Advice, opinions, mortgage help please!

[Anonymous]

Location:

Cumberland County, Maine

Scores:

FICO Scores (today): 648 TU & 676 EQ for me, wife's EQ is 632

Employment:

I'm an Intern Architect and have been with my current firm for over 2 years.  My wife is a Career Resource Specialist and has been with her company for over 4 years.

Income:

Me = $4,400 per month (52800/52*4)

Wife = $2,576 per month (30920/52*4)

Total = $6,976 per month

Assets:

We currently own a 1.76 acre parcel of bare land that my grandfather gifted to us in March 2010 (Tax appraised @ $74,300).  It is deeded to me free and clear; owe nothing on it but the quarterly property tax payments ($310/Q or $103 per month).  We're going to hold onto this parcel until we can afford to build our final dream home that we've already designed.

Reserves:

$0

Debt:

We've managed to payoff my Chase CC ($1,200 limit), CapitalONE CC ($500 limit) and a Retail CC ($1,500 limit).  My wife has a Dell CC with a balance of $5,707 with a $6,000 limit ($170 per month min.) and an AT&T CC with a balance of $19,378 with a $20,250 limit ($382 per month min.).  I have an auto loan with a current payoff of $9,800 ($365 per month) and a personal loan with a payoff of $1,858 ($122 per month).  I have SEVEN student loans totaling a $113,372 payoff with monthly payments of $615.  I've applied to consolidate my two federal student loans which will lower my total monthly student loan payments to ~$575.

Total Payoff = $150,115

Total Payoff not including low interest rate student loans = $36,743

Total Debt Payments = $1,648 per month

DTI:

$1648/$6976 = 23.62%

We would like to build a single family house for our primaryresidence in the total build value range of $150-175K including land.  There are a couple of scenarios we're thinking of doing:

1.  Borrow against the equity in the land we already own:

I was pre-approved last March (not including my wife) on a $45K loan but then denied in underwriting because of a couple of late payments within 12 months.  The loan was based on a 75% LTV limit while setting the value of land at $60K.  They told me to reapply in March 2011 and not miss any payments since that will put me at 24 months without a late.  My score has climbed more than 30 points and I haven't missed any payments and no other negatives have shown on my report since applying, other than the hard inquiry.

This potential $45K would pay off my wife's two CC's, my vehicle and personal loans and put about $5000+ in savings after all fees and closing costs have been paid.  It would consolidate all the above mentioned debt other student loans...  It would lower our DTI to 12.4%.  I contacted a mortgage broker and was told that taking this loan out would not hurt our chances of being approved on a mortgage since it is helping our DTI and putting reserves in the bank.

If approved, we'd consolidate the above debt, put reserves in the bank, apply for a mortgage in 6-12 months and hopefully start construction on a new home.

2.  Buy a small fixer upper:

If allowed (help me on this one) use the equity in the land as collateral to buy a small fixer upper, live in it for 2-5 years and then either refi or sell it to build our final house on the land we currently own.

3.  Keep at it for another 12+ months:

Stay in my aunt's house and just keep chugging away at our debt and hope that our FICO scores climb even more.  Then buy or build a house.  This option doesn't necessarily allow for cash reserves since I don't think it's smart to put $ into savings when you're paying on debt with interest.

[Anonymous]

what are you currently paying for rent?  That would effect it alot.

I would probably not even consider taking out the equity of the land you own if you want to build on it on the near future.  The reason being that unless I am misunderstanding something, you would then have to qualify for a construction mortgage with little to no reserves and with enough equity built in somehow to pay off the 45K loan.  I do not believe you can get a construction loan on a property that has a lien on it (the 45 K loan)

The option to buy a fixer upper is tempting but also very risky.  You would have to make enough on it to offset taxes paid for the time you were there and the realtors fees when you sell it to make it even a break even.  If your long term goal is to build on your property I would focus there. 

It is a tricky equation, but with over 150K in debt and under 100K in income I would stay where you are at, eliminate any unnecessary spending, and get debts paid off as quick as you can.  Ideally start by paying the highest interest ones first (but some prefer to do small balance as it makes them feel like they are accomplishing something to see accounts paid off)...  Get some money in the bank and the debt load down to a reasonable amount.  Then make plans to build the house. 

It does depend a bit on your current living situation though.  If your rent is really high, etc that can change the equation.

One other trick to consider is trying for either a 12 month deferrment or forebearance on your student loans.  Deferrment is interest free and a forebearance you stil lpay interest.  If your interest rate is relatively low, the added interest may be worth the ability to use that 600 each month to pay down your other debts.  With an extra $600 per month, you could basicly pay of the car in a year or pay off a couple of the smaller ones. 

