Want to buy a house even though we are in lots of debt.
March 23, 2010 8:43 AM   Subscribe

My wife and I have a LOT of credit card debt and no savings. We can now afford to start paying off the debt. We'd like to buy a house as quickly as possible, what can we do?

Over the past five years we racked up about 70k in credit card debt. Obviously our credit rating isn't so great any more. My wife was chronically ill and we weren't sure she was going to make it so we were a lot less than responsible. Now, she has made a miraculous recovery, and we want to get on with our lives. I recently received a large pay raise so that I am taking home $4,000 a month after taxes. Our credit card minimum payments are about $1,200 a month, so we could afford the payments on a mortgage for a $100-150k house, but we have very little savings for a down payment. We are living with my parents but we are miserable here.

Our plan is to make paying off the debt our primary focus until it's done, but we are so miserable and depressed without our own space we are willing to pay more over the long term to get a house now. As I understand it, it is possible to get a "shitty" mortgage now and in 5 years when our debt is paid down refinance into a more reasonable mortgage. Is that true, or are we doomed to live with my parents for a while longer? We have three dogs so it is impossible to find an apartment, and we hate the idea of throwing the money away renting. Please e-mail wanttobuyahouseindebt@gmail.com if you need more information. Thanks.
posted by anonymous to Work & Money (37 answers total) 8 users marked this as a favorite
"You can always refinance!" is one of the key way that people screwed themselves over with the real-estate market crash. You do not want that.

Renting is not "Throwing money away." It gives you a place to live, which isn't your parents' place, and without taking on massive debt like a mortgage, and with far lower risk because you don't have to worry about paying tons of extra money to fix a roof, boiler, etc. I'm not saying there aren't reasons to own a house, but in your circumstances, buying a house is a very bad idea and I see no reason at all not to rent, assuming you can afford it after you deal with your credit card payments.
posted by Tomorrowful at 8:47 AM on March 23, 2010 [28 favorites]

(oh, and "shitty" mortgages are actually a lot harder to find now, because people with them are the ones who are now unable to pay anything. You're making $4k a month after taxes; that's a pretty fantastic income and it should do you fine if you're willing to have some patience and not try to jump directly to homeownership.)
posted by Tomorrowful at 8:48 AM on March 23, 2010

Can your dogs stay with your parents while you rent?
posted by chesty_a_arthur at 8:50 AM on March 23, 2010

Yeah, the days of no-down-payment mortgages to people with crappy credit are long over. Why not rent for a while, pay those cards off, and on time for a couple years while socking some money away for a down payment?
posted by M.C. Lo-Carb! at 8:51 AM on March 23, 2010

Why can't the dogs live with him while he rents? I rent, and my building allows dogs. It is pretty common these days.
posted by jrockway at 8:52 AM on March 23, 2010

Pay down your existing debt and accumulate enough savings to protect yourself for a few months to a year in case you lose your job. Then start saving for retirement. Then start saving money to purchase a house. Then, maybe, begin to consider taking on more debt.

Purchasing a house and losing it to foreclosure throws a hell of a lot more money away than does renting, and it's a lot more miserable.
posted by sallybrown at 8:54 AM on March 23, 2010 [3 favorites]

I agree, renting is the solution here. Also, depending on where you rent, you may be able to get into a rent to own program, and renting through a major property management company (as opposed to someone advertising their condo on Craigslist) might help create a record of payments and help bolster your credit rating.

Given the credit markets these days, I wouldn't bet on your ability to get a loan at all right now. I'd use the money to get out of the parents house and rent while rebuilding your credit history and getting your life back on track.
posted by Naberius at 8:57 AM on March 23, 2010 [2 favorites]

We have three dogs so it is impossible to find an apartment

Sorry, this sounds like an excuse because you want to buy a house. You need to make LOTS of phone calls, but you can find a rental. We have two dogs and two cats, and I was hung up on more than once, but we eventually found an awesome duplex. Call any ad that doesn't specifically say "no pets." Explain how wonderfully trained and quiet they are (they are, aren't they?). Offer to bring them for an "interview."

I know what it's like living with parents (having done that less than a month ago..) and I'd advise you to get out of there for your own sanity. With a shitty mortgage, it will take you FOREVER to get any equity in the house, so you're better off renting. Plus you don't have to worry about maintenance, property taxes, etc. Rent and pay off the debt as fast as you can. Then buy a house.
posted by desjardins at 8:58 AM on March 23, 2010 [4 favorites]

Mortgage lenders will frown on that $70K in CC debt, so while you may feel you can afford a mortgage, they may not extend one too readily. And if you did get a mortgage, for the first 4-5 years most of your payment is interest, anyway, so it's not like you'd be building equity rather than "throwing your money away" on rent.

