down payment vs other debt

kaffineApril 3, 2009

I'm looking at buying some land this year and in a few years having a house built. I have around $5000 in credit cards and have a car loan.

Is it better to save up so I have a large down payment or to pay off all my credit cards but have less for the down payment? I could pay off my car loan by the end of the year but then I wouldn't have any money for a downpayment.

Thank you.

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Getting a land loan is tough...much harder than financing improved land. Lenders to not like land loans. My guess is that you'll need, at minimum, 25% down payment. There are many banks that won't lend over 50% & a few that won't lend at all on raw land. The days of rolling 100% site costs into a construction loan are, thankfully, over.

The amount of your CC debt + car loan doesn't mean much without knowing your entire financial picture. For some people, that's an excessive amount of debt & for others it's peanuts. For a land loan these days, I can almost guarantee you'll need to be a prime borrower. So, with that in mind you can decide the best path to preparation to purchase that building site.

Best wishes.


    Bookmark   April 3, 2009 at 10:33AM
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Hi Kaffine,

'What Triciae said' at a minimum..... PLUS;

I *rarely* advise carrying a credit card balance (UNLESS its 0 APR, 0 fees, and you are using several for "teaser credit roulette" which I also really do not recommend for anyone not a screaming time-and-detail freak (of which I am definitely not.))

I also *try* to advise clients to buy vehicles with cash (terms for cars are rarely beneficial,) so if you have additional cashflow you can 'save' I would PROBABLY suggest paying down the vehicle loan(s), and off the revolving cards.

Lastly, building a custom home is *generally* best done if you already own a home, and have accumulated some equity and reserves. Your first post doesnt' really say one way or t'other... so if that's not the case, you *may* want to replan a little.

Of course, we're always standing by to offer our 2 cents here!

Dave Donhoff
Leverage Planner

    Bookmark   April 3, 2009 at 12:34PM
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Thank you. Looks like I might try and find a small house on a large lot then.

I could have used the advise on CC balances a few years ago. I finally figured it out when I saw I was paying $100 a month in intrest on one card. I almost have them paid off.

I don't own a home now. I was planning on buying the lot and paying it off before construction.

    Bookmark   April 5, 2009 at 4:21AM
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If you have c/c debt, then you most likely will qualify for a smaller mortgage in whatever house you eventually buy. The reason being is the lender will take into account the amount of your car and c/c payments and deduct them from your qualified mortgage payment. It really is best to go into a mortgage with no debt, especially if you are a first time home buyer. There are many expenses that crop up making it difficult to pay off c/c balances.

    Bookmark   April 5, 2009 at 11:43AM
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One advantage on construction loans is that loan to value can revert to loan to cost once the land is paid off. This means your down payment on the construction loan can be the land, an additional vehicle rather than tying up cash. The major drawback is the crazy interest rates construction loans command. Perhaps Dave has more particulars here.

    Bookmark   April 5, 2009 at 7:35PM
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Right now I'm looking at a small house on a 1 acre lot. It's bank owned and they are starting to drop the price into the reasonable area.

I make around $65k a year before taxes and have been at my job a little over 3 years. Currnetly my car loan and credit card monthly payments toltal $775.

I'm looking at $125k to 150k purchase price. I have about $10k that I can get for a downpayment. Do you think I will be able to get financing or do I need to keep saving for awhile? I'm not in a hurry to buy but I would like to buy this year. Thank you.

    Bookmark   April 6, 2009 at 2:09AM
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This is what I'd do if I were in your shoes (take it with a grain of salt if you wish):

1. Don't really know much about the car (if that's your only one, how much is owed, and how soon you'll have it paid off), but if you can't get it paid off within the next 12 months (or sooner), I'd sell it. If you're upside-down on the car, take a loan for the difference, and so you can sell it. If that's your only car, save up a couple grand for a used car that you can own free and clear.

2. Clear out that CC debt - at nearly 8% of your worth, to me that's too heavy on CC. One moderate financial emergency or a lay-off would break you. You don't need that stress in your life.

For me, I'd have to be a renter till I cleaned up these debts first. I know prices are great, but I'd want to get rid of those debts that are nothing more than a ball-and-chain on your life. Save up more cash, and get rid of that debt with a vengeance - that's the way I live my life.

    Bookmark   April 6, 2009 at 9:50AM
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I agree with the above about paying off the cc debt AND after it's paid off, pay the balance off every month! CC's have horrendous interest charges. Not a good way to borrow money, which is essentially what you're doing when you have cc debt.

    Bookmark   April 6, 2009 at 10:37AM
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