[Anonymous]

We're currently living with my widowed aunt to help her pay her bills so she doesn't lose her house.  Her husband, my uncle, owned a business and died suddenly and unexpectedly last September so she's doing the best she can to maintain.  He didn't have any sort of life insurance package or much in savings when he passed...  So she's left in this large 3 bedroom house that she couldn't afford the mortgage on without us paying her rent.  We're paying her $550 a month which includes all utilities.

We don't plan to build on the land we currently own for a while; we're now thinking 5-10 years before that happens.  And yes, before we can even think of building on it, if we take out the equity line it'll have to be paid off before the construction loan.  The construction lender we'll be using for both our first home and the final home is a private investor that will "approve" us with a final mortgage approval.  He would be willing to pay off the equity line and roll it into the construction loan but that's because of his high interest rates.

When I mentioned fixer upper, I meant something that may need new flooring or a kitchen/bath update; nothing major, at least to me.  Honestly, I'd rather not buy someone elses headache anyhow and just build new since I have the resources to do it realatively cheaply as compared to the average person.  So I guess let's take this off the discussion table.

Although I agree that we should continue to pay down debt, I don't fully enter my student loans into the equation.  Yes, I'm aware they will be entered into the equation for a home loan and any other application for that matter, however they are of lower interest (average over all of them is currently 2.65%) than any other form of borrowed money I will ever hold a note on and will most likely go full term before paid off.  My main focus is my wife's large CC which is currently at 10.99% and the Dell CC is at 24%.  Our plan is to tackle the Dell card next given it's lower balance and higher interest rate than the AT&T CC.  Then tackle my personal loan (14.9%) and then the AT&T CC.

Our rent is low but I'm not going to want to stay living in my aunt's house for more than another 12 months.  We have an 8 month old son and he's going to need his own room soon.  Not to mention the satisfaction and life accomplishment of finally being out on our own.  We're 31 and 30 years old.

I've been using deferments and forbearances on my student loans every other year or so to free up the funds to pay down debts.  I currently don't have any of those options available and won't until next year (2012).

So...

Do we take out the equity line, pay off all our debt other than the student loans and go for a mortgage in 6-12 months? It will provide ~$5,000 in cash reserves, lower our DTI, therefore qualifying us for more $ to build/buy with.  But it will put a lien on our property and therefore prolong the ability to build there, which we're willing to accept.

Or do we just wait out the 6-12 months and see how much debt we can pay off and see what we qualify for then?  I estimate being able to pay down the Dell CC to about 65% and potentially pay off my personal loan by then too.  Just paying the minimums to the AT&T CC will drop it's utilization as well, albeit slowly.  But this option leaves us with $0 in cash reserves and will be a lower qualified amount to buy/build with...

I guess my main question is, what would we qualify for right now?  Do you need more information than I've given to answer that question?  And then my next question is, do you think we're approvable right now?

[Anonymous]

Here is a breakdown of my credit report...

I have a court judgement on my report from 2006 for $607 that was settled and paid in full in 2008.  Two collections in 2006, one for $350 and the other $800 that show paid and closed in 2007.

All the below items are for a span of 24 months during their individual payment histories.

Current Accounts:

Chase CC: No lates

CapitalONE CC: No lates

Personal Loan: No lates

Auto Loan: No lates

SallieMae Student Loan: No lates

VSAC Student Loans (have 2): No lates

AES Student Loans (have 2): No lates

Wells Fargo Student Loan: 30 day late 1/09

Iowa Student Loan: 1/09, 3/09

Closed Accounts:

Boat Loan (paid and closed 6/09): No lates

HSBC CC: TU shows a 30 day late 12/08 and EX shows a 30 day late 05/07

Toyota Motor Credit Auto Loan (paid and closed 2/08): 30 day lates: 4/06, 7/06, 12/06, 1/07, 6/07, and 7/07

Personal Loan (paid and closed 10/06): 60 day late 10/06

Auto Loan (paid and closed 2/05): No lates

Think I'll need to write an explaination letter for any of those lates?  Think I'll have any issues being approved for an FHA loan?

