Pre-existing Debt Predicament (PMI, home loan, interest rate, approve)

[jzamorski113]

I've been lurking around a while, but finally made an account to ask a question.

My girlfriend and I are going to be looking to buy a house in the winter. Our lease is up on our apartment in November, but we can go month to month after that.

My main reason for posting is because I want to make sure all of our finances are in order before we start the process.

We will be applying for the loan together (I will be proposing to her soon, but shh).
Combined gross is around 90k depending on if bonuses get included or not.

We are currently living together and pay 925 in rent +75 for parking +utilities.
Also we both have student loans which won't be paid off too soon. I have about 55k in student loans. My parents and I both pay $470 a month towards them, which is double the amount in hopes to pay them off quicker than 10 years(8.5 remaining).
My girlfriend has much less student loans as she was very fortunate to have her parents pay for the majority of her education upfront. Her loans are $200 a month, but she pays $400 a month.
We also both have car loans of $315 a month, both with about 10k left on them.

Currently we have about 35k in savings combined, and I have about 45k in investments that I can sell for a home.

Using some online calculators, it doesn't look like we would qualify for much of a house, even with using a very large down payment, mainly because of all the outstanding debt. The loan amount would be 160k +whatever down payment.

My main question here would be...we could pay off both car loans in full, which would free up $630 in monthly debt obligations.

Using the same calculator, we would then qualify for a 290k loan plus down payment amount.

Does this seem to be the better way to go? Obviously by the numbers it is, but my main concern is that we don't want to deplete all the savings/investments that we have, because the majority of the homes in our price range and search area need some updating.

If we pay off the auto loans, we'd probably have to go with an FHA Loan or apparently there is a new Pennsylvania Home Loan program ( http://www.phfa.org/forms/newsletter..._April2012.pdf) that looks like it could be a good option since it does not require PMI (depending on the rates).

Anyone familiar with this or could offer any friendly advice? We'd like to qualify for a good amount, but set our budget lower so that we are not house poor.

[karen_in_nh_2012]

When I was looking for a mortgage back in January, I checked with several lenders about what their acceptable debt-to-income ratios were, just so I would know in advance what to expect. I had paid off my car 2.5 years early a few months before, and I had zero credit card debt, so all I had was a student loan.

If I remember correctly, the maximum debt-to-income ratio was 41%. On an annual income of $90,000, that's $7,500/month gross income so 41% of that = $3,075. This is the MAXIMUM debt they would allow INCLUDING the mortgage (and the mortgage includes principle, interest, taxes, and insurance, aka PITI). Subtract your current debts from $3,075 to see what the maximum PITI is that they would approve. Assuming debts of $235 (they'll count the minimum student loan payment, not what you actually pay) + $200 + $315 + $315, that leaves $2,010 for PITI. That's the absolute maximum payment you could afford with a 41% ratio. Paying off the cars would make a big difference, but OTOH, you probably don't want to be at the top of these ratios since when you buy a house you will be looking at maintenance, lawn care, etc. (I LOVE having a house and would never want to live in an apartment or even a condo, but you have to be realistic about expenses!)

I'm curious, is the interest rate on your cars lower than the interest rate on your student loans? If the car loans' interest rates are higher, it makes more sense to put more funds toward THEM rather than to your student loans (although I know with $55k in debt, you want it paid off fast, and it's satisfying to put a lot extra on it).

Also, regarding bonuses, my lender would only count them if I had at least two years' worth and then they would average them to get an annual amount. Your employer would also have to confirm that they are "likely to continue" or something to that effect.

Hope this info helps. Good luck and keep us posted!

[jzamorski113]

Thanks for the fast response!

The car loans are both 3.9%

My student loans are actually 4 loans all through Sallie Mae, so I pay 1 amount. However 1 loan is 5.25%. The other 3 are right around 2.5%. I might look into paying off both the 5.25% loan and my car loan...and then having my parents keep contributing to the rest of the student loans.

At that point we'd almost certainly have to use an FHA loan or the PHFA loan. Looks like the PHFA loan is 3.875% interest rate now with no PMI. It doesn't show the APR's though. Where as an FHA loan is 3.5% Interest rate with a 4.5% APR.

Definitely will have to look at things further, but I am thinking the best thing to do is pay off some of the debt.

I think I'd rather stick with our budget and put less down, and be able to pay off other debt and have a nice security blanket for if the house needs upgrades.

To me, I just wouldn't feel comfortable wiping out all sources of money just to get the lower interest rate with the conventional loan.

Please feel free to suggest otherwise, as clearly I am new with this.

[breeinmo.]

Can your parents pay off the school loans and have you make the payments to them, or is paying them at all a burden for them? If its a burden, I'd say you're very lucky to have parents that will sacifice things for themselves for you. Sorry if that sounded snotty, but when you wrote your GF was lucky to have parents that paid most all of hers, I felt that it was probably yours that are owed a big thank you. I'm very torn on parents that do without to pay for weddings & schooling for their kids. Boy did I go off topic! Me, I'd pay off the cars. Most are very forgiving about school loans but not other items.

[jzamorski113]

My parents would not be able to pay off the loans, they are helping both me and my sister out by contributing each month to our loan payments. I am lucky to have parents that are helping me out. But my girlfriend went to an expensive school and all but like 15k is paid for...which is awesome. Myself, I had like 80k in loans, but I am grateful that my parents have now offered to match my monthly payment. I am not sure how long they are going to be able to help me for, because my sister's are way more expensive and she doesn't have a job yet.

Anyway, I agree, I think I'll be paying off the cars, as they are a big chunk of monthly debt, but not a high principal amount left.

[SmartMoney]

I would pay off the car loans, provided you could find something in the higher price range you could be happy in. Forget the 160K....study after study has shown many wind of paying dearly for under-buying. You're better off renting until you can afford something you want. I would get into the PA program ASAP, before you start making too much money to get in.

Please note: I did not rerun your calculations.

[jzamorski113]

Originally Posted by SmartMoney

I would pay off the car loans, provided you could find something in the higher price range you could be happy in. Forget the 160K....study after study has shown many wind of paying dearly for under-buying. You're better off renting until you can afford something you want. I would get into the PA program ASAP, before you start making too much money to get in.

Please note: I did not rerun your calculations.

Thanks for the response and good advice!