Q: I am a 40-year old single man earning $32,000. I have $30,000 in my 401(k) and $15,000 in credit card debt. I’m saving $500 each month to buy a house. Should I wait until I have enough saved for a 10 percent down payment or borrow from my 401(k) account?
A: Let’s set aside your down payment question for a moment. I’m more concerned about the $15,000 in credit card debt that you’re carrying. You didn’t say what is the rate of interest you’re paying, but I’m guessing it’s a whole lot more than the 1 percent your $500 per month savings is earning.
You didn’t mention how much you’ve managed to save for a down payment, but I think you should take nearly all of it out of the savings account and pay down your debt. Your debt-to-income ratio is already out of whack and you may find it difficult to get a mortgage lender to approve your home loan.
Conventional lenders will allow you to spend up to 36 percent of your gross monthly income on your total debt, including house payment, taxes, insurance, school loans, car loans, and any credit card debt.
You’re already paying a large slice of your income each month to your credit card company. Eliminating or reducing greatly that debt will go a long way toward helping you qualify for a home.
Once your debt is paid down, you should investigate zero down and very low down payment loans. These are available from conventional lenders as well as FHA. You’ll pay a bit more in fees with FHA, but it’s easier to qualify for those loans.
Pull up a copy of your credit history and credit score ($12.95 from myFICO.com) and make sure your credit score is as high as possible. When you get a zero down or low down payment loan, it helps to have a higher credit score or you will get soaked with higher loan fees and a higher interest rate.
Once you have your credit history and score, pay a visit to a couple of local mortgage lenders. Show them your score and ask them to talk about the various zero down and low down payment loan programs they offer.
Once you start to see what kind of mortgage you can actually afford on your income, you will be able to start shopping around for a property to purchase.
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