jones, CPA, CIA:
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I concur with the advice given by Sue Garcia. I would also suggest that with the exciting changes her husband is considering, what and where you buy might change. I would caution that until your husband has several years of income from freelancing, his income will not support as large a loan as it would if you apply now. All of that said, the key is being able to make the house payments while his new work is building up and while you may be laid off again.
My recommendation would be for you to pay off some of your existing debt before pursing the purchase of a home. When you are ready to buy a home there are many financing arrangements which makes it very affordable. The thing to keep in mind also is that are many hidden costs with buying a house, especially a new house. Some of the hidden costs include blinds, appliances, sod for yard, etc.
Also, the general rule of thumb is to have about six months of savings to cover you during times of unemployment, illness, etc. My recommendation would be also for you to build up your cash reserve.
You're still young, so don't rush it. Good luck!