Home Buying Advice - Getting finances in order (Manassas, Woodbridge: short sale, rent)

[Forehead]

All,

Thought I'd put this out there. My wife and I aren't planning on moving for 3-4 years, but I'm kind of a planner and really like to get things in place well in advance, so I thought I'd ask this here.

We currently have a TH in Lake Ridge (Woodbridge) that we purchased in 2006, the peak of the market. It has lost a lot of value since then and we're definitely upside down on it.

We both have good solid career jobs, I'm a Fed and she's an In Home Counselor/Social Worker. We make decent salaries and do not have trouble meeting our financial obligations at this time so I'm not factoring in the potential for job loss, etc. when asking these future based questions.

I want to move back into Fairfax County, for a variety of reasons. I grew up there, but that's not really important. My main concerns are getting my commute time shaved down (work downtown), not affecting hers too much (Manassas) and getting my children (current and future) into a better school system. I've done some research and it seems like the elementary schools in PW County are just fine, but the secondary education is inferior. Our only child to this point is 5 months old, so we have some time, we're not in a huge rush.

I'll probably be asking a series of these questions over the next few years, but this one is generally about finance. What is the best course of action for increasing the amount of money that a lender will provide to you? I'm trying to weigh all this out, between paying down current obligations (Student Loans, car, etc.) or paying down our current mortgage, or just saving money for a higher downpayment. Which one helps you the most, makes you more attractive to lenders?

I've used some of those online mortgage calculators, the "how much house can you afford" things, and they give me back estimations that seem awfully low. When I use them, I haven't been including debts that will be paid off in 3-4 years, like the car, and it still seems like I'm usually given a number that is around what we're already paying on our TH. And we're saving some money each month, so it seems like the numbers ought to be higher.

I haven't been on this forum long enough to figure out protocol for posting numbers. I don't mind posting approximates, but I didn't know if people put up their monthly incomes, bills, etc, or if it was considered tacky.

Thanks in advance for the help.

[weezycom]

Paying off a car loan helps, but since cars are an ongoing expense for repairs or replacement, that isn't as big a deal as keeping current on car loans. Loans that can be paid off without recurring similar bills arising are better to pay off (student loans, credit card for a large purchase such as appliances, etc.).

Paying down your current mortgage to get out from underwater and then saving for a bigger down payment these days is probably the best way to get into a larger loan.

[Forehead]

Originally Posted by weezycom

Paying off a car loan helps, but since cars are an ongoing expense for repairs or replacement, that isn't as big a deal as keeping current on car loans. Loans that can be paid off without recurring similar bills arising are better to pay off (student loans, credit card for a large purchase such as appliances, etc.).

Paying down your current mortgage to get out from underwater and then saving for a bigger down payment these days is probably the best way to get into a larger loan.

We pay off our credit card each month, that was drummed in by my parents early. So no issues there, though we are trying to keep our spending down on it to save more.

Regarding the underwater townhouse. If you sell a place for less that you owe, do they just add the difference to your new mortgage on your new home? Just curious...we had originally thought about renting it out, but I'm not sure the rent we could get for it would cover the mortgage payments, and I'm not sure I want to go through the hassle of being a 1st time landlord.

[HokieFan]

The amount you qualify for is based upon your debt to income ratio.

So basically, the more debt you can get rid of, the better. There are two arguments when going about this.

One is to make the minimum payment on your larger debts so that you can increase the amount of payments on your smaller debts and eventually eliminate those. Get rid of your smaller debts first.

The other argument is to first pay off the debts that have the highest interest rates.

Personally, I prefer to pay off the smaller debts first and then put that extra money towards the larger debts.


Also, if possible, perhaps pay a little extra on your mortgage payment each month. This will help build more equity into your home and which may help you have a larger down payment.

And of course, the amount you qualify for is not necessarily what you can afford as they don't account for other monthly expenses such as utilities, groceries, insurance, cell phones, etc. etc...