There's not quite enough info here to make specific suggestions. (Is your wife working, and if so, what's your combined income?) In any case, focus on that $70K, it's killing you with a high interest rate — presumably around 18%, in which case $1050 of that $1200 minimum payment is interest. At that rate it would take decades to pay it off. You need to be paying far more than the minimum every month. Can you afford to pay $2500 or more and live on $1500 or less? That would get the debt paid off in a few years and make it realistic to think about buying a house.
posted by beagle at 8:59 AM on March 23, 2010 [2 favorites]

Renting is not "throwing your money away". It's "paying for a place to live". It sounds like you want a place to live other than your parents' house, so you should go ahead and pay for it.
posted by mr_roboto at 9:04 AM on March 23, 2010 [1 favorite]

I may be way off on this, but I don't forsee anyone lending you money to buy a house when you have $70,000 in credit card debt. You need to make a huge chunk of this disappear before you should start thinking about buying a house. I agree with others that renting is a viable option that is TOTALLY WORTH IT BECAUSE YOU WON'T BE LIVING WITH YOUR PARENTS.
posted by puritycontrol at 9:06 AM on March 23, 2010 [3 favorites]

You don't mention what income your wife has, if any. If she's well enough, she needs to get a job. Then the two of you should rent as inexpensive a place as you can comfortably live in. If you have to find new homes for one or two of your dogs in order to be able to rent a place, then do that. Then you pay off your debts. Look into refinancing the debt to get lower interest rates or even partial debt forgiveness. Set up a budget and stick to it. Live as simply as you happily can. With both of you working you should be able to put a good $3000 a month on the credit card debt which should pay it off in less than three years. Then, for a year or so, you save that $3000 a month for a down payment on a place of your own. Then you buy a place. You'll have money to pay the mortgage and do whatever repairs or upgrades the house needs and buy food other than Ramen. With no debt, if one of you should get laid off or become ill, you should still be able to make the payments.

That means you'll be debt free and a homeowner in about four and a half years. Whereas if you buy a home now, in the same four and a half years, the best case scenario you'll still have most of that 70K debt and probably no more equity than you'll have with my plan. The worst case scenario is that, if one or the other of you gets laid off or ill or whatever, you will lose the house and still have all the credit card debt to deal with.

I know this isn't what you want to hear. But the truth is you didn't get into this situation overnight and you can't fix it overnight. The last thing you should do is take a "I want it now and I'm going to have it now" attitude. You and your wife have a future now and you need to plan for it and be prudent so it can be a good one.
posted by orange swan at 9:08 AM on March 23, 2010 [8 favorites]

It is not impossible to find an apartment that will allow dogs - it's just difficult. You should consider renting a small house with a yard if you think you can afford a mortgage.
posted by belau at 9:17 AM on March 23, 2010

My wife was chronically ill and we weren't sure she was going to make it so we were a lot less than responsible. Now, she has made a miraculous recovery, and we want to get on with our lives.

Unfortunately, all this is going to look like is that you and your wife are a lot less than responsible. $70,000 in credit card debt is pretty damn bad. I agree with the people who say you should look harder for a place that will rent to you and your three dogs. Those places are out there.

It seems to me like you need to change your attitude about money. Renting is not throwing your money away, and spending tens of thousands of dollars more than you can afford isn't really something you should do no matter what sort of health you're in (assuming that money wasn't going towards medical payments - it doesn't sound like it was, from your explanation). I know you want to buy a house right now, but seriously, don't.
posted by wondermouse at 9:18 AM on March 23, 2010

As others here have said, renting is NOT throwing money away. Also, I think you're failing to calculate the other costs of owning a home: property taxes, insurance, repair costs.

orange swan has the best answer here: Rent for four or five years, pay down your debt, save up your downpayment, buy a house you love that you can afford.
posted by anastasiav at 9:23 AM on March 23, 2010

I agree with the other posters - do not take on a mortgage while you have $70K in credit card debt. Even if you find someone to lend to you, you will be completely house-poor between the mortgage and the credit cards. And what if, God forbid, something else happens to your wife or to your job or to you? You'll be totally up shit creek with a mortgage on top of everything else.

