Should I Buy a House if I am in Debt?

Question

My husband and I have $36,000.00 in credit card debt with an average interest rate of 6.7%. We can only make minimum payments on this debt. We have about $3,000 in savings, and are 30 years old with 3 children, the oldest is in kindergarten. We both work part time 12-18 hours a week, and my husband works full time. We manage to bring home $38,000.00 a year.

Is now the time to buy a house?!

Thanks,

Rebekah

Answers

Before I answer this question, I’d like to share answers from my peers.

Here’s the response from Mrs. Micah

Can you afford a mortgage payment, private mortgage insurance, and a down payment? Will you be able to pay for repairs? Is your credit score good enough to get you a good interest rate?

There are far more factors to consider when buying a house, but from what it sounds like you’re in a situation where the answer to those is probably “no.” This may be a “buyer’s market,” but unfortunately that doesn’t mean we all can buy (my husband and I can’t either). Once you’ve made greater inroads into your credit card debt and aren’t stretched to make minimum payments, then it’ll be time to ask those questions again. You don’t have to be out of debt to buy, but you do need cash flow.

If you’ve been living in an apartment and feel you need a house, you may be able to find one to rent. If you could afford the rent for it, you shouldn’t have to worry about maintenance costs, private mortgage insurance, points, down payment, and all the little additional expenses that come with buying houses. That’s a halfway solution that several of my friends who aren’t yet ready to buy houses have used.

Here’s the response from Plonkee Money

Whether it’s time to buy a house depends on whether you can cut your housing costs significantly by doing so. A sensible mortgage would be no more than $110k to $140k resulting in a mortgage payment (not including taxes) of around $600-$850 a month. Is this a lot less than you are paying in rent? — because you’d need to budget for maintenance and tax and so on. Do reasonable, in your case I’d guess 3 bedrooms, properties in your area come up in this price bracket?

If it doesn’t cut your housing costs significantly to buy, then given that you have no down payment and need to put more money into paying off your credit cards, and build up more of an emergency fund you probably can’t afford to buy. Mrs. Micah’s suggestion to look at renting a house is a good one. If you’re currently in an apartment, I can see how you’d want more space; especially outside space perhaps renting a duplex or townhouse would be a good idea (I’m biased, they are by far the most common sort of housing that people live in where I am in England).

It’s never a good time to buy if you can’t afford to do so — no matter how much property prices fall. Getting more space for your money, however, and a good living environment is a reason to consider moving to a house particularly when you have kids — renting has many advantages, not the least of which is flexibility.

Here’s the response from Patrick at Cash Money Life

At first glance, I would say probably not. In the current lending environment, lenders are looking for homebuyers to make a 20% down payment on the home to qualify for a home loan. Unless you can come up with that 20% down payment, it will be extremely difficult to get a home loan.

The other thing that may work against you is your credit card debt, which is almost as much as your annual take home pay. Lenders will look at several factors when determining whether or not to offer you a home loan, including your income, credit score, how much you currently owe, and other factors.

My best recommendation for you is to improve your credit score and try to knock down your current credit card debt. In a few years you may be better prepared to purchase a home. Dave Ramsey offers some good tips on how to get started if you are looking for a good place to start.

Here’s my response

Thank you for asking your question. Given that you and your husband have sizable credit card debt and a small amount saved, I think it does not make sense to even consider buying a house. Unless, and this is far-fetched, you can free up significant amount of money each month by owning a home — i.e., your eventual mortgage payment is much cheaper than your rent.

I think a better course of action is to look at how you can improve your cash flow, reduce your debt, and increase your savings. I will again refers to the first three steps of Dave Ramsey’s Seven Baby Steps:

  1. $1,000 in an emergency fund — you have this already…good job!
  2. Pay off all debt with the Debt Snowball — You may want to start my looking at my 7 steps debt reduction guide and even consider using $2,000 out of your savings to pay down your most expensive (e.g., high interest rate and fees) or completely eliminate your smaller credit card balances.  Hopefully, this will also help you improve your cash flow.
  3. 3 to 6 months expenses in savings – Once your credit card debt is gone — and this could take a few years — be sure to build up your emergency fund

In addition to these three steps, you’ll want to do what you can to reduce your spending and increase your income. This will allow you to pay down your debt even faster.

I am sorry that these may not be the answer you’d hoped for, but this is how I would do it if I were in your shoes.

About the Author

By , on Feb 19, 2009
The following is a question submitted by our reader. You can see all questions submitted here, and submit your question here. Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a financial expert as needed.

Leave Your Comment (17 Comments)

  1. Bernice Matthews says:

    URGENT Iwant to our purchase a home for me and my family. I have a 20% down payment. No credit card debt. I make $80,000 a year. The house I want to purchase is $440.00 However .my fiancée is temporary laid off and receiving unemployment benefits. He is iron worker and in a union. They have laid off periods every year. He collects from a special. Fun. Can we afford. To buy a home. He also has credit card debt.$20,000 and a loan #$18,500 he pays @ $756.00 per month. We have put an offer on a home and waiting for a response from the bank.