[Anonymous]

My honest opinion is that you are in no shape to buy a home.  If you have already been skipping your student loan payments with deferrments and forebearances and still have 26K in credit card debt and a 10K car loan while living in a fairly cheap living situation how are you going to be able to manage a mortgage, savings, paying off the debt, and maintaining the home.  The average home costs a couple hundred per month in upkeep and maintenance not counting larger items that go out such as roofs anf furnaces...  IN my opinion, even though you want to move out and it is very understandable why you would want to, you are being handed a gift right now in being able to stay there for a relatively low price.  550 for a family for rent and utilities is really low.  The bottom line is that while you have managed to pay down a couple small cards, the big elephants remain mostly untouched and need to be brought under control before taking the risk on buying a home.  An extra year spent living with your aunt right now and paying down debt will most likely show many rewards come 5 years from now.  take 3 months and put every penny you have into the debt you have by cutting out all extra spending and see what you can accomplish.  At the end of those 3 months use that info to determine how long it would take you to realistically get the car paid off and at least one of the other two cards paid off (whil paying down the other one)...  I think if you could get the car and the 6K card paid off while paying down the other one a little bit, then you wills ee romm to start saving, building reserves, and also see a nice FICO oncrease from paying down the utilization.  I think you could easily be in range of building your dream house sooner rather than later with some sacrifice over the next 18-24 months.

That all said, of course it is your choice if you choose to try to buy now...  If that is your decision I would do this...

If you are dead set on buying something right now do 2 things.  First pick something you could see yourself keeping as a rental unit.  Not to say you  have to, but if market conditions make it necessary and the cost of selling/etc makes it a better deal to keep the property as a rental unit...

Second, I am always leary of taking out mortgage debt for personal debt, but if that is the best thing to do (and with that much cc debt and with interest rates pretty low right now it may well be), do not take reserves out.  Take out the exact minimum you need to take out to pay off your debt.  Even better, have them pay off the debt at close so it is done and while keeping the accounts open, do not charge any more on cc than you can pay off that month....  I say this for a couple reasons...  First is that taking out money with interest to stick in an account that pays little interest does not make sense.  Also, if given the lower payments, you can still not manage to put together reserves of your own in a few months (6-12) then you are in no shape to buy a house and upkeep it period.   As a final caution, typically probably 75% of the people who use debt to pay off cc end up with the original debt and new cc debt in a couple years.  Be careful.  It alwasy sounds good to pay off cards, but doing so and not touching them (except the occasional charge to keep the accounts active) is tough and most people never follow through.  FI you close them it will hurt your credit score so you want them to remain active and open.  Anyway, good luck. 

[Anonymous]

Points taken.  Thanks for the honest reply.  That's a good idea about not taking out the reserves and just put the extra funds per month into savings that the consolidation (equity loan) freed up.  That not only saves us the interest we would have paid on that amount but it would look better come mortgage time if we show that we're saving our own money, not sitting on borrowed money...

So let's say this; we take out just the funds against the equity in our land to pay off the auto and personal loans and the CC's (currently $36,742).  That would basically consolidate $1040 in monthly payments down to about $365 which frees up $675 a month.  Then over the course of 6-12 months we put all our extra money into savings, that means we could potentially have between $4050 to $8100 in savings come mortgage time.  We'd still have the same amount of overall total debt but our monthly debt would be drastically reduced.  We'd go from a DTI of 24.34% down to 14.48%!  And it would increase our maximum qualified PITI from our current $107K up to $231K assuming $4000 annual tax and $1800 annual insurance @ 5% interest on a fixed 30 year term.  I have a spreadsheet I've created to calculate all the figures I need.

Setting whether or not we should buy now aside, are we qualified for FHA as we stand, given the DTI, FICO's & other info in my previous posts?

[Anonymous]

it is hard to say without knowing your wife's scores.

A couple questions would pop into my mind...How long have yoy been out os school.  I ask this because certain fileds that tend to have high student debt alos have high earning potential after the first few years (law, Dr, etc) and may give you a little room on DTI as a compensating factor if you have only been out of school a couple years and are expecting income to increase. 

That said, I am not sure they would do allow that with the vurrent debt load...Hard to tell.

Also, your wifes score of 632 could be an issue.   I assume paying down some of the revolving debt will help that remendously.  But, only knowing one score (632) and knowing that most FHA lenders are now requireing 640 or higher FICO that may be an issue.  You ideally want midscores to be over 650 to allow some room if something comes up.  If her midscor is at 640, you could probably qualify for a small mortgage right now with not too much problem (say 100-125K)  Assuming you consolidate the student loans, and then all the other debt with a personal loan, you would qualify for much more (closer to 200K).  Just keep in mind what you buy, how long you plan on living in it, and that maxing out on a mortgage right now is just going to prolong paying off your debt, add to the amount of interest you are paying on stuff now, and delay hwo long before you can buiold the home you want.  So just weigh all of the options with a long term (5 year +) eye on it.  Things that may make life better short term right now may come back to bite you over the long term (I am the king of this by the way.... so I am not being judgemental at all.....)