Help...I am so lost!

[ktacserv]

I am new here, not sure where to start, but I am having a hard time making wise financial decisions for my family right now. I will try to give as much detail as I can - but please ask if you have additional questions.

We are a family of four - Husband and I both work full time, and we have two young children: 22 months and 11 months.

We rent a tiny apartment right now, because we have never been able to afford buying a house. Husband and I dream of owning a home, but it seems like we just cannot get it together enough to have enough money to get one. We hate this about our lives...and want desperately to change it, but feel that we have a lot of factors that are prohibiting us from being able to save. It is beyond depressing that my husband and I both work so hard and such long hours and still see no improvement in our lifestyle from it.

I was out of work for a year, which depleted completely what little savings we had built up. I was able to get another job in August but I am making significantly less than what I had hoped to make (30k/year). My husband makes 50k/year. We have also added two children to our family within the last two years so our expenses have more than doubled, making it impossible to save.

Here are our current "debts":

1. Credit cards - we have three cards to our names (collectively). I recently paid one off completely, it only has a $900.00 credit limit but has a 30% interest rate! There is no balance remaining on that card now and it has been locked away in the safe for no one to use. The two remaining cards are:

Visa - $7950 balance ($8100 limit), 11.999% interest rate, $160 min. payment
Mastercard - $7350 balance ($7500 limit), 7.90% interest rate, $130 min. payment

I want to add that within the last year, husband and I have not used these cards at all. I have been extremely proud of us for that - it was my resolution last year to stop using credit cards and we did it. But we are only making min. payments on these cards right now so the balance really isn't going anywhere.

2. Student loans - combined we have over $90K in loans, we have gotten our payment plans down to the minimum that we can right now. Total though we are paying $600/month for our student loans.

3. Medical bills - my daughter has a very rare disease which means we are patients of one of the most expensive childrens hospitals in the country. Love the treatment she recieves, do not love the bills that come our way afterwards. Husband and I are both offered medical insurance thru work, but we work for small companies so the plans to choose from are not great. Currently we are on the best that is being offered - we have an HSA which we are supposed to use to pay the bills that come our way. The problem is that we never have enough money in the HSA to pay ALL of the bills that come to us each month. His company contributes $200/month to our HSA account, and we contribute $50/paycheck on top of that (so, realistically $300/month goes into the account). I am on payment plans with all of the doctors offices but on a normal month, our medical expenses are in the $700-800/month range right now. We are expecting this to get worse with time. We empty the HSA account each month paying what we can on the bills, often we dip into our savings account to cover some of the expenses when I get a particularly nasty phone call from one of the doctors offices about the money we owe. We have hesitated to put more of our own money towards the HSA account at this point, because we were worried that we would not use the money in time. The account rolls over and "resets" each year - and the money is use-it-or-lose it. I am starting to see the likelihood of this happening is nill...but we are new to this process so the whole thing still overwhelms me most days.

Anyway - thank you for reading all of that. I can elaborate on our other expenses if you would like, but the bottomline is that right now we have about $600/month that we have allotted towards "savings" - taken automatically from our paychecks and dropped into the savings account. We try very hard not to ever touch this money, but it is inevitable that a couple of times per month I take from the savings account to cover a medical bill, so realistically we are leaving maybe $200/month in our savings account after all is said and done.

We have previously only been making minimum payments on our credit cards, and socking money away in savings in hopes of getting enough for a down payment - right now we have less than one thousand dollars in savings. I have no idea what the bank will want to see from us in order to approve us for a loan to get a house. I have no idea what we should be doing in order to make sure our credit rating is decent - should I save money for a down payment? should I take that money and pay down the credit cards instead? Split it down the middle? How do you know what the right thing to do is? Should I be worried about the outstanding medical bills affecting our credit rating? So far...no one has defaulted us and I've been able to play nice with everyone on the phone.

