Paying off debt, buying a house, building credit, and other adulting questions -- advice sought, obviously

In My Humble Opinion
1

I’m trying to figure out how to do Adulting and be an Adult, and am a bit lost.

Tl;dr: we have some consumer debt, mediocre credit, and want to buy a house. We also have the cash funds to handle much of the above, but not all. So what do I do?

I currently have a $387/month car payment with ~$16,400 left on the note @ 14.9% interest (hey, I was desperate for reliable wheels…). I also have a credit card with a ~$4000 balance on it and we have at times been behind on the monthly minimum payments, which has hurt our credit rating.

We have always been diligent with our savings – “pay yourself first,” as my wise (and wealthy) grandmother once told me – and we now have the means to pay off both these consumer debts and then some. The credit card seems like a no-brainer. However, we are tenants and we would like to purchase a home. We have yet to meet with a mortgage lender, and I’d like to have some hard figures ready to present to the lender, as well as an attack plan going forward. Our credit is not stellar (but isn’t shit) due to the credit card’s outstanding balance. We will also be able to put down a sizable (~20%) down payment on a $250K mortgage.

I am a college professor with an employment contract and a union and I will have full tenure starting July of next year. My income is stable, but my wife does not work.

I’m receiving conflicting advice, so I’m turning to the Dope.

Our goals:

  • Reduce consumer debt. Especially the credit card. Maybe have a Visa for dire emergencies, but otherwise I really, really don’t want to have any CC debt. I’d like to get rid of the car payment too as that’s money that we could otherwise be plugging into a savings account.

  • Buy a house. We’ve been wanting to buy for years, and it’s time to shit or get off the pot. I turn 40 in… shit. 14 days. ::gulp:: We have fairly good deal rent-wise, but we do not want to live in this neighborhood anymore and it’s time to set down some roots and build equity. When we buy we plan on staying long-term, perhaps forever – we are determined to find a house that is ADA accessible or able to be remodeled as such so we can live there as old fogies as necessary.

  • Be able to save. This is a no-brainer. A lot of people don’t do this, we find it a necessary part of our monthly budget.

So, I guess my question(s) are:

  • Is there any reason not to pay off the credit card in full? We have the funds to do so.

  • Is there any reason not to pay off the car loan in full? We have the funds to do so. In this instance the only thing I can think of is continued monthly payments (which have always been made before the due date) will help us continue to build credit.

  • Assuming we pay off the CC and the car, what is the best way to build credit in addition to paying utilities on time (which I’ve heard from a financial advisor doesn’t really affect your credit unless you get something disconnected and the bill is sent to a collection agency)? One thought that I had was to apply for a gas card or similar that we could use on a limited basis to keep our credit afloat and building without being tempted (or able) to use it on Door Dash or Kroger or whatever. Hopefully this would prevent us digging ourselves into another hole but have a record of good credit usage.

  • Is there a sort of “best practices” approach to home buying, especially knowing that we can put down a substantial down payment? I know nothing about home buying.

Like I said, I’m kind of lost, but we’ve been saving for a while and finally hit our goal, so I’m asking… now what??

(And yes, I realize we probably should’ve had a better plan well before now, but this is the situation now, so…)

2

This may be a good time to start looking for a house but the housing market could be at the top of a bubble right now and a really bad time to buy a house. Your credit rating and how much cash you have for a down payment on a house have to be taken into account before paying off debt.

3

One thing to be aware of is that in much of the country it is a difficult time to buy a house. Inventories are very low and houses sell very fast. Which means that to actually end up buying one, people have to move very quickly, offer more than asking, and waive things like inspections. Those are all pretty risky things to do, and this is not normal, so you are probably better off waiting longer.

The standard process to buy a house (which, again, doesn’t work super well at the moment) is approximately:

  1. Get pre-approved for a mortgage. This involves finding a lender and giving them some documentation about who you are and how much money you have/make, and they give you a document that says “So and so is pre-approved for a loan up to $X”.
  2. Find a realtor who is recommended by someone you trust and work with them to find a house you like.
  3. Make an offer contingent on things like an inspection and a loan.
  4. Have the seller accept your offer.
  5. Pay “earnest money” into an escrow account. This is usually a few percent of the total price, and it’s an “I’m serious about buying this house” deposit. It’s refundable as long as you choose not to buy the house for one of the reasons in your offer.
  6. Get the loan, get the inspection
  7. Depending on the results of the inspection and market conditions, you can ask for things to be fixed, or for a new price, or you can just walk away.
  8. Sign your name to 735 separate documents, mostly without reading them.
  9. Now you have a house.
4

I don’t know if this is “best practices” but I can only tell you what my wife and I have always done. First, we use credit cards for nearly everything, but never carry a balance. We pay our bills, usually several thousand a month, as they come in. Actually, our bank allows us to automatically pay the CC bill on the due date every month. I’m not sure why they do this since it means they never collect interest but they do. And we get a 1.25% rebate on our credit usage beside.

