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Savings or pay off debt.
Hi, I am new to this board. My husband and I are ready to buy are first home in the next 3 months up to a year from now. We just got done paying off a lot of our debt and we still have some more to go.
We talked to a handful of banks and have been pre qualified for all of them. Our main question was should we use our extra money each month to pay off debt or put it into savings. We have very little savings right now. We are trying to figure out what would be better or a combination of the two and each bank kept giving us a different answer.
My husband thinks we should focus on the debt so we don't have as much money going out for bills each month once we have a house. I think we should save more so we have more negotiating power when we are offering on houses and we have more for moving costs and maintenance on a new home.
Any advice would be great, we were hoping for a straight answer from the banks but one would say savings and the other would say pay off debt. Which one is it?? The other dilemma is my husband wants to pay my car off so we have more money to put towards either savings and remaining debt. I want to pay off our smaller balance credit cards and put the rest into savings.
Re: Savings or pay off debt.
Do you have any savings for a downpayment? Unless you qualify for a USDA or VA loan, you need to put down at least 3.5% for an FHA loan.
I would agree with your husband that you need to pay off debt. Once you get into a house you'll have a lot of unexpected expenses and if you are already carrying cc debt and a car payment, where is the money coming from? As far as which debt to pay - what are the balances and interest rates on the cc debt and car? I assume the cc's are a higher interest rate debt so I would pay those off first. Then maybe split savings/paying off your car. It might take longer than a year to get into a better financial position - paying off debts and having savings + additional savings for a downpayment but once you own there are a lot of unexpected expenses and problems. You might post your budget on Money Matters. Those ladies are very helpful.
Before you even get yourself into owning a home where you'll likely have a higher monthly payment than your current rent plus the responsibility of repairing the home, get rid of your debt!
Without knowing your situation, I would guess you have more free money right now than you will after you purchase a house. Put all of that into paying off your debt. Set aside at least a couple thousand dollars in an emergency fund, then move forward with saving. You can't easily get rid of bills once you own a home. But you can always put off a purchase until you're more financially secure. Don't put too much of your heart into a financial decision.
My husband and I were in the same boat as you guys before speaking with a financial advisor. We originally thought we would be homeowners by the end of the year. Now, even though we'll be debt free by August, we won't be purchasing until end of next summer, close to a year and a half from now. But I know we'll be in a much more financially secure situation by then. Meeting with a fee-based advisor has been the best choice we could have made.
Before buying a house get your finances in order! Pay off all credit card debt. Pay off cars. Establish an emergency fund of 6 month's expenses. Save your downpyament, closing costs, moving costs, start up costs, repair/renovation costs, decorating/furniture/applicances as well as yard items and tools.
If you do not have a budget - start tracking your spending and then categorize. Look for areas to cut back or eliminate. (eating out, entertainment, clothing, vacations, cell phones, cable extras, etc.
Check your credit reports and FICO scores - fix any negatives.
You want your debt to income ratio to be low.
Keep your housing expenses to 25-28% of your TAKEHOME pay. (THat is mortgage, PMI, Insurance, Taxes and Utilities) Do NOT go by what a lender will loan you!!
Owning a home is much more than the mortgage payment - don't buy before you are financially ready and do not over buy. Plan to stay at least 7-10 years (the amount of time to recoup your buying and selling costs) and do not think of your house as an investment.
MM board can help with budgeting and finding places to save.
If you pay off the debt, use the money that you would be paying each month (i.e. the car payment or monthly credit card payment) and put that directly in savings, and do not touch it.
While buying a home can be exciting, think realistically. I would love to move into a house right now but know that DH and I would like to be debt free (aside from some SLs), and have about a 15% - 20% down payment for a house, and still have money leftover in savings. Therefore, it will be a couple years until we can accomplish this.
This is all great advice that I agree with 100%. Even if you have been pre-approved, getting final approval for a mortgage has become more difficult than it was even a few years ago. The less debt you have, the better off you are- especially when trying to get a mortgage, but also just life in general! When you have paid off your debt, it will feel great!
But do make sure that you have an emergency fund of at least several months worth of living expenses. You never know what could happen, and having that security is priceless.
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