Help preparing for home purchase next summer

[Anonymous]

Good morning,

I am in the military and we are finally PCSing to a long term (4 year) duty station next summer.  We don't yet know where exactly we will be going, but hope to purchase if the local market makes sense to do so.

My questions relate to the best way to prepare for the mortgage application next summer; we have some options, mostly relating to the keep cash vs pay debt conundrum.

Background (balances projected for next summer when we want to buy):

Credit scores: Mid-700s, no negative stuff whatsoever

Gross wage income: $86k

Savings: $24k

Mortgage on rental property we own: $950/month ($102k balance, 6%)

Rental income: $950/month

Credit card debt: $160/month ($8300 balance is at 0% for the duration of my military service, paying it down more than the minimum would help DTI but wouldn't save any interest; limit on the card is $16500)

Auto loan 1: $441/month ($15000 balance, 2.25%)

Auto loan 2: $720/month ($31000 balance, 2.49%)

Student loans - subsidized: Military deferment for at least 4 more years, $9000 balance, no interest accrues

Student loans - unsubsidized: Military deferment for at least 4 more years, $21000 balance, 6% interest accrues

Questions:

My inclination is to pay down the highest interest rate items; i.e., the 6% unsubsidized student loans even though they're deferred, or the 6% rental house mortgage, or perhaps to keep the cash reserves on hand and pay nothing down.  However, I have a feeling that my inclination may not be best thing in the credit score/mortgage game.

- Is it best to pay down the non-student loan items like use most of the savings to pay off the $15000 auto loan and the credit card to reduce my monthly debt payment?

Should I at least pay down the 0% rate credit card to 30% utilization?

- Is it better to retain all the savings for closing costs/emergency fund, or perhaps use it for a 10% down payment?

- Does our rental house mortgage and income impact my DTI the same way as any other debt; i.e., the mortgage is completely paid for by the rental income, but still hurts me because it's not a 36% ratio?

- Do regular mortgages factor in the deferred student loans?  Do VA mortgages?

- I hear the VA has a higher DTI limit, plus doesn't charge PMI, but there is a loan fee since I'm not disabled; is the VA loan still the best option even with the loan origination fee?  Advice on how to begin looking into the VA loan providers?  I know USAA is one, but I'm not sure how to go about learning about who has the best rates, etc.

- Any other general advice if you were in my position?

If I had my druthers, I would do a 15 year VA loan on a ~$200k house, but I'm wondering if I'll be forced to do a higher rate 30 year loan simply because of the DTI. 

Thank you for your help!

Capt A

[MarineVietVet]

Welcome to myFICO.

First of all THANK YOU for your service. I know the sacrifices members of the military have to endure.

I will defer to the mortgage experts for their advice to you.

[ezdriver]

- Is it best to pay down the non-student loan items like use most of the savings to pay off the $15000 auto loan and the credit card to reduce my monthly debt payment?

Keep in mind that, in addition to a down payment, you also need:

1) Funds for reserves ... underwriter will require it.

2) Funds for closing costs [including prepaids]

3) Funds for contingencies [eg: minor repairs just after occupying]

As much as one desires to leverage eveny $ they have to buy a house, it is prudent to be concervative in one's approach and not leave yourself with an empty pockty at closing. All the best and thank you for your service.

[ezdriver]

If I had my druthers, I would do a 15 year VA loan on a ~$200k house, but I'm wondering if I'll be forced to do a higher rate 30 year loan simply because of the DTI.

Think about your monthly cash flow and consider this:

If you commit to a 15yr motgage, your higher payments may strain your cash flow.

If you commit to a 30yr mortgage, it will be easier on your cah flow and you can make extra payments as cash flow is available. If you double you payments, you effectively have a 15yr mortgage without the legal commitment for the hight monthly payment.

[Anonymous]

Thank you both for your replies.

Regarding the comment that we need to hold onto some cash for reserves, closing costs, and contingencies - can you give me a rough idea of the types of numbers we're talking about here?  I have no idea what an underwriter is going to be satisfied by, for example.

[justrock]

Let me start by saying I am getting an FHA loan and the fees for VA loan are a bit different.  That being said, I just got my updated GFE from the bank.  There are three items that are not included on it but that I have to pay for myself (I am getting no concession from the seller.).

Home Inspection $650

Attorney's fees     $1300

Survey                 $ 850

Included in the GFE

Origination Fees (document prep and Title review)  $300

Appraisal Fee                                                            $350

Hazard Ins premium                                                  $750

3 mos insurance reserves                                         $180

Property tax reserves 12 mos                                    $3624

Lender's title insurace                                                $598

Owners title insurance                                               $880

Recording fees                                                           $355

Transfer taxes                                                            $732

Pest/water/septic                                                        $150

These items add up to almost $10,000

There are also some other fees that have to be paid at closing, including seller's prepaid taxes that have to be reimbursed and cost of whatever fuel might be left in the tanks.   I am in New York, which has very high closing costs, but the house I am buying is $160,000, less than what you are looking for.  Underwriter's don't want to see you empty your bank account either, they like to see two or three months PITI left over.  They might overlook that with a strong credit file though.