I recently read All Your Worth and found it to be the very best money planning book I've ever read. It's straight-forward, easy and best of all - it focuses on how to get your money into balance instead of white-knuckling it on a super-tight budget. Please do yourself a favor and get it - I cannot recommend it highly enough. Really!
posted by widdershins at 9:24 AM on March 23, 2010 [3 favorites]

Yes to renting. A house and all the maintenance involved can be a real millstone around your necks. I sounds to me like you just need to get out from under and concentrate on paying debts down. A fixed rent will insulate you from fluctuating utility bills and tons of big and small repairs.
posted by bonobothegreat at 9:29 AM on March 23, 2010

Rent a house; about 50% of landlords around here will say "no pets" but the other half will let you pay a nonrefundable deposit in case your dogs eat holes in the walls and piss down the inside.
posted by rubadub at 9:29 AM on March 23, 2010

Can you get an interest only loan? I'm not even sure if these still exist after the "bubble" burst, but this would be the best thing for your "situation." Sorry to keep using quotation marks.

If I were in your position, I would PAY OFF ALL DEBT before even considering looking into buying a house. If that means living with your parents, so be it- you will pay it off that much faster.

Devote every extra cent to paying them off. Look to reduce the interest by balance transfer to a lower interest card. Make it your one and only goal to pay off that debt.

If most of your bills are going to the hospital and you haven't already put it all on credit cards, you should look into debt reduction- there is some formula (which I'm sure is different for every hospital) for income to amount owed ratio. If you meet this criteria, you can get the bill reduced... BY ALOT- I know from experience.
posted by TheBones at 9:30 AM on March 23, 2010 [1 favorite]

Our credit card minimum payments are about $1,200 a month, so we could afford the payments on a mortgage for a $100-150k house, but we have very little savings for a down payment. We are living with my parents but we are miserable here.

Have you sat down and calculated how long you'll have to keep paying that minimum payment to get rid of your debt? Plugging some reasonable guesses into this calculator shows it could take 40+ years to pay down $70,000 with a $1,200 a month minimum payment. Your number one priority should be keeping your income high enough to stay above water and putting as much as you can each month into that debt.

As for the house, you are making a common mistake that gets many people into trouble: your income goes up and you figure out that you can barely make a monthly mortgage payment, and you assume that means you can buy a house. Aside from the down payment, your real ongoing costs for owning a home will be higher, because you'll need to pay for maintenance (if your roof starts leaking, you have to pay to fix it), property taxes, insurance, etc. And if all of your monthly income is paying for your mortgage and credit card debt, you can get hosed if any unexpected costs come up.

Buying a house is a big decision, and it's easy to get in over your head. That's why the fact that you need a downpayment is a good thing, because if you're able to save up enough money over time for a downpayment, that's a good sign that you are financially stable enough to own one. Although living with your parents isn't ideal, from a financial perspective it is helping you dig yourself out of a hole. If you continue paying down the debt and bringing in more income than you need you'll be able to get back out, but until then you should focus on not digging yourself any deeper.
posted by burnmp3s at 9:32 AM on March 23, 2010 [3 favorites]

Also, something no one's really pointed out is that your three dogs are another potentially huge expenditure for you in the future. Animals get sick and require vet care, sometimes costing thousands of dollars there as well. You need to focus on paying down your debt and making yourself a savings cushion. With the amount of money you're bringing in, you can do both simultaneously. While living with your parents and your wife isn't ideal, from a financial standpoint you're in a perfect position for getting back on your feet relatively quickly. Buying a house in your position will only set more financial traps for you than you've already set for yourself.

Forget about your credit card's minimum payments - that stuff is a trap set by credit card companies for the sole purpose of making you owe them more money than you do already. Isn't it odd that you're worried about throwing money away by renting, yet you're willfully allowing your credit card company to gouge you by acting like all you really owe per month is the minimum amount due? Pay back way more than those minimum payments. Pay back as much as you possibly can, as soon as you can. You can afford to do this right now!
posted by wondermouse at 9:56 AM on March 23, 2010 [2 favorites]

In my area, there are a LOT of empty houses that have been on the market for over a year with no nibbles, and many of those homeowners are willing to rent (either rent-to-own or just rent for a year or so until the market picks up). Check around and broaden your search from strictly apartments. You can probably found a rental house for the same you'd pay for a 2-bedroom apartment, and most likely be able to bring your pets with you.
posted by Oriole Adams at 10:11 AM on March 23, 2010

Check out this interactive chart from the New York Times. Very enlightening when comparing the costs of renting vs. buying. It let's you plug in a bunch of variables.
posted by jasondigitized at 10:59 AM on March 23, 2010 [1 favorite]

I seriously can't understand why anyone buys a house. Throwing money away? I think that's my friends who lost $150k in the value of their home in 1 year.

I can't find a job in my town? I leave, go somewhere else.

Water heater gives out? I'll call my landlord, he puts one in and it's on by the next morning.

