What to do next?

[fosterj]

Hi all,

Here's our situation:
Currently my wife and I are renting in our apartment building and have been for the last 10 years..but the time has come where we just can't stand it any longer, we need a house. We have a 2 year old daughter and are planning on having another child next year. We need the extra space a house will give and also just need the change, we've been renting way too long.

We have:

• multiple bank accounts at 4 different institutions (total $40/month in account fees)
• 3 credit cards that tally about $10K (all maxed out) with 18-20% interest rates on the cards (about $600 month just to pay the monthly all together)
• A car loan for $27K ($600/month)
• My student loan $7K left ($70/month)
• we have a low credit score..(not sure on the exact..just know it's low)
• no savings to speak of.. $20 in one of our bank accounts till the next paycheck comes in tomorrow.

I make about $41K per year at my day job and my wife $17K per year. I also run a small business evenings and weekends that generated $10K last year.

That about sums up our picture... so what we are trying to figure out is how to get to that house we so desperately need/want, but also to clean up our little financial mess of living paycheck to paycheck with never a dime to spare.

So our first step we believe is to get rid of all these bank accounts, just choose one bank and move everything to them and also hopefully get a mortgage through that bank as well. We basically picked one two weeks ago and made an appointment to talk to their mortgage specialist.

All fine and dandy.. basically they told us (after the credit check)..yep if you can come up with the down-payment and closing cost we will approve you.
So that works out to about $15000 we need to make this happen.

Here's the problem... how do we come up with $15000? Living paycheck to paycheck we have tried to put money away before but it's dam near impossible. I'm all ready stressed out working days/evenings/weekends all hours of the day and night to keep my day job and small business going..and that's just to make ends meet day to day with nothing left to spare.

Some thoughts I've had was:

• going to another bank and trying to get a low interest line of credit..for say about $25000..use it to pay off the credit cards and the rest for a down payment.
• just stay in this apartment another year.. pay off those credit cards by hell or high water..and save save save.
• problem with waiting a year..the next time we go to the bank my wife would be on maternity leave and we'd have a lot less money to work with.
• sell the car and get a cheaper one.. but the problem with that is it won't pay off the car loan..so we would still be paying on that loan for a few more years
• talk to a mortgage broker and see what they say...

Anyway just looking for thoughts, opinions, experiences, etc.. anything that you may think would help us get there.

thanks
-Jeremy

[ea1776]

Hi Jeremy,

Why do you pay $40/month in bank account fees? Yeah, I would definitely consolidate to one institution that has free checking, online banking, etc. without fees.

With your situation, you may consider selling your car, and switching to a cheaper car. 27K is a big car loan for your income level.

I would continue paying only the minimum on your student loan for now, until you have an emergency fund in place and the CC is paid in full.

I would STOP using any credit cards.

I would do a budget, so you know exactly where all of your money is going each month, and so you can therefore manage it better.

Cut back on any luxuries (eating out, other expensive things) and try to find less expensive things to do for fun (local library, bike rides to the park, etc.).

Think of ways to cut back on expenses (i.e. cut coupons, take the bus, eliminate monthly subscriptions and go to library).

Also, I think you should have an emergency fund in place before purchasing a house (at least 2 months worth of expenses), put away in a high yielding savings account.

I'm sure others will chime in with advice. Good luck!

[disneysteve]

We have:

• 3 credit cards that tally about $10K (all maxed out) with 18-20% interest rates on the cards (about $600 month just to pay the monthly all together)
• A car loan for $27K ($600/month)
• My student loan $7K left ($70/month)
• we have a low credit score..(not sure on the exact..just know it's low)
• no savings to speak of.. $20 in one of our bank accounts till the next paycheck comes in tomorrow.

what we are trying to figure out is how to get to that house we so desperately need/want, but also to clean up our little financial mess of living paycheck to paycheck with never a dime to spare.

Here's the problem... how do we come up with $15000?