Second I have never bought a car on time. The last time I bought a car, the dealer took $1500 deposit on the credit card and the rest by certified cheque. I was surprised, but somehow the salesman just knew we were going to pay cash. He told me that.

I don’t know if this is now possible but I never had to go get a mortgage for either house I bought, but was able to get enough a down payment to take over the existing mortgage. This saved me a bundle of money.

Did you mention kids? I am also a college professor (retired long ago) but the one time I struggled financially was when the kids were in college (especially when the two oldest were only a year apart). That was a stretch, but that was when my wife went out to work and we managed to pay what was asked and, eventually, their loans (with some help from some modest inheritances).

We always contributed the maximum allowed to RRSPs (more or less equivalent to 401(k) I think) and now collecting them. That plus my pension, government pensions, have allowed us to live relatively easily, although not in luxury.

5

First things first…
–Be sure that you have 6 months living expenses in cash, just in case. Find a bank that will pay a decent percentage of interest for a savings account. Ally and Synchrony each pay 0.5% for savings. It is not much, but even getting $2/month is better than nothing.
–Pay off the credit card ASAP. You are probably paying 20%+ interest, so that $4000 is really costing you $4800. If you have cash for emergencies, put everything into paying off the credit card AS SOON AS POSSIBLE. Also, see if you can find a card that will allow a transfer of that debt to a new “card” with a lower rate.
–The note on the car is ridiculously high. Refinance it. Try to find a credit union, maybe through your university (?). You should be able to get in the 5% range.
–If you are in a HCOL or a VHCOL (Very High Cost of Living) area, i would wait to buy. But that is not the most immediate concern.

You might try going to Bogleheads.org for more advice.
Bogleheads.org - Index page

6

Ditto this. My car loan is through a credit union at 3.74%

7

I agree about having 3-6 months expenses in savings (or somewhere liquid – that you can get to it easily/reasonably if needed).

In general, if any savings beyond that are earning squat (like most are today), then a quick way to get a return on your money is to pay off high interest debt – in your case, the car loan and the credit card(s).

If you’re invested in things that are returning more than the interest that you’re paying on those loans (please let us all know the details <grin>, and), then you can afford to maintain those loans in order to free up capital for said high-yield investments.

Unlikely right now, though, unless you have capital at pretty serious risk (eg, cryptocurrency or ShortStop-type gambits).

But that has to be measured against your current credit rating, and the effect of that rating on your potential cost of getting a mortgage. I’d talk with a mortgage broker about that.

Because it may be that it would be very helpful to you to be really disciplined, pay down (but not off) your existing debts, on time (ie, as the payments are due) – maybe for a year – and see which way the market goes where you are.

Bad credit makes for expensive interest rates, as I’m sure you know. Putting real numbers to that would be useful, though.

Good luck !

8

Credit card debt is just pure poison. I urge getting rid of that even if you don’t have 6 months living expenses saved. After all, for emergencies, several thousand of available credit on a card is a cushion just like that same money sitting in your bank account would have been.

I pretty much think anybody with a credit card balance has the best investment opportunity in the world just sitting there waiting for them, and all other financial discussions can wait until that’s gone.

9

Definitely pay off the CC balance and refinance the car loan.

Check the history of home prices in your area. If they have been skyrocketing over the past few years (like they have in my area) this might not be the time to buy. But you don’t have to stay where you are. The rental market is soft in a lot of areas now, and you might be able to find a good deal in a better neighborhood. You might even be able to rent a house.
Houses are more expensive than you’d think - not just purchase price, but changes when you find something you can’t live with.
iamthewalrus_3 has good advice on the process. I know someone who used a friend as a realtor and was convinced to waive inspection or else she’d lose the house. Guess what - there was a lot of stuff wrong with the place.

Finally, check your budget. It sounds like you are saving, which is good. I hope your retirement savings are in good shape. Houses are more expensive in terms of utilities and maintenance, so make sure you won’t be going into a hole to buy one.

10

And don’t forget property taxes

11

Around here (Boston), this is one of the worst markets to buy a house. Especially for first time buyers. Offers being accepted are nearly all cash, and typically high 5 to low 6 figures above asking. If you’re not selling a house in this market to finance a new house you’ll be priced out of a lot of desirable locations.

12

You may have to plan to step up to your retirement house. That’s typically how most people get a nice house.

  • Buy a starter house/condo. Do a bit of fix up. Hopefully sell for a profit in a few years
  • Buy a modest house. Do a bit of fix up. Hopefully sell for a profit
  • Buy a nice house

With the crazy house prices right now you’ll need to set your expectations for a step up path to a nice house. It’s unlikely you’ll be able to afford a nice house unless you have a ton of cash available or are making high salaries. You can get a guess at home prices in your area by going to sites like Zillow.com and Redfin.com The prices aren’t perfect, but it will help give you an idea of what homes are currently going for.

