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I've been in a pretty crappy financial situation. I've described my situation in detail in the past and I am greatful for all the great advice I have received here.

Since asking that question 8 months ago, my situation has changed a bit. I paid down some of the credit card debt (down to $30k). I saved a bit of money ($20k). I paid off IRS completely. The 401k is up to $17.5k. My divorce proceedings show no signs of ending (i owe the lawyer $10k).

I decided to have a look at my credit report, found a ton of stuff that was not mine, disputed it and to my utter astonishment, TransUnion listed my score as 720, despite having a foreclosure.

I've started looking for a bigger place to rent (my kids are getting older and need their own bedrooms), and my uncle suggested buying a house instead with an FHA loan that requires 3% down.

The idea of having a place of my own is very appealing to me. However, I am a bit skittish about the cost. The place that I was going to rent would cost about $2k a month. If I bought a place for about $450k (average price for a 3bd place), I'd be likely paying upwards to $3k a month. I think I can do it, but it would definitely be real tight.

There are possibly a couple of things coming into the picture that might make things easier for me. My ex got a job, so my alimony will go down hopefully. Also the kids are with me most of the time, so my child support should also go down. My older kid is gonna go to public school, so the private school tuition will go down to $500 from $1000. Hopefully, my credit card debt will end within 2 years and I'll be able to put that payment ($1382) towards the house as well.

Thoughts? Is this a good idea, bad idea? Am I stretching myself too thin?

EDIT: I got pre-approved (subject to underwriter's final approval) for $389k FHA loan with 3.5% down. There is some real estate here for that, but it definetely limits my options.

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9 Answers 9

up vote 16 down vote accepted

Personally I would hold off on buying a house until you have the credit card paid down even more or paid off completely so that it is one less bill you have to worry about and once it is paid off you free up that much more money to maintain the home. Likewise, you also have a lot of variables right now and the resolution of those variables will affect how much you can afford in the way of a home. The less surprises the better.

As I'm sure you know, being a home owner can be quite expensive and if something ends to be repaired then you have to pay for it out of your own pocket, at least when you are renting that falls onto someone else. Likewise, unless you are confident that the market has bottomed out by you, you might find that you are underwater on the mortgage once everything is said and done.

If you want to start making process towards buying a home though, you could check to see if any of the local banks or credit unions have some sort of savings program where you get higher interest rates in exchange for designating the savings for the down payment on a mortgage. Likewise, you could just find a high yield savings account and start making automatic transfers into it every month.

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That's a great idea about a savings account for the down payment. +1. –  NeedAdvice Sep 1 '11 at 4:16

I wouldn't buy a house at this time. Your credit card debt is the most expensive thing you have. Which is to say that you want to get rid of it as soon as possible. The lawyer isn't cheap, and your personal situation is not fully resolved.

Congratulations on paying off the IRS, and getting up the 401k to 17.5k.

Take care of the two things in paragraph 1, first,and then think about buying a house. You're doing too much good work to have it possibly be derailed by home payments.

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There are many other good answers here, but I just wanted to note that it could be dangerous to rely on the changes in alimony and child support that you've mentioned. You have no way of predicting if your ex will lose her job or take the kids back more of the time. If you already have a house and mortgage and all of a sudden alimony and child support go up again, you could be in big trouble.

Congrats on everything getting better, it sounds like you're dealing well with a crappy situation. Good luck!

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+1 for "dangerous to rely on the changes..." This is a good point. I focused on the credit card debt ending. That's real. But the rest is a potential, not a certainty. Nice point, Sean. –  JoeTaxpayer Aug 31 '11 at 0:45
    
@Sean Wallace. I disagree, using that line of thinking (e.g. not to rely on changes in alimony/child support) no one would ever buy anything. I mean there is no guarantee that one wouldn't lose a job that supporting the mortage. –  NeedAdvice Sep 1 '11 at 4:09
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You're right. You have to make some guesses and assumptions. That said, relying on yourself to hold a job is one thing and relying on someone else (who you previously mentioned you didn't expect would ever work) is another. –  Sean W. Sep 1 '11 at 6:01

Short answer: NO. Do NOT buy a house. Houses are a "luxury" good (see Why is a house not an investment?). Although the experience of the early 2000s seemed to convince most people otherwise, houses are not an investment. Historically, it has usually been cheaper to rent, because owning a house has non-pecuniary benefits such as the ability to change things around to exactly the way you like them. Consult a rent vs. buy calculator for your area to see if your area is exceptional. I also would not rely on the mortgage interest deduction for the long term, as it seems increasingly likely the Federal government will do away with it at some point.

The first thing you must do is eliminate your credit card and other debts. Try to delay paying your lawyers and anyone else who is not charging you interest (or threatening to harm you in other ways) as long as possible. Save enough money to maintain your current standard of living for 6 months should you lose your job, then put the rest in your 401(k).

Another word of advice: learn to live with less. Your kids do not need separate bedrooms. Hopefully one day the time will come when you can afford a larger house, but it should not be your highest priority. You and your kids will all be worse off in the end should you have unexpected financial difficulties and you have overextended yourself to buy a house.