Jeremy, I have to say it doesn't sound like you are in any position to be considering buying a home right now. You've got 3 maxed out credit cards (which is part of why your credit score is low). Despite having no savings, you took out a $27,000 car loan which is insane IMO. And you are living paycheck to paycheck. Even if you could magically come up with a downpayment, how would you afford the ongoing expenses of owning a home - mortgage, taxes, insurance, maintenance and repairs, furnishings, etc.?

You need to stop living beyond your means. You earned a decent income of 68K last year (I don't know where you live so I don't know how good that is). Sell that overpriced car and buy something for perhaps $5,000 or less. Review your spending to the penny and figure out what you can cut out - cable tv, dining out, extra features on your home phone, cell phone service, new clothes, movies, magazine subscriptions, etc. Then start putting every spare penny toward repaying those credit cards to get the balances down, which will help your credit score. Then you can start building some savings.

Unless you can significantly increase your income, I really don't see a house being realistic in the near future.

[LivingAlmostLarge]

Car's driving you into the hole. Gotta sell and get out from under it. Maybe one day you can afford it but not right now.

[fosterj]

Thanks for the replies.
As for the bank fees.. we kept opening accounts whenever one bank would give us a loan, or credit card over another bank... in the end all the banks here, except 1, have monthly fees on their accounts.

Here's the problem with our car situation:

Back in 2002..we bought a 1998 Sunfire (purchased with a loan for $15000).. the car payments were $300/month. But the repairs would run us close to $500 month.. (or two months would go by and then a $1000 problem would occur). Just to keep the thing on the road we were going broke fast, plus you were always worried about what would happen next.

In 2005 we traded the 98' sunfire for a 2005 Mazda3 (four door as we were expecting our first child at the time).. We consolidated 1 credit card and the remaining $5K of the sunfire loan with the new car loan.

We walked out of the dealership the summer of 2005 with a a brand new car and a $40K loan. ($295/biweekly)

While this seemed good at the time (fixed car cost..no surprises) we didn't plan well enough for the near future. 7 months later my wife was on maternity leave and money got extremely tight.. this lead to maxing out all the credit cards just to keep on top of the monthly bills and the expenses of a new baby.

Currently we owe a remaining $27K on that consolidated car loan. To sell the Mazda3 right now would net about $17K (that's what they are going for locally in the paper)...that still leaves us with a $10K loan and no car....not a position we can be in as the wife uses the car in her daily job.

I would love to sell the car (although I would recommended Mazda3 to anyone that wants a great reliable and fun to drive car, no complaints) and get the savings there... but I can not go back to the situation we were in before of the surprise repair bills every few months.

I take the bus while my wife needs the car for her day job..she uses it during her daily work routine, so we need to have some sort of car.

I'm leaning towards..just the account consolidation and save as much as possible while paying off the credit cards for another 6-12 months.

But it's hard to do when you know the bank has already said..yes here you can have a house right now, just find a way to get the down payment.

edit-----
on a side note: When I went to drive the sunfire to the dealership for the final deal.. the rear-end brakes let go..with a loud bang and the service car light came on... I drove it to mazda parked it handed the keys over and drove the new car away... This was after the week before when we were on vacation with the sunfire..and the water pump broke in a French community on a long weekend....(we don't speak a lic of french)... in the end that was almost a $2000 repair job after driving 5 hours to get home by filling it with water every 30mins...

fun times...

[DebbieL]

I agree with DisneySteve, you can't buy a house right now, and I'm not sure you have the discipline to keep up with all the associated costs that ownership brings anyways. You have been renting for 10 years and saved nothing.

Your income seems okay (depending on your area). What are average incomes where you live? I think it is a spending problem, as opposed to an income problem. If you live in an extremely high cost of living area (like me) then I might look more at the income side of things. The bank really doesn't care how tight things will be for you, so who cares if they are "willing" to give you a loan if you can come up with the downpayment? They will foreclose if you fall behind, and then you'll have nothing anyways.