We also have two cars that are about to die any moment. Realistically one of us will need to buy a car in the next year - I am dreading this and was desperately hoping it could wait until we got a house. I've heard that if you buy a car right around the time you want to buy a house, it will kill your credit and no one will approve you for a mortgage loan. True or false?

One last thing - we are expecting about $3,000K in tax returns this year. What do I do with that money to use it the smartest way possible - split it to pay down the credit cards? Put it in savings? Pay down the medical bills? A little of both - which of those things is most important?

Thank you so much for all of the advice!!

[bjl584]

OK. I would slow down and put home ownership on the backburner for the moment. You need to get your finances in order before you can start thinking about buying a home.

Please list all of your monthly expenses. And i mean everything that you spend money on. I guarantee that more than one person can recommend a place to cut back.

Do you have anything that you can sell to raise capital. A yard sale or Craigslisting some items may help you out greatly.

You have some money coming in soon from a tax return, and my instinct would be to tell you to pay down your debts with it. But, you may want to keep that money as an Emergency Fund being that you have large medical bills coming in monthly and you have two cars that are about to die. The last thing that you want to do is to finance another car when when of them dies on you.

List out everything that you can and let's have a look.

[ktacserv]

Monthly expenses:

Rent - $1350.00
Electric - $200.00
Phones - $150.00
Cable - $80.00
Student Loans - $600.00
Mastercard - $130.00 (min. pmt)
Visa - $160.00 (min. pmt)
Car insurance - $90.00

Food - $400/month (estimate)
Diapers/Formula - $250.00/month (estimate)

"Extras" (eating out, toys/clothes for kids, etc.) - $150/month

Medical expenses:

Money put into HSA account from paychecks: $100.00/month
Money taken from checking/savings to cover bills that overdraw HSA account: $400.00/month (avg)

[bjl584]

Monthly expenses:

Rent - $1350.00
Electric - $200.00
Phones - $150.00
Cable - $80.00
Student Loans - $600.00
Mastercard - $130.00 (min. pmt)
Visa - $160.00 (min. pmt)
Car insurance - $90.00

Food - $400/month (estimate)
Diapers/Formula - $250.00/month (estimate)

"Extras" (eating out, toys/clothes for kids, etc.) - $150/month

Medical expenses:

Money put into HSA account from paychecks: $100.00/month
Money taken from checking/savings to cover bills that overdraw HSA account: $400.00/month (avg)

Rent:
Well, without knowing where you live I can't say if your rent is high or not. Have you shopped around for other apartments? Considered a roommate maybe?

Electric:
It seems high for a small apartment. Unless this is how the heat is generated. Even then, I would think that this would be included in the rent.

Phones:
This is way high. Drop the texting, email, internet, etc. Cut back to a bare minimum plan for both you and your husband.

Cable:
Drop the cable.

Student Loans:
You already said that you have these down as much as possible. When is the last time that you contacted the lender about a refi or about a change in a payment plan? It may be worth a shot.

Credit Cards:
You're already making the minumum. What I am going to suggest is not a solution to your financial troubles, but it may buy you some breathing room. Have you tried to balance transfer these cards to a lower interest card? Or even a personal loan at your bank?

Car Insurance:
Again, without knowing where you live, it's hard to say if this is high or not.

The food may be on the high side as well.

I would cut out the "extras" completely for the time being.

[ktacserv]

Rent:
Well, without knowing where you live I can't say if your rent is high or not. Have you shopped around for other apartments? Considered a roommate maybe?
We shop around frequently for other places to live, this is normal for our area. I live in a very expensive area - home/rent prices are high compared to the rest of the country. Moving out of the area is not an option. Roommate is not an option, considering all four of us live in the one and only bedroom as it is.

Electric:
It seems high for a small apartment. Unless this is how the heat is generated. Even then, I would think that this would be included in the rent.
This is typical for our area and for an apartment of our size - yes, it is high. I am already on a payment plan with the electric company and have taken all of the rate-reducing incentives that they offer (lowering utility usage and so on).

