When buying a new house which is better?

[yoopermom]

A larger down payment, or less debt?

DH and I do NOT have huge incomes, but own our current house free and clear (and would sell it after buying a new one, although our market is poor right now, so it might end up only being rented). The only debts we have are 8K on his truck loan and 10K on my old student loan (currently in forbearance since I'm underemployed). We have 35K sitting in the bank from the sale of our last home 5 years ago.

We are getting a rather unexpected amount of $$ back from our taxes, and are debating paying off the majority of the truck or plumping up our savings. We are looking at buying a new home within the year, and wondered which would matter more to the loan company, having less debt or a larger down payment?

Opinions?

TIA!
Terri

 

[jedijohn]

If you can put 20% down on the house your golden (will definitely be approved) and won't have to pay for PMI; if that is already your situation, then put the money towards all your non-tax deductible debts (like the car loan).

 

[twinboysmom]

We looked into refinancing recently and besides our credit scores, the only thing that mattered to the mortgage company was our debt to income ratio. They could have cared less what we had sitting in savings. I requested to have our savings account (of which is fairly substantial, could pay off all car loans and then some) brought into consideration and i was told that it didn't matter. Apparently since the foreclosure crisis mortgage rules are different because we have purchased many houses and it was nothing like this. Honestly, I would say pay off the vehicle loan and if you have any credit card debt first. And you might talk to a mortgage company for some preliminary advice. Good luck.

 

[sam_gordon]

I'm not going to speak for a bank, but if it was me... why do you have ANY debt? You have 18K of debt and 35K in the bank, plus you're going to get some more in tax refund.

Personally, I'd pay off ALL debt, build the savings back up, THEN look for a house. 35K is 20% (I think that's what banks look for in a downpayment) of $175K. I don't know how large a house you're looking for, but can you afford new house payments on top of the debt (which you admit you're already behind on)?

 

[twinboysmom]

I'm not going to speak for a bank, but if it was me... why do you have ANY debt? You have 18K of debt and 35K in the bank, plus you're going to get some more in tax refund.

Personally, I'd pay off ALL debt, build the savings back up, THEN look for a house. 35K is 20% (I think that's what banks look for in a downpayment) of $175K. I don't know how large a house you're looking for, but can you afford new house payments on top of the debt (which you admit you're already behind on)?

Maybe they're like us and have 0% interest vehicle loans and have their savings in a CD, money market, or higher yielding credit union account.

 

[yoopermom]

No, we're not behind on debt (never have been, never will be, frugal us!) and pay our only c.c. off in full every month. The 35K would easily be 20%, so we don't need to worry about that, either. It's a personal choice as to why we chose to take out a loan on the truck, rather than use savings, but know that we did think about it.

Sounds like we might as well go ahead and pay off the majority of the truck with the tax $$, since we have the 20% down to avoid the extra insurance.

Thanks all!
Terri
Edited to add: maybe you think we're behind because of the forbearance on the student loan? No, we could be making that payment, but are not because I'm not fulltime in my field, so have chosen to postpone that loan, that's all.

 

[sam_gordon]

Edited to add: maybe you think we're behind because of the forbearance on the student loan? No, we could be making that payment, but are not because I'm not fulltime in my field, so have chosen to postpone that loan, that's all.

Yes, that is what I was assuming. I apologize for making the assumption.

Still, if it was me, I'd rather pay off the debt and then use that monthly payment as part of a mortgage payment.

 

[lizabu]

If you have a large down payment you will be approved for a mortgage. I know people who have terrible credit and because they managed to get a large downpaymenttogether they were approved.

 

[yoopermom]

Apology accepted, no worries. I'm a teacher who's been laid off twice in the past five years, went back for further certification (hence the new student loan) and am still only working p/t (at least in my field, thank God). Thanks to my frugal grandma who taught me my budgeting skills, we have superb credit, own our home free and clear, and don't have much debt. We'd have more income if we lived elsewhere, but have a 16yo DS who we've made a promise to about staying in the area that's been "home" to him his whole life (and DH loves it here, too, but personally I'd rather be in FL).

We won't overextend ourselves to buy this house, but, if we can get it for the right price, I want to make sure we look as good to the mortgage company as possible.

Thanks for ALL the advice!
Terri

 

[dfchelbay]

Apology accepted, no worries. I'm a teacher who's been laid off twice in the past five years, went back for further certification (hence the new student loan) and am still only working p/t (at least in my field, thank God). Thanks to my frugal grandma who taught me my budgeting skills, we have superb credit, own our home free and clear, and don't have much debt. We'd have more income if we lived elsewhere, but have a 16yo DS who we've made a promise to about staying in the area that's been "home" to him his whole life (and DH loves it here, too, but personally I'd rather be in FL).