  2. Eric Myers says:

    Thanks for a great analysis. I think its very important to ensure you can afford the decision you make regarding a home. If handled improperly it can put you further into debt and only worsen your situation. With that in mind, I think it can be a wonderful time to buy as prices are lower than theyve been in years and the many available government grans really make it a wonderful time to purchase a home.

  3. Brenda says:

    I want to put my house in my husband name (or should I sell it to him)? I owe $48,000 on my house. I am unable to refinance, because of my recent bankruptcy. He only makes 8.50 an hour with o.k. credit will someone finance him? By the way my house is a vendor lien purchase. The owner wants me to put the house in our name.

  4. David says:

    I have a client in the same situation also wanting to buy a house. Thanks for providing such a great explanation that backs me up in the advice I will give him.

  5. Anna James says:

    Do you know of any bank or financial company that will allow you to buy a home and combine your credit card debt with that purchase so you can have one bill to pay.

  6. KG says:

    I would agree buying a home right now is not the best choice for these people. This a recipe for foreclosure. Also, with the tightening lender requirements, banks are not going to be favorable to these people. Getting rid of this unsecured debt seems much better.

  7. Golfing Girl says:

    Minimum payments on credit cards, maybe 1 month of emergency fund, and you’re thinking of buying a home? Are you for real???? NO. Let me repeat, NO you’re not ready to buy a home!!

  8. Jules says:

    It’s a definite “no”, although you guys did a great job of explaining why. That said, the US situation is slightly different to the UK situation Plonkee and I would be more useful. Here foreclosing on the mortgage would lead to even bigger debts if the house was in negative equity – you can’t toss over the keys here, the debt to the bank stays with you even after the house is gone!

  9. Corey says:

    Sorry, but I agree with most of the comments already posted. I understand the desire to purchase a house while interest rates are so low, but without a significant downpayment, you would just be adding to current foreclosure problems. Wait until you have a positive net worth to make such a significant investment.

    In the mean time, if you would like to take advantage of low rates. take out a loan to pay off high interest credit card debt using an unsecured loan from a peer lending site like lendingtree.com. This will help you reduce your interest rate and pay off your debt more quickly, so maybe you will be in a better position to buy a house before interest rates climb.

  10. Wow – a lot of words written in the name of diplomacy. I would have said four things: (1) With your negative net worth, you are already one lost job or medical condition away from bankruptcy; (2) the mortgage rescue plan was designed for people in your situation so be grateful you don’t need to be rescued; (3) please go take a class or at least read a book on personal finance; and (4) in response to your actual question about buying a home, emphatically “NO.”

  11. James says:

    NOOO!!! The people in question in this post are not in any position to buy a house. Pay off as much of your debt as you can and try to get a full time job or another part time job. They simply do not have the income level where buying a home makes any sense.

  12. tom says:

    Agree with SP.
    Like what are they doing to do if one of them loses a job? or gets sick or injured on the job?

    What is the recession becomes worse and the bank wants you to pay up all your debt now, what are you going to do then?
    What if they raise the interest rate on your debt you have now?
    What if one of your kids gets sick, or worse and you need to pay medical bills and take time off?

  13. Rob says:

    Massive, crushing credit card debt and only part-time income from one spouse? This would be a big negatory to buying a house. Once the debt is gone ( All of it ), and a reasonably savings account is in place, it may be time to revisit taking on a mortgage. Until then, it’s time to work more ( that’s right, Ms. Part Time worker, you’ll have to squeeze it in somehow ) and attack that debt. A mortgage and a home, with all the extra expenses it brings, would only compound your problems… and likely end up with you in bankruptcy court. Or worse, divorce court! Financial problems can create all kinds of stress on even the best of marriages. So in short, I say no way, not a chance, nuh-uh, run away.

  14. SP says:

    My response: “Are you kidding me?”

    Ok, you guys were all much more tactful, but this is the type of thing that got us into this mess. People that weren’t ready to buy houses, bought houses. They either couldn’t afford them to start with, or circumstances changed a bit, and they couldn’t afford them on new circumstances.

    Luckily, this reader is taking time to seek advice and thinking this through, something others didn’t do (or they did, and they got the wrong advice). And the bank probably wouldn’t loan out the money anyway (which they would have a couple years ago).

    They have debt almost equivalent to 1 yrs pay. They have little downpayment and really, they just stated how much cash they had, it probably shouldn’t go to downpayment, probably should be kept around for an EFUND.

    Take a deep breath, and wait it out.

  15. tom says:

    I agree there is no way it makes any sense to purchase that house at this point, i say increase your income, pay off the debt and eventually you will need to worry about putting your kids through college.
    And I am sure they dont want to end up living on the street when they arent able to cover the mortgage.

  16. RJ W says:

    As interest lower, the higher home prices tend to get. Since interest rates are very low now, history would suggest that home prices, depending on the are of the country you live in, still have room to go down.

    The advice given was great. Wait a year or two. Build an emergency fund. If you need more room, rent a house. There are plenty available.

  17. Chiko777 says:

    I think it depends on a lot of different things like how much the house is going for? Can you afford the down payment? Can you afford the monthly payment? and more. There are some question that need to be answered for a more accurate answer to be provided.

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