Phones:
This is way high. Drop the texting, email, internet, etc. Cut back to a bare minimum plan for both you and your husband.
I realize the phone bill is high - we are on a two year contract with a very large fee to break the contract. Contract expires in one year.

Cable:
Drop the cable.
Sorry, but not willing to do that. I know, sounds ridiculous, but we have cut down as much as we are willing to. Our cable is our one and only form of entertainment, so it's staying. We work hard and feel that we deserve this one simple luxury.

Student Loans:
You already said that you have these down as much as possible. When is the last time that you contacted the lender about a refi or about a change in a payment plan? It may be worth a shot.
We re-financed both loans within the last year - $600/month is down from what we used to pay only a year ago, which was $1000/month.

Credit Cards:
You're already making the minumum. What I am going to suggest is not a solution to your financial troubles, but it may buy you some breathing room. Have you tried to balance transfer these cards to a lower interest card? Or even a personal loan at your bank?
I have been shopping around recently for a balance transfer - problem is that we do not qualify for another card that will approve us for a credit limit high enough to take one of the balances completely. So I've been running the numbers on splitting the balance to a 12 month 0% introduction rate on a new card and when I do the calculations, so far there are no benefits to transferring a portion of the balance. The bank will not give us a loan, because one of the credit cards is already through our bank, so they won't loan us money to pay down another loan that we already owe them.

Car Insurance:
Again, without knowing where you live, it's hard to say if this is high or not.
Our car insurance is actually incredibly cheap for our area.

The food may be on the high side as well.
I try to clip coupons as best as I can, I cook 99% of our meals and it's hard to feed a family of four for less than this from my experience. But there may be ways I have not explored to go cheaper with our food bill.

I would cut out the "extras" completely for the time being.
You are right. With children though, this is much easier said than done.

What I would really love some advice on is what we should be doing with our incoming tax refund, and what the bank will need to see in order to give us a loan for a home.

[minnie1928]

I would keep the $3000 back for car/medical expenses.

I would also adjust your withholding. $3000/year is $250/month that you could really use now instead of 12 months from now.

Diapers - have you considered cloth at all? Even if it's only for the time that the kids are home, it would help.

Cut cable - I dropped it in lieu of Netflix & Hulu back in August. No one in my family even cared!

Your electric bill is crazy high! Are you using CFLs, turning off lights, drying laundry on a rack, etc? If not, then you should really look into it.

Any and all additional money should be applied to the Visa first, then the Mastercard. The more you pay down, the more your minimum payments will drop. Which will help in the months where the medical expenses are higher.

The idea of purchasing a house is in your very, very distant future...I'm sorry. Banks are looking for 20% down and great credit. Assuming your credit is still ok, you are far from having down payment money. Plus, home ownership is more than just the mortgage...it's the maintenance, insurance, HOA, etc.. Focus on the credit cards, then tackle the medical debt, then build up your savings for an emergency fund, then I would start saving for a house and tackling the student loans. Don't forget retirement too.

Good luck!

[bjl584]

What I would really love some advice on is what we should be doing with our incoming tax refund, and what the bank will need to see in order to give us a loan for a home.

I would save it for an Emergency Fund. And, going forward, adjust your withholdings so that you don't get a refund.

Unfortunately, you are not going to qualify for a home loan right now. You need 20% down. If you have to go FHA, then don't do it cause you probably can't afford the mortgage in the first place. When you own a home your expenses increase dramatically. No more calling the landlord when something breaks. There are also taxes and insurance to budget for.

[ktacserv]

I would save it for an Emergency Fund. And, going forward, adjust your withholdings so that you don't get a refund.

Unfortunately, you are not going to qualify for a home loan right now. You need 20% down. If you have to go FHA, then don't do it cause you probably can't afford the mortgage in the first place. When you own a home your expenses increase dramatically. No more calling the landlord when something breaks. There are also taxes and insurance to budget for.

