Some questions from a first time buyer

[looking123]

I am 24 years old, looking to buy my first house in April or May. Before applying anywhere, I was hoping to get a ballpark figure of what I could probably afford. I also have a couple other questions that I've been wondering about. I'd really appreciate any advice!

First, here are my questions. I posted all my info below.

1. How much mortgage do you think I'd be approved for? And what is the maximum monthly payment for mortgage and taxes that you’d think I could afford?

2. Based on my situation, would it be more beneficial for me to pay off my car loan to lower my DTI ratio, or would be it better to have more cash in the bank? I'm torn over what to do about this.

3. Some of the houses I’ve been looking at are short sales. I’ve heard these are sometimes tougher to buy. Is this true? Is the process to buy a short sale house much different than a regular sale?

And here's my info:

1. Credit: I just signed up for the Score Watch free trial. It said my FICO score is 777 (lucky! ). I have no negatives. Since I got my first credit card about 6 years ago, I haven't missed any monthly payments. Same with my student loans and car loans. I currently have the following CCs: Amex BCE ($8,500 limit, opened August 2011), BOA ($5,000 limit, opened April 2008), and 1st Financial Bank -- my original student CC ($8,000 limit, opened March 2007). Utilization is usually 1% to 3%. I also have a handful of store cards and gas cards -- I don't really use these anymore but I've had them for several years.

2. Income: My annual gross income is between $40,000 and $45,000. I am the only source of income for this mortgage. I think this is one of the areas that will hurt me most.

3. Source of income: The majority of my income is from my job (hourly). I also make a couple hundred per year in interest/dividends as well as capital gains in my non-retirement investment account. I don't normally take my investment income in cash, but it is available to me and I could get it within a business day or two.

4. Monthly debt payments: I have a car loan, which started in September 2012. This is $425/month, and the loan is currently around $23,500. No other debt -- student loans were all paid off last year. This might be one of the biggest problems going against me.

5. Employment: I work full time as a public accountant (CPA). I have been with this firm since January 2010, when I started as a part-time paid intern. As soon as I graduated (May 2011), I began working full time.

6. Assets/reserves: I currently have about $90,000 in cash in my bank accounts. I have a CD worth $3,800, savings bonds worth $1,800, and an investment account with stocks and some cash worth $5,000. I also have about $8,000 in IRAs. Basically it comes to around $100,000 in qualifying assets. I'd consider the IRAs non-qualifying (these won't be touched). I'd prefer not to touch my non-bank accounts either, but I will if necessary.

7. Location: Burlington County, NJ

8. Property: Single-family preferably, or townhome/condo

9. Value: I'm looking for houses between $150,000 and $200,000 -- most I'm finding are around $180,000. Property taxes are anywhere from $4,500 to $6,500 per year. Is this feasible for me?

10. Occupancy: Primary residence

11. Transaction type: Purchase

If you need any other info, let me know. I'd really appreciate any advice! Thanks!

[tooleman694]

You could probably get a mortgage around 140k or so, if you put 40k down you would hit your 180k amount you want.

[MovingForward_2012]

+1, short sales can take 6-12 months to close depending on the bank that accepts your offer. If you have the time to pursue it, it could be a great investment but they do take a long time to close as the banks like to sit on their hands in most cases.

Make sure you leave yourself with ample reserves after closing.

[fdiggy]

We offered market value on a house owned by Deutsch 2 months ago. Havent heard anything, not even a hint of knowing of our existance from the Bank of getting our offer. I read a conventional 20% down offer has a better chance than say FHA 3.5% down.

[looking123]

Thanks for the advice on the short sale everyone. 

How about the car loan? Would it be better if I paid it off or kept the extra cash in the bank? I can see both sides of this. If I pay it off, my DTI will be looking much better and my overall monthly payments once/if I get approved would be much lower. On the down side though, I'd have less reserves after closing. Ugh I have no idea what to do!

[oscar_actuary]

I think whether paying your car off or not helps you get the house you want, would depend in part at least on what DTI ceiling your lender uses

Generally, its pretty close whether you use the Mortg the back end allows you after the limiting factor of the car loan vs just the 28% front end, when you take into consideration the 25k additional you would have for a down payment if you kept the loan.

If the bank relaxes the back end ratio for a big down payment, then the argument to keep the loan is stronger.

I don't see how the 140k loan was suggested, with $500/month going to tax+insurance  I could be goofing up some math.

I must say, 90k saved, 25k car loan, and 45k salary, age 24 is a combination that makes me want to delve in more. 

[looking123]

So you're saying I should check with my bank first to see what DTI ceiling they use? But most likely I'll probably have to pay off the car loan to get a good DTI right?

What number are you coming up with for the mortgage amount? 

I do agree, my financial situation is a little unique. 

[Autumnslight]

With your scores and the amount of cash you have, you should have a good shot at being able to do a conventional loan with 20% down on a $180,000 purchase. You'd probably be right up around the 45% DTI ratio for conventional, but if you were over it, it shouldn't be by much, and you should have enough cash to be able to bring it down enough to qualify.

I would contact a mortgage broker and get pre-approved as soon as you're ready. Once you're under contract on a house, the broker can help you figure out what the best option is with the specific numbers.

I wouldn't pay off the car loan unless the broker wants you to, as having the open installment loan should actually be helping your credit mix and making your file look better. From what I've seen, it seems that more cash reserves trump paying down debt unless you absolutely have to in order to qualify.

Edit: My math went a little wonky. No coffee yet today, sorry! Assuming $45k annual income, your issue is going to really be the front end DTI ratio, which is usually 33%. You could get under that by keeping the car loan, and puttiing down about $50k on a $180k house. That gives you a monthly payment of  $1,227, assuming 3.75% interest, $1,000 annual insurance, and $6,500 annual property taxes. All of those assumptions are hopefully a little bit high too.

[Autumnslight]

Another way to go could actually be FHA, with a big down payment. If you did $50k down on a $180k house, 3.25% interest rate, $1,000 annual insurance, and $6,500 annual property taxes, you'd be looking at a monthly payment of $1,342, which includes monthly MIP of $141. If you have a purchase contract and an FHA case number before the end of May, then you'll be stuck with the monthly MIP of $141 for 5 years, but then it'll be gone.

FHA tends to be more lenient on front end debt ratios than conventional, which is what your issue would likely be. Paying off the car won't help that, so better to save the cash and put it towards more downpayment if need be.

[MovingForward_2012]

Keep in mind the bank approves you for a certain amount based on your income and your required debts. What you can afford needs to come from you based on your spending habits. If you buy a house above what you can afford, make sure that you have a plan for what you need to cut back on. ALWAYS leave disposable income to put into savings every month. I put away $600 a month by having an auto transfer set up for $150 every week.