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Whittle debt, then shop for mortgage

Ilyce Glink
Tribune Media Services
Jul. 10, 2004

QUESTION: I'm a 40-year-old single man earning $32,000. I have $30,000 in my 401(k) and $15,000 in credit-card debt. I'm saving $500 each month to buy a house. Should I wait until I have enough for a 10 percent down payment or borrow from my 401(k) account?

ANSWER: Let's set aside your down payment question for a moment. I'm more concerned about the $15,000 in credit-card debt. You didn't mention the rate of interest you're paying, but I'm guessing it's a whole lot more than the 1 percent your $500 per month savings is earning.

You also didn't mention how much you've saved for a down payment, but I think you should take nearly all that money and use it to pay down your debt. Your debt-to-income ratio is already out of whack and you might find it difficult to get a mortgage.

Conventional lenders will allow you to spend up to 36 percent of your gross monthly income on your total debt, including house payment, taxes, insurance, school loans, car loans and credit-card debt.

You're already paying a large slice of your income each month to your credit-card company. Eliminating or greatly reducing that debt will go a long way toward helping you qualify for a mortgage.

Once your debt is paid down, investigate zero-down and very-low-down-payment loans. These are available from conventional lenders as well as the FHA. You'll pay a bit more in fees with FHA, but it's easier to qualify for those loans.

Get a copy of your credit history and credit score ($12.95 from ) and make sure your credit score is as high as possible. When you get a zero-down or low-down-payment loan, it helps to have a high credit score or you'll get soaked with higher loan fees and a higher interest rate.

Once you have your credit history and score, visit a couple of mortgage lenders. Show them your score and ask about the zero-down and low-down-payment loan programs they offer.

Once you see what kind of mortgage you can afford on your income, you'll be able to start shopping around for a property to purchase.

Q: I'm looking into buying in a new development planned for the Orlando area. The developer has notified us of many investment limitations on the property that prevent an owner from reselling within the first three years of ownership.

The limitations include providing the developer with up to 10 percent of the selling price upon resale, as well as a 6 percent real estate commission. In addition, if the house is vacant more than 60 days after taking title or for any 15-day period thereafter, a $45 a day fee is assessed. Is this legal?

A: The question you need to ask is not whether the restrictions are legal, but why you would want to buy in such a development.

Many of the restrictions may be legal, perhaps all of them. But if you feel the restrictions are so onerous, why would you buy in such a development? If you make a profit on the resale, the seller wants to share in your profits and force you to market your unit along with the developers'.

Some of the other restrictions indicate that the developer is trying to discourage real estate speculators from purchasing in the development. While the developer has a vested interest in making sure the development is not dragged down by rampant speculation, there are other means of achieving this goal.





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