Now that your credit score is up, see if you can renegotiate your credit card loans or negotiate a new loan with lower interest.

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I don't think mortgage deduction will go, the recommendation that got some attention recently was only for non-primary houses. If you own one house, the report was not recommending no deduction. I do agree people should not assume house is a good investment. I look at it as more of a "forced" retirement investment. You may not beat inflation, but at least once its paid off, you only worry about property taxes for your living expenses. And when it is eventually sold, it would make nice retirement fund (or help pay for crazy expensive nursing home...) –  Andy Wiesendanger Aug 31 '11 at 18:56
    
@Andy, the mortgage interest deduction has been one of the worst tax policy blunders of the last few decades IMO, so I hope you are wrong, but we'll see. As for the "forced" retirement plan (or forced savings plan would be more accurate), I agree a house could be helpful for the average person with low will-power (which is most Americans), but I think eliminating credit card debt is a higher priority. If you have the will power, though, investing in a safe actual investment, such as corporate bonds, works better (and you can pay your rent with the interest once you've saved enough). –  Tal Fishman Aug 31 '11 at 19:10
    
yes, good point about will power. You could invest the money, beat inflation, and come out better than the house. That's why its "forced". I guess you could say lazy... –  Andy Wiesendanger Aug 31 '11 at 21:11
    
That's another thing that changed, but I forgot to mention. I have the kids 5 out of 7 days now. My credit card debt is at 2%, not much room to negotiate. Also I wouldn't be buying it as an investment, I simply want to live there. –  NeedAdvice Sep 1 '11 at 4:06
    
That's very relevant, you should put that in the question. Given these facts, I'm going to shade my answer to "probably not yet". With just 3% down you could be in negative equity in a heart beat. You should save a bit more and pay off the credit cards before you buy. Even when you do, be very patient, only get a house if it's really ideal and a good price. –  Tal Fishman Sep 1 '11 at 12:20

The $3K includes property tax, right? It looks like the mortgage alone will be about $2150 or so. If your (cal) state tax is enough to put you into itemized deductions, your mortgage and property tax are a write off, and the $3k will actually be closer to the $2K you are considering for rent. The wild card as I see it is that your budget is so tight that any unforeseen expenses will be charged. As a long time homeowner, I know these expenses sometime appear to be high, and regular, despite their random nature. The money earmarked for credit card payments will go a long way to cover the tight budget you seem to have. This and your decreasing support makes this look tight but not impossible. The condition of the house would make or break the deal, in my opinion.

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My opinion is to hold off. I don't see housing market rising anytime soon, possibly even going lower, so you don't have to worry about getting in before it rises. Pay off the credit card debt, maybe even earlier if possible, then that flexibility will be there, the divorce proceedings may have an end in sight, and therefore you'll know more about any outcomes from that. The economy is still shaky, the flexibility of renting may come in real handy.

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I think your best course of action depends on the likely outcome of the divorce proceedings. The alimony/child support payments are controlled externally.

I don't like to plan around things that I have no control over. In your shoes, I would probably avoid buying until things are settled down.

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that's part of the issue, my divorce has been going on 3 years now and with the turmoil prior to divorce - I have been in a heightened state of alert for nearly 6 years. A house, I think, would bring a sense of normalcy and permanency to the situation. No? –  NeedAdvice Sep 1 '11 at 4:12
    
That's a good point. It's probably better for your kids to not have to deal with moving every couple of years, etc. I think JoeTaxpayer hit it -- if you find the right place, it will probably work. –  duffbeer703 Sep 1 '11 at 12:26

Just echoing the other answers here. You're not ready yet. 3% down, or no money down loans are what got so many of us into trouble these last few years.

It sounds like you make a pretty good living and are able to squirrel away money despite paying rent. Let me suggest something that I haven't seen here yet. Save up for a 20% down payment. You will get better rates, won't have to buy mortgage insurance and it will give you enough of a cushion on your payment that you could better weather a job loss or other loss of income.

Your priority for saving are, in order:

  1. Your emergency fund, at least 12 month's worth of living expenses.
  2. Your retirement funds.
  3. Kid's college.

Home prices aren't going up any time soon, so you're not going to miss out on a great deal. Keep your expenses low, treat yourself and your kids once in a while and keep saving.

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I'm confused why you think you need a $450k house. That seems extremely high in today's market except perhaps in certain major urban locations. If you're going to live in suburbia or a smaller town/city, you should be able to find a nice 3br house for well under $300k. Before you rule out buying a house, I'd spend some time researching the real estate listings in your area, foreclosures, properties owned by bankruptcy court, etc. - you might be surprised to find a great home for as low as $150-200k.

Of course if you live in a place where what I'm saying is completely off-base, please disregard my answer.

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In the area I live in, $450k is low end. I wish it weren't so. –  NeedAdvice Sep 4 '11 at 4:03
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@R - obviously you haven't lived near a major metropolitan area on the coast. Where I am $450K will buy you a 2 bedroom house in a not-too-great part of town, or perhaps a condo. –  justkt Sep 6 '11 at 17:34

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