I should have mentioned in my original post that husband and I did adjust our withholdings halfway through 2009. So hopefully that will solve the refund issue. We had a bit of a rough time figuring out what the withholdings needed to be now that we are newly family of four - adding two dependents within the last two years.

We were actually qualified for a home about 1.5 years ago with 5% down payment (Is that an FHA loan? I don't recall.) Pre-qualified for $210k. We were going to put an offer down on a house, and literally 30 minutes before our meeting with the mortgage broker I got called into the presidents office and told I was laid off. Then I was out of work for a year, and then we had a baby with a medical disorder that brought chaos of medical bills into our lives.

And yes, I realize what a house brings and the responsibility involved. Considering we do all of our own apartment repairs here, it does not initimidate us. We are both in the building industry - husband and I - hoping that will help us when we get a house.

Considering that our rent and electric expenses are so high, I feel that they should at least even out SOME when buying a home. Our $1350/rent should be comparable to a house payment (and it was, the last time that we were home-shopping 1.5 years ago...have things changed that much within the last 1.5 years?). Our $200/electric should go WAY DOWN when we get into a house, because our apartment has cheap windows, no insulation, low-efficiency appliances, etc. which is what drives the electric price up.

There has to be a way that we can get into a house before a decade passes. I do not foresee us sharing one bedroom when the children are 4 and 5 years old. I will seriously go off the deep end if we cannot get out of here before then.

[minnie1928]

have things changed that much within the last 1.5 years?

Simple answer...yes.

You need 20% down...that's the new rule of thumb. You no longer have the 5% to put down. Down payment is just that, a down payment on the price of the house. It doesn't include inspections, appraisal fees, 3 months of taxes & insurance. These are all things (among others) that you would need to pay ON TOP of the down payment.

You now have a child with a medical condition that requires your focus and your money. And, you have a car purchase in your near future.

So yes, things have changed....

[ktacserv]

So can someone help me (with the math I guess) figure out what income we need to make in order to make it feasible to save for a home and buy a home within the next 5 years?

We are both up for review and possible raise in March. Trying to figure out if we need to double our salaries or what in order to make this happen. Take on another job or three?

[minnie1928]

Say you bought a house for $175,000. 20% down would be $35,000. $35000/5 years = $7000/year. To net $7000/year you would probably have to increase your income by about $9000+/year.

If you pay off your credit cards, that would free up $3480/year. So, if the cards were paid off and you used the old minimum payments towards your house fund, then you would only need to increase your income by about $5500/year.

That would get you the 20%, but you would also need to cover the other costs associated with purchasing a house (appraisal, inspection, etc.). I'd figure a few thousand to cover settlement costs.

[bjl584]

Minnie's advice is about right on. Pay off the cards, put that money toward a downpayment, and pick up extra work to boost income. Just be sure to use all of the extra money that you earn as savings. Resist the temptation to buy a new car, furniture, etc.

If you work a part time job and work say 15 to 20 hours a week on average, you should easily be able to net 5 to 6 K per year. If your husband can do the same, then that is potentially 10 to 12 K in one year going into savings. Do that for 5 years and you can have between 50 and 60 K as a downpayment.

[bjl584]

That's just a quick example. How much is an average home where you live? I will assume 4 bedroom 2 bath.

You may not need to save as long as 5 years to have an adequate downpayment.

[ktacserv]

That's just a quick example. How much is an average home where you live? I will assume 4 bedroom 2 bath.

You may not need to save as long as 5 years to have an adequate downpayment.

Unfortunately prices are sky-high here. We were shopping around 1.5 years ago and the range for what we need (space wise) is around $225-$250k. That's for a very modest, small house that would need a lot of TLC.

[bjl584]

Unfortunately prices are sky-high here. We were shopping around 1.5 years ago and the range for what we need (space wise) is around $225-$250k. That's for a very modest, small house that would need a lot of TLC.

So then you are faced with about $50K for a downpayment and probably another $5 to $10K for "the other stuff." It may seem daunting, but it can be done. A combination of cutting back wherever possible and increasing income over the next few years will really pay off.