We won't overextend ourselves to buy this house, but, if we can get it for the right price, I want to make sure we look as good to the mortgage company as possible.

Thanks for ALL the advice!
Terri

You can buy my house...I don't want it anymore.

 

[J3nn78]

Pay down enough debt to be able to keep the 20% down to avoid the PMI. Don't forget to leave enough $ for closing costs-ours were about $9k

 

[Friendly Frog]

I bet your loan officer could tell you what would work best after he/she saw all you actual financials. It may not matter either way from what you have said.

You can always pay off the truck after talking to your loan officer but you can not get the money back if you pay of your truck then talk to the loan officer.

 

[Vijoge]

Pay off the truck first , then the student loan. Then save until you have at least a 20% down payment for the new house.

 

[disneysteve]

What is the reason for the move? With you currently under-employed, might it be better to wait before considering a new house? Why would you buy a new house before selling your current house? Do you want to be a landlord? Can you afford to carry both homes at the same time if you aren't able to get this one rented for a while?

I agree with paying off the debts. Whether the car or student loan comes first depends on the interest rates.

Definitely don't buy with less than a 20% down payment and make sure your monthly payment on the new loan won't exceed 28% of your monthly income.

One thing nobody has mentioned is that you also need to make sure you leave yourselves with at least a 6-month emergency fund after the down payment, closing costs and moving expenses are all paid out.

 

[Rob R]

Do yourself a favor and don't buy the new house until you sell the old one.

If they ever invent time travel you'll post below in how you wish you took my "free advice"

 

[Janet Hill]

About your student loan that is in forebearance. Does interest continue to accrue? On many of them this is the case.

 

[Jeff_G]

If I didnt have a house payment, there is NO way I would go back to another one!

Pay off all debt, save back up for 6 to 9 months of emergency money, then save enough to pay for your next house without taking a mortgage. Sell your current house and rent before you purcahse your next.

 

[libinatorsmom]

I have serveral thoughs on your question - granted I am not a bank or lender or do i work for one - but if all you are saying is true - GREAT CREDIT and over 20% DP you should have absolutely no problem obtaining a low interest and easy home morgage. So It shouldnt matter which you do... you can just decide if you prefer to keep the money in savings or pay off the vehs....

But my real opininon is that its our absolute goal to have our house/land free and clear 100% no payments to worry about no reason to worry in case gosh forbid something happens to one of us and leaving us at one imcome or loosing a job etc. Also it took us over 18 months to sell our acerage/farm and we were WAY under priced... It was terrible... plus we had to put more money into the home and property to make the sale go through... make sure you have a strong stomach and a good heart if you are thinking about being a landlord... been there done that - NEVER again... Granted this is my my opinion - but just reconsider it all

 

[Kika]

I agree with the previous poster. If you are putting at least 20% down and have good credit (780-850 range), it probably won't matter to the bank which of the two choices you make. I would pay down the debt if it were me, but either way, you should be good in the eyes of the bank! (I going with the assumption that you will be able to float both houses in the event you don't get a renter or something happens to your renter. Otherwise, I agree with the other poster's advice to sell your current home before buying.)

Good luck!

 

[twinboysmom]

OP, you have got all kinds of good advice but i will say it again. It is no longer just about credit score and downpayment folks. The biggest thing is your income to debt ratio. With the foreclosure crisis Fannie and Freddie changed the mortgage rules and those of us who hadn't bought a house in the last 18 months or so might have been in for a surprise. We only are trying to get 70% of our homes value refinanced. Both of us have credit scores over 800. Herein lies the problem. Our income was cut significantly when I decided to stay home with our babies. We still pay our bills on time. Our problem is our vehicle notes. It is also not what you owe on the vehicles. It is the monthly payment. We are actually ahead on our payments but because our vehicle notes are what they are we do not qualify to refinance with the new rules. We were quite shocked as when we bought this house 5 years ago we only made a little bit more together than what my spouse makes now and had the same debts.

We are still working with both Bank of America and Quicken with refinancing. I have started working a bit and once I have established that I am consistently bringing in an income we will be approved. We also believe sometimes things happen for a reason and we have actually contemplated moving closer to family so, who knows.

OP, you are obviously doing something right as you have a paid off house and most of us don't. Good luck with our decision.