Snows? Landlord and family shovel it.
posted by sully75 at 11:07 AM on March 23, 2010

Just with regard to CC debt, is it possible to get a personal loan at a lower interest rate, and to pay off a chunk of the debt? With CC rates at 10 - 17% per year you should consider reducing this to be the highest priority.

Also (and perhaps you have done this) I would make a simple diagram of cash flowing in, and cash flowing out per year, and then consider how much is the maximum you can pay to reduce that debt so that it is gone within a reasonable time frame. Then consider how much you can afford to pay on housing, when you are paying that amount to reduce your debt.
posted by a womble is an active kind of sloth at 11:12 AM on March 23, 2010

While you have $70k in unsecured debt, you are a huge bankruptcy risk even if you don't want to go that way. I wouldn't loan you a dollar, and given that banks are overloaded with foreclosed houses they will not want to lend with much risk of you sinking back down.

You can rent houses. Rent is cheaper than mortgage interest in many places, and houses may still be overvalued. You'll be fine renting.
posted by a robot made out of meat at 11:17 AM on March 23, 2010

Listen, I hated the idea of throwing away money to rent a place that wasn't mine, all mine, but I hated the idea of living with my parents more, so I got an apartment.

I hated that I couldnt be irresponsible with my small income, but I hated the idea of having debt that is mostly credit card interest more.

You are a classic case of "made your bed, now lie in it." Rent a cheap studio apartment, have the wife get a job, and put 2500 to the credit card every month. Stop buying shit you don't need. If you were living with your parents while racking up 70k in credit card debt, you already have a lot of shit you don't need. Sell said shit on craigslist and save the profits.
posted by WeekendJen at 11:41 AM on March 23, 2010 [4 favorites]

Paying off a 5% mortgage when you could be paying off a 20% credit card is throwing away MORE money in interest than you might throw away paying rent (do the maths). Not only will you be throwing away money, but owning a house with no equity and no savings is utterly ridiculous, and a good way to find yourself running up your credit card bills yet again.

How about proving to yourselves that you really can be financially responsible (i.e. not buy shit you can't afford) for a few years before staking your future on it?
posted by emilyw at 12:08 PM on March 23, 2010

Spend a year paying down your debt really fiercely. 4k/mo after taxes is, what, 60K/year? 2500/mo to debt will get you a long way. There are lots of support groups and blogs about this. Work on learning to budget, and becoming truly financially responsible. There's a lot of "shame on you" feel to some of these answers, and I'm not trying to say that. But I am saying that you haven't learned enough about financial responsibility to take on a mortgage, and a bank won't give you a mortgage because of that, and because your debt:income ratio is too high.

Join a credit union. It was easier for me to finance with a locally based credit union than a big, national bank, and the service was way better.

Visit 3 different banks, esp. any local banks. Ask to meet w/ a mortgage loan rep., and get advice about shaping up your credit. If you pay on time, it might not be too bad. They can help you with the strategy you need. Visit 3, 1 or 2 could be idiots.

Stop using the credit cards. Start paying way more than the minimum. Negotiate any medical bills. Negotiate for lower interest rates. Slash the budget. The dogs will be happy with basic dog food, and your old car will be fine if you take care of it.

Stay with the parents for 6 more months. Manage it by keeping your goals in mind, every month of minimal rent payments to the folks is a step toward financial freedom. Maybe you can even paint the parents' house in lieu of rent, or do serious yard work.

Financial stability and, eventually financial freedom, is so terrific that it's worth putting up with a lot to get.

Once you have a down payment saved, and can qualify for a standard mortgage, you'll be able to buy a nicer house, with a lot less stress.
posted by theora55 at 12:35 PM on March 23, 2010 [1 favorite]

I think you and your wife should read The Total Money-Makeover by Dave Ramsey. It is full of stories about people who paid off even more credit card debt than you all and became debt-free. You can check out a copy at your local library.
posted by val5a at 1:43 PM on March 23, 2010

I grew up with a 170-lb Great Dane and several cats and we never had trouble finding a rental -- as an adult I've had one or two big dogs and always found rentals. I agree that it might be a bit more work to find something, but it's certainly not undoable.
posted by kate blank at 2:49 PM on March 23, 2010

You'll be better off paying down the $70k so that you pay less interest on it, rather than getting a mortgage with a bad interest rate and PMI probably tacked on top of that. Getting a house, even with a less-than-ideal mortgage, might be a good choice in a year or two, and might be a significantly better choice in the long run, but if you run the numbers, I'm guessing that you'll want to pay down that debt first. I'd say keep up the good work, keep your spirits up, and ask yourself again two years from now.
posted by gimonca at 3:16 PM on March 23, 2010

Have you received one of the new credit card statements yet? The ones that say "here is your minimum payment and your interest rate. If you pay the minimum every month, it will take you X years to pay it off"? Take a look at that, because according to this calculator, if you're paying 9% on your $70,000 debt and only paying $1200/month (without adding to the debt), you'll end up paying over $22,000 in interest and it will take you six and a half years to pay it off. Now, rent a cheap place for three years and pay $2400/month on your credit, and voila you only pay $9200 in interest and pay off the cards in less than three years! THEN, you'll be debt free, have much better credit, and can therefore get a much better mortgage rate, which then will save you tons of money in interest payments over the life of your mortgage.

