apply for mortgage or wait?

[liz2011]

Hi!  This is my first post and I need some advice/information about USDA guranteed loans.  My husband and I had planned to pay off debt/save up for about 2 years to get a traditional mortgage with a down payment.  However, we have recently been offered the option to buy the townhouse we are currently in with a low down payment...we are torn because we hadn't planned to buy a townhouse, but now that the option is on the table we are wondering if it would be a good investment for a starter home.   I have also just become aware of the USDA option for buying with little to no down payment.  This has got me wondering if I should apply for this type of loan and see how much we could get approved for.   According to the website our income would qualify for a guranteed loan (but not direct).  If we were approved, we would likely buy a house within the year--either the townhouse or a stand-alone house (sorry, not sure of the correct terminology!), depending on if/how much we got approved for.  (we have no negatives on our credit report at all...but there are two CCs, one at 50% util, and one near 100%, as well as student loan debt.  How much will this hurt us whan applying?)  If we bought the townhouse it would be a "starter home" and we would plan to sell it in about 5 years or so.  Is this a smart idea considering the market right now?  I am not sure if/how much a townhouse would appreciate, and we don't want to get stuck losing money or not being able to sell, of course. 

Best-case scenario would be that we were approved for an amount that allowed us to buy a stand-alone house now...not sure how much that CC debt would hold us back.  The other option would be to wait and continue to rent for 2 years while we pay down that CC debt and hope to save enough for a traditional down payment. 

 Any advice or insight would be appreciated.

[ShanetheMortgageMan]

Hi Liz, welcome to the FICO forums.  USDA will lend on condominiums (which a townhome is normally legally classified as) as long as it's been approved by either VA, FHA, Fannie Mae or Freddie Mac ... however not all lenders will lend on condominiums with their USDA program, so that will be one question you'd want to ask any prospective lender.   The "stand-alone house" you referred to is technically called a "single family residence".   The different legal classifications of homes that you can finance with residential mortgages are "single family residence", "PUD", "condominium", "co-op", "manufactured home", "duplex", "triplex", and "four-plex".  Single family residenes are easiest to approve, PUD's are fairly easy too, condominiums review a detailed review.  Your townhome may be a single family residence, it is quite possible, as single family residences can also be attached.  It may also be a PUD instead.  You should contact the current owner, they should have an idea or at least be able to give you the # to the homeowners association so you can ask them about it.

As far as the market, you'll have to talk to a real estate agent as I am not sure where you live and even if you lived right in my backyard I really couldn't tell you what the market will be doing in the future.  In general home values have come down, but they are not declining nearly as much as they were 12-24 months ago, and in some areas they have leveled off or are seeing very slight appreciation.  What if you can't sell your home in 5 years from now?  What would your plan be then?  If you don't want that possibility, then you may not want to buy, because it'll always be a possibility.

As far as you qualifying, your credit having a couple credit cards at 50% utilization and a student loan, in itself, isn't an issue.  It's good that you have current and on time trade lines, as well as a diversity of them (revolving & installment), and if you haven't missed any payments or had any delinquent accounts then I suspect your scores are probably very good to excellent.  Have you checked your scores here?  You can get your Equifax & TransUnion, your Equifax one from here should be exact to what a lender pulls, and the TransUnion uses a slightly different scorig model (Classic 98 vs. Classic 04) so it'll be close but not exact to what a mortgage lender pulls.  Credit & credit scores are only one part of qualifying though - the rest can be found at Do I qualify for a mortgage? Info that is needed.

[liz2011]

Thanks for all the info!  I did go ahead and check my credit score after posting (the TU one at least...didn't realize Equifax was what the lender would pull but I'm hoping it's close enough!) and it is 722.  I am pretty happy with that and realize that paying off my CC debt would raise it even higher.  DH's credit is newer than mine but he also has no "baddies" and very little CC debt so I'm thinking his score will be close to that as well.  We're planning to go to the bank soon and hopefully get a pre-qualification letter to find out our price range.  Right now we are hoping to be able to buy a single-family detached home because we don't want to be in a position where we are unable to sell the townhouse.  We did find some nice single-family homes in our area that we feel could be in our price range.  After reading on this forum a little, I saw that some lenders are offering low down payment conventional loans...not sure if this would be the best option for us or if we should try for the USDA loan.  If we left the CC balances as they are we could swing a 3-5% down payment.  If we paid the CC balances down it would be tight.  Right now total CC utilization is about 70%.  What do you think...should I leave CC's as is for now or will 70% be too high when applying for the mortgage?

Thanks!! 

[ShanetheMortgageMan]

The utilization percentage would be fine at 70% as long as your debt ratio & credit score qualifies - if neither does then paying down the credit card debt will help out both.