I'll use my DH and I as an example for you. Where we live it is well over half a million (actually the average is over $600K) right now for the average price on a house. It's ridiculous. The average HOUSEHOLD (not individual) income is somewhere in the low 60K's range. Our combined income is currently close to 90K, and we wouldn't buy a place if you put a gun to our heads. Being house poor is not on my list of things to do. I also have a daughter. Just last month I sold my car (a 2003 Corolla) and am now commuting to work and college by bicycle. My husband still has his vehicle. We save money every month (I save over 1K monthly just from my income). We rent for just under $900/month, so for us to buy would make no sense right now. We will consider it when prices come to a more sane level, and we have a HUGE down payment.

You need patience, and the discipline to start saving your money. A house is WAY more expensive than you probably think with all the maintenance and taxes, etc. Just wanting a house isn't a good enough reason to justify buying a house. Heck - I want one too, just not badly enough to sign my life away on a huge mortgage (and yes, I'm sure the bank would be MORE than happy to "help" DH and I out with a mortgage too).

[disneysteve]

But it's hard to do when you know the bank has already said..yes here you can have a house right now, just find a way to get the down payment

Despite the whole real estate bubble and sub-prime meltdown, there are still banks and mortgage companies willing to lend money to anyone with a heartbeat apparently.

JUST BECAUSE THE BANK IS WILLING TO LEND YOU MONEY DOES NOT MEAN YOU CAN AFFORD TO BORROW IT!

[fosterj]

Thanks Debbie.

What you guys are saying does make a lot of sense.

As for saving money... I can save and I know we can do it if we set that goal. Last month I had $2500 saved since January because I knew I would need it in April... Government came and took it all at tax time... $1500 my business had to pay in..$1000 personal income tax I had to pay in.

The going rate of the houses in the area we are looking at is about $170K.

We currently pay $860/month renting vs. about $1200 for owning a home locally (according to the bank we talked to) ... on paper it would seem if we could get rid of the credit cards ($600/month payment) we could swing the monthly home owning costs.

I know paper is not always the same as the real deal. I have a excel spread sheet system I use to track our weekly expenses and have been for 2 years now, but I admit I can't always stick to the plan..expenses come up you just don't expect.

[disneysteve]

Are you saying the mortgage payment would be $1,200? If so, keep in mind that actual ownership costs can be about 40% more than that, so more like $1,700/month when you add in insurance, taxes, maintenance and repairs. Plus a bigger place means more furniture, window treatments, higher utilities, cleaning costs, etc.

I agree that if you were rid of the CC debt, that would help tremendously (and it would raise your credit score), but until that is the case and you are saving money every month, a house just isn't realistic. Once the CCs are gone, you could save that $15,000 downpayment in about 2 years. Faster if you find other expenses to cut. Maybe then looking at home ownership might be more reasonable.

[fosterj]

disneysteve,

thank you also for your comments... I want to assure people I know we shouldn't just do it because the bank says we can. And I'm fairly confident the only way out is what has been said here and I thank you all for that advice.

It's exactly what I was looking for.. just some re-assurance that the best way out of this mess is the way I was initially thinking. SAVE SAVE SAVE.. and get rid of the credit card debt and maybe the car if it's possible.

But you never know if there are other viable options or not unless you ask, correct?

again thanks.

[DebbieL]

You are on the right track - save! Once your debt is tackled and you have gotten into the savings habit, then I would revisit the idea of purchasing a home.

PS - I envy you. I wish houses were $170K here

[ea1776]

But it's hard to do when you know the bank has already said..yes here you can have a house right now, just find a way to get the down payment.

I know what you mean, but lenders don't determine whether or not you can afford something. You should be the one planning and figuring out whether or not you can afford it.

Do some meticulous long/short termplanning, take extreme quick actions to reduce your debt, and you'll find you can dig yourself out of this financial mess faster than you think. If nothing else, planning things out will make you much less stressed out, and will give you a sense of control over your presently-out-of-control finances.

Again, good luck!

[jIM_Ohio]

Get Organized. Here is what you need to do:

List all bills each month. Include the CC minimums
List all monthly income. Only include money which comes in steadily each month.
List additional income seperately if it is sporadic.
Do you get a tax return? How much?
List all debts. list them in the following way

Highest interest rate debt amount minimum monthly payment
next highest interest rate debt amount minimum monthly payment
next highest interest rate etc...