I recently purchased a home (in Lake Ridge!) and I used Liz McElroy with SunTrust Mortgage out of Fairfax. I recommend her. She is awesome.

[ajzjmsmom]

Originally Posted by Forehead

We pay off our credit card each month, that was drummed in by my parents early. So no issues there, though we are trying to keep our spending down on it to save more.

Regarding the underwater townhouse. If you sell a place for less that you owe, do they just add the difference to your new mortgage on your new home? Just curious...we had originally thought about renting it out, but I'm not sure the rent we could get for it would cover the mortgage payments, and I'm not sure I want to go through the hassle of being a 1st time landlord.

I am not in finance but wouldn't think the difference from the old mortgage would be added to your new mortgage, I would think you would have to pay off what is owed.

[lindy112]

Originally Posted by Forehead

Regarding the underwater townhouse. If you sell a place for less that you owe, do they just add the difference to your new mortgage on your new home? Just curious...we had originally thought about renting it out, but I'm not sure the rent we could get for it would cover the mortgage payments, and I'm not sure I want to go through the hassle of being a 1st time landlord.

If, in 3-4 years, you're still underwater, you'll need to bring money to closing yourself or do a short sale. Each mortgage is its own entity and can't be combined with a new purchase.

[oneasterisk]

You might have some better luck posting the mortgages subforum: http://www.city-data.com/forum/mortgages/

Your best bet is to speak to a mortgage lender, but with that being said... I'd imagine your debt to income ration would be pretty important in figuring out what the bank is willing to loan to you. Even though you have a high salary does not necessarily mean the bank will loan a ton of money to you if you also have a ton of debt. I would pay off as much debt as you can (Car loans/Credit Cards/School Loans etc). I like to use this calculator (Prudential Carruthers Realtors | Finance Calculator: Mortgage Qualifier), see how changing your credit card debt changes the scenario.

Lower debt to income ratio will also raise your credit score since it is a large percentage of how your score is calculated (Your Credit Score: How Creditors Calculate Your Worthiness). A better credit score will allow you to get a better interest rate allowing you to have a lower monthly payment.

The online calculators are also assuming that you not pay more than 28-36% of your income on housing costs.

Without a 20% down payment, your lender will also charge you PMI (Private Mortgage Insurance), so saving for a sizeable DP will allow you to save that fee, thus reducing your mortgage obligation.

[HokieFan]

Originally Posted by Forehead

Regarding the underwater townhouse. If you sell a place for less that you owe, do they just add the difference to your new mortgage on your new home? Just curious...we had originally thought about renting it out, but I'm not sure the rent we could get for it would cover the mortgage payments, and I'm not sure I want to go through the hassle of being a 1st time landlord.

I doubt that they would add money from a previous mortgage to your first mortgage. You would probably have two mortgages on your hands.

But if you're waiting 5 years or more, the market will most likely have improved, you will have paid down your mortgage (this is where paying extra each month helps) and hopefully, you will not be upside down but instead have some equity.

[Forehead]

Alright cool, good feedback here. I want to stress again because I've seen one or two people post this, we don't have credit card debt, we pay our card off each month. That's not the issue. By far our biggest expenses are our current mortgage and childcare.

Like I said, we're not in bad financial shape at all, but I want to lay out a plan for the next 3-4 years so that I don't have any headaches when the time comes. Some things I know, such as the 20% threshold for PMI, and some things I don't, such as not being able to roll the difference on an old mortgage into a new one. Not that I want to pursue that course of action, but I do want to know my options.

But it's good to know...I had figured I might just worry about paying off other debts like student loans from grad school and the car, but now that I know about the mortgage issue, I may try to concentrate on that a little more as well.

[Claire2900]

Since your child is 5 months old, you're paying top price now based on age. Once your child reaches 2, the price should drop a nice amount per month. Since you're used to paying that now, I would save the difference when the time comes. I wouldn't use this to pay down your mortgage since your upside down now and if you have an emergency, the funds would be readily available.