13

Three suggestions to refinance this loan. Is refinancing a better option than just paying it off from savings and using that $387 to put into savings each month? If so, why?

This is something I’m kind of worried about. Is there a big difference in real estate agents? If / when we buy a house an inspection is mandatory. My BIL is also a general contractor and his son does environmental damage restoration work and will ask both of them look at any house we are prepared to make an offer on. I always thought that a real estate agent basically does the paperwork and helps the homeowner navigate the purchase process.

Maybe these questions should be their own thread.

14

Potentially, yes. A good agent will have experience in your area and insight into the market and will be able to give you good advice. A bad agent (even if they’re totally above-board but just green) won’t know that stuff. A really bad agent may result in legal challenges or things falling through because they didn’t know what to do.

Yeah, but there’s a lot of paperwork and it often has to be turned around pretty quickly. A good agent can tell you that this one line out of 20 pages of legal boilerplate is not standard and you should counter with it removed.

15

You say your credit is mediocre - do you know your credit score? Most banks have a composite score system which allows you to track it month by month. Do you know and have you fixed the cause(s) of your low credit score?

What’s your location? Housing markets are pretty wild right now, and location is key.

Regarding your current debt - pay off the credit card. Period. Then you can put regular purchases on it and pay it off at each billing cycle. This should help your score a lot, as well as not throwing away money on interest. Refi the car - I can’t imagine anyone paying that kind of interest on a car right now.

Don’t expect to spend what you may pre-qualify for. Remember, that debt has to be repaid. If they say you qualify for $400K, look at what your payment is likely to be with taxes and insurance. And I’d finance for 15 years instead of 30. People will say they’re just going to pay extra and pay it off early, but it’s a lot easier just to plan for what you can afford. And you’ll own your home as you’re looking toward retirement.

Good luck!

StG

16

If you can refinance that car at a decent rate and invest the $387 in something that pays a better rate than the car loan is costing you (which will totally not be a savings account, which probably pay .1%), you’re ahead. One of my Schwab accounts posted 25% gains over the last 12 months. Which isn’t typical, but you can find investments that pay well into 5-8% or more easily depending on your risk profile.

There absolutely is. A good agent has knowledge of your market, knowledge of the closing process in great detail, can guide you on inspections (and what to do / how to negotiate with the seller if problems are found, and probably is in touch with many specialized service people who can fix those problems. There’s a lot of really terrible agents. Beware.

17

Is there any way to tell if an agent is a good one or a bad one or is all by word of mouth?

18

So you have $50,000 (or hopefully more - closing costs) in cash? Great!

Just pay it off. Then only use it when you can pay it off in full each month. Go back to saving the amount you are paying now so you can quickly rebuild your savings.

You could look at refinancing this with a credit union. You might get your rate down to a tolerable number and then just pay it off as usual. This might be a decent strategy to preserve your home purchasing power be preserving your down payment. Traditional mortgage lending guidelines were that you could spend up to 28% of your gross monthly income on housing and up to 32% on all debt. If the refinanced car loan were 4% or less of your income and if that were your only outstanding debt, it wouldn’t hurt your ability to qualify for a mortgage. You would also have the cash in your hand if you found the house of your dreams tomorrow.

Good luck! It never seems like the perfect time to buy but at least mortgage rates are incredibly low now. That partially offsets what seems like crazy high prices.

Do it. Don’t cancel the cards though. Some of the factors the credit scoring models look at are (1) length of account history (longer is better, so if you cancel cards you’ve had for a long time, it could ding your score), (2) credit utilization (the amount you have borrowed divided by the size of the credit line (lower is better, so keeping the account open but not using it is better), and (3) open credit limits (if you have a lot of available credit, it looks like you could just charge up a storm and bankrupt yourself. This is one factor that weighs in favor of closing old credit accounts but the first two factors tend to be bigger factors for most people. Your mileage may vary if you have a lot of open credit cards).

Keep the cards you have, use them each month but very sparingly (like paying the cell phone bill) and pay them off in full each month.

Books have been written about buying a first home. You might want to pick up a couple and just read through them. I would also recommend talking with a few real estate agents to find one you are comfortable with and at least a couple of mortgage lenders about your ability to qualify. You’ll get a gut check if your plan is realistic. Ask them to show you a sample HUD-1 and talk you through it so you can understand the kinds of things that will factor into your loan cost and your ability to finance it.

The best time to plant an oak tree is fifty years ago. The second best time is today. Best wishes!

19

Like many others I have never paid a penny (or a cent!) in credit card interest. :sunglasses:

This helps explain why I bought my first house aged 35 (putting down a 50% deposit out of savings. :smiley: )

20

I don’t know. I got my first agent from word of mouth then used her for 25 years. I got my next agent (when I left the first agent’s area) through her recommendation. Realtors® make a big deal being members of the National Association of Realtors; other agents are just some person with a real estate license. I don’t know that that matters much in practice, but all my agents of been Realtors.