If you have 20 debts, list all 20 on one line at a time.

Each of these issues is a different problem.

You need a budget (problem 1) and will need to look to optimize spending and remove spending from the budget.
The budget should be based on a fixed income. Maybe the income from your second job is sporadic- do not include this unless income is reliable.
The debts organization will help you get rid of most bills the most efficient way possible.

Once you lose the debt, apply that money towards the 15k for house savings. Compare rent with house prices and then make good money decisions.

I would like to point out you are in your situation because of bad financial decisions. Step 1 when you dig yourself into a hole is to STOP DIGGING DEEPER. Make better decisions financially based on how you SPEND. Most people do not have an income problem, they have a spending problem.

At 68k, you make more than close to 50-75% of the people in this country. SERIOUSLY. Cap spending and see what you can squeeze out of the current spending you have.

[MelC]

I agree that you are not ready to buy a house. There has already been a lot of good advice posted so I wont repeat it again.
Once you are ready (paid down some debt, car paid off), try looking into a government loan:
ww.hud.gov
I recently got an FHA loan and I do know they do not take into consideration your credit score. This loan worked best for me because it had low interest and it qualified me for assistance with paying the closing costs. I didnt pay anything for closing costs.
I have been waiting to buy a house for a couple years now but wanted to be in the right spot financially first. I waited till my car was paid off and my credit cards were also paid off. My only debt when buying my home was my student loans. It felt so good to start off my life in my new home with no debt. I am on the payment plan to pay off my house in 15 years (by making 2 extra payments a year) instead of 30. If you wait till you are ready, it will feel so much better when you do finally carry your wife over the threshold into your new home

[maat55]

Thanks for the replies.
As for the bank fees.. we kept opening accounts whenever one bank would give us a loan, or credit card over another bank... in the end all the banks here, except 1, have monthly fees on their accounts.

Here's the problem with our car situation:

Back in 2002..we bought a 1998 Sunfire (purchased with a loan for $15000).. the car payments were $300/month. But the repairs would run us close to $500 month.. (or two months would go by and then a $1000 problem would occur). Just to keep the thing on the road we were going broke fast, plus you were always worried about what would happen next.

In 2005 we traded the 98' sunfire for a 2005 Mazda3 (four door as we were expecting our first child at the time).. We consolidated 1 credit card and the remaining $5K of the sunfire loan with the new car loan.

We walked out of the dealership the summer of 2005 with a a brand new car and a $40K loan. ($295/biweekly)

While this seemed good at the time (fixed car cost..no surprises) we didn't plan well enough for the near future. 7 months later my wife was on maternity leave and money got extremely tight.. this lead to maxing out all the credit cards just to keep on top of the monthly bills and the expenses of a new baby.

Currently we owe a remaining $27K on that consolidated car loan. To sell the Mazda3 right now would net about $17K (that's what they are going for locally in the paper)...that still leaves us with a $10K loan and no car....not a position we can be in as the wife uses the car in her daily job.

I would love to sell the car (although I would recommended Mazda3 to anyone that wants a great reliable and fun to drive car, no complaints) and get the savings there... but I can not go back to the situation we were in before of the surprise repair bills every few months.

I take the bus while my wife needs the car for her day job..she uses it during her daily work routine, so we need to have some sort of car.

I'm leaning towards..just the account consolidation and save as much as possible while paying off the credit cards for another 6-12 months.

But it's hard to do when you know the bank has already said..yes here you can have a house right now, just find a way to get the down payment.

edit-----
on a side note: When I went to drive the sunfire to the dealership for the final deal.. the rear-end brakes let go..with a loud bang and the service car light came on... I drove it to mazda parked it handed the keys over and drove the new car away... This was after the week before when we were on vacation with the sunfire..and the water pump broke in a French community on a long weekend....(we don't speak a lic of french)... in the end that was almost a $2000 repair job after driving 5 hours to get home by filling it with water every 30mins...

fun times...

I agree with Steve, you need to focus on getting out of debt and sell the car. If you really get after it you can get rid of these debts fairly quick. Then you can save for an EF and down payment.