Not to mention the fact that it may be very, very difficult to get a mortgage with $70K in credit card debt.
posted by echo0720 at 4:43 PM on March 23, 2010 [1 favorite]

The fastest way to boost your FICO and qualify for a mortgage with a good rate:
1) Pay at least the minimum on all your bills on time.
2) Pay extra towards the balances with the highest balance:limit ratio. Get them all under 75%, then all under 50%, then all under 25%, then all under 10%. Higher than 0 but less than 10% of your limit seems to be the optimal range for maximizing your FICO score.

Note: This is not the fastest/cheapest way to get out of debt. The fastest/cheapest way to get out of debt would be to pay the balances with the highest interest rates first. But in your case, it sounds like your priority is to qualify for mortgage sooner and thus the FICO-maximizing approach better meets your goals.
posted by Jacqueline at 8:34 PM on March 23, 2010

I certainly agree with most of what's above. Rent now, and pay down your debt.

Nobody has mentioned, though, that you can do this through a certified credit counseling agency. What is great about this is that they can negotiate low or no-interest terms with the creditors and give you a plan for paying the entire balance down in 60 months or less (if you can't do it in five years, you are pointed toward bankruptcy attorneys).

Of course, you can also negotiate with them yourself, but I imagine that $70K is across a lot of different lenders, and often one won't budge unless others do too. You're holding so much debt, you see, that you're a bad risk to the creditors you already have.

1. Find a place.
2. See a credit counselor.
3. Work out a budget that you can comfortably live on and repay the debt.
4. Continue to explore ways to increase your income or minimize your expenses while keeping your sanity intact.
5. Reach debt freedom.
6. Save for a big down payment (20% at least).
7. Now look for a house.
posted by dhartung at 9:38 PM on March 23, 2010

I love questions about strategy! It seems to me that you have two objectives. First, you want to be living in a house. Second, you want to be accumulate wealth - i.e., stop throwing money away.

I'm going to assume that financial considerations aside you'd be just as happy in a house with a long-term (i.e., not monthly) rental rather than a house you own. This isn't true for everyone - some people like the sense of security that comes with ownership. But some people are very happy knowing that it's easy to move someplace else if their circumstances change. So I'll assume that the goal of "living in a house" is satisfied by either rental or purchase.

OK, so the way I would rephrase your question is: will you accumulate more wealth by paying a mortgage plus an extended period of credit card interest, or by paying rent and shortening the period for which you pay credit card interest, and buying a house later.

The thing about house buying is that rent is very often not enough to pay the cost of a mortgage. In fact nowadays it usually isn't enough to pay the cost of a mortgage! The owner is just trying to cover some of the his or her costs while waiting for the value of the house to rise. As we now know, this is a risky plan. So when you rent a house you are actually getting partially free accommodation. The property owner is subsidizing your stay! In fact, a renter who invests in things like index funds might be able to buy a house outright before a property owner has paid off his or her mortgage. And you are in an even better position. Here's why:

I don't know what interest rate you're paying on your credit card debt, but let's say it's 20%. That is much, much, much more than you could expect to get on average unless your name is Warren Buffett. But, by paying off your credit card debt you are effectively earning that much! It is as if you have suddenly become a very smart, very lucky investor from Nebraska.

So, here's my answer: find a nice rental house with a back yard for the dogs. I suspect that it will be easier than you think, now that the market's tanked. Put as much money into paying off your credit card as you can. If you're paying 20% interest then it's as if your money is tripling every six years. Don't think of it as punishing yourself ("paying back my debt"). This is an investment. You are making the smartest investment you can possibly make. And once your cards have been paid off, decide if you want to keep renting or perhaps buy a house of your own. If you decide to purchase you'll get a better rate on your mortgage because you will be debt free.
posted by Joe in Australia at 10:35 PM on March 23, 2010 [2 favorites]

Have you considered filing for bankruptcy?
posted by snowjoe at 12:15 PM on March 24, 2010

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