Should I Buy a House if I am in Debt?

Question

My husband and I have $36,000 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 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 a 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 refer 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 by 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.

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