House hack questions

[James Janotta]

Hey guys I'm looking into getting my first house hack within the next 6-7 months. Couple questions if anyone can offer advice I'd greatly appreciate it! So I plan on going with the FHA 3.5% down and hopefully going for something in the 3-400k range in a neighborhood like back of the yards, mt greenwood, south shore but also open to other options. My dilemma is that I have about 7k in credit card debt and a $600 a month car payment. I have another car that's paid off that I am going to sell for around 15k. I don't have much for savings so one of my main questions is should I pay off my card and some of my car with the money or put it on the 3.5% down payment? I made 50k last year on taxes and have a 700 credit score. Thanks

[James Janotta]

Side note if anyone is hiring for any weekend jobs, preferable remodeling as I’d like to learn the ins and outs of the business, I’d love to work, can also do evenings.

[Anthony Swain]

Hey @James Janotta welcome to the community!

House hacking can be a GREAT opportunity, as many of us in these forums believe. Also, using a low down payment option can be a good tool to utilize leverage. 

What area are you in? I don't know if you mentioned that?

If I was you, I would work on paying off that credit card debt, before you get into another large debt, especially if that $7k is high interest debt. 

As far as savings/down payment, it is probably a good idea to have a emergency fund buffer beyond your down payment. On that same note, see if you qualify for any down payment assistance programs/grants. $50k per year you may be eligible.

Have you went through the pre-approval process? This is where a lender will review your financials and see how much loan you'll get approved for. This will give you a much better idea of how much home aka house hack you can afford.

Good luck James. You're in a great place to network, learn, and grow. We are all here to help!

-Ant

[Teri Feeney Styers]

@James Janotta In addition - a good lender will help you answer that question. They may want to see your debt to income ratio lower in which case you pay down debt. They will also lay out closing costs for you so that you know exactly how much cash to have on hand. @Anthony Swain is correct about wanting a reserve cushion too. The water heater blows up a week after closing guess who pays? And are you selling the correct car? $600 per month would go a long way on a mortgage payment or creating a savings pool. Maybe drive the $15k car for another year or two... Lastly, not to be judgy, but if you have credit card debt that you can't pay off each month then you probably need to adjust your spending habits too. You don't want to pay down your cards, buy a house, then find yourself back in debt in a year... 

[Paul De Luca]

Quote from @James Janotta:

Hey guys I'm looking into getting my first house hack within the next 6-7 months. Couple questions if anyone can offer advice I'd greatly appreciate it! So I plan on going with the FHA 3.5% down and hopefully going for something in the 3-400k range in a neighborhood like back of the yards, mt greenwood, south shore but also open to other options. My dilemma is that I have about 7k in credit card debt and a $600 a month car payment. I have another car that's paid off that I am going to sell for around 15k. I don't have much for savings so one of my main questions is should I pay off my card and some of my car with the money or put it on the 3.5% down payment? I made 50k last year on taxes and have a 700 credit score. Thanks

 This is a good question for a lender. I recommend connecting with @Zack Karp to discuss since you want to weigh the pros & cons of paying off your credit card debt and understand how it will affect your DTI & credit score.

[Jack Matthias]

Hi James!

House Hacking is going to be a great opportunity. The first thing I would work on is getting the credit card debt down, this will help with what you can qualify for and also increase your credit score. The next thing would be connecting with a lender and seeing if you can find any properties that pass the self sufficiency test if looking at 3-4 unit buildings. As many properties haven't been able to pass this key test for FHA multi units lately.

[Zack Karp]

@Paul De Luca thanks for the tag!

@James Janotta so the answer to your question depends on who is answering it. Common sense from most people would be to pay off the credit card, and maybe pay down the car. However, there are several layers to this.

First off, you will have a much easier time winning a property with a Conventional loan vs FHA. Sad but true statement, as this comes down to seller perception. I'm not saying you cannot get a property with FHA, but in a multiple offer situation, a seller will take a Conventional buyer over a FHA buyer every time. Conventional allows you to put 5% down for a primary 2-4 unit. Conventional also has a tighter DTI requirement, and higher reserve requirement. But ultimately a better loan for you too. You may not be able to qualify for Conventional, or what you qualify for might be too low, but it's absolutely worth exploring.

If your credit card minimum monthly payment is only $25/mo, then you are actually mostly likely better off NOT paying it down or off, and having that extra $7K available for down payment and reserves. Then after you close on a property, then you can decide if you want to pay it down or off.

If you want to discuss your strategy or numbers, feel free to reach out. Happy to map out a game plan for you to not only qualify for this first property, but set you up for success for future properties.

Best of luck!

[Caleb Brown]

I'd 100% get ride of that credit card payment. What car are you paying $600 a month on and what do you owe? At a 50K salary $600 is a lot for what you make. Maybe focus on getting that income up along with paying debt down. You'll need money saved - for the DP, closing costs(sellers can pay) and reserves for things that come up. In 6-7 months you can bust it to get things in order but that might be too aggressive. Also why do you have 2 cars? I'd drive the paid off one and get rid of the car payment

[Rick Albert]

This is a lender and personal question.

Lenders look at your monthly Debt-to-Income Ratio. The more monthly debt you have, the lower the purchasing power.

You also don't have much for savings, there are often surprises when owning a property that you should have some reserves for.

I'm not a financial advisor, but on the surface, I would sell the car for $15K, put $7K towards the credit card and the rest into savings.

Also, with the $7K in credit card debt, you need to ask yourself "why do I have this debt?" Then make sure you put personal best practices in place to not put yourself in this position in the future.

[John Warren]

@James Janotta you have lots of good advice on here. I am a big believer in living below your means, and I also know from 10 years of investing that you need to capital to make any significant progress in this game. Your situation isn't as bad as you think. There are tons of used cars out there for 5k that will get you from point A to point B. I was driving a $1700 Ford F150 when I was building things, and I would sell the used junker every few years and buy another one that would get me by for a few. Get rid of that car payment completely and cut that CC debt down. Then save up 5k. Hustle on the side jobs, and save, save, save. 

Once you have a nice nest egg, you can attack this from a position of strength. I can tell you that making the sacrifices now will pay off 100% down the road.