I have one correction to my post above: my debt-to-income ratio is 6%, not 16%.

I don't know about what lenders like most, but I believe that it takes about 6 months for changes in your credit card balance to be reflected on your credit report. So paying off your credit card may not help unless you do it 6 months before you buy the house.

There are certainly a couple of options for you. Personally, I'd pay off the credit card first, then save for the house - even if that means waiting a little longer. I think the housing market is going to take all of 2008 and into 2009 to even start seeing the light of day so I would guess you have a little time.

The thing about owning a house is that all those good intentions of paying off other debts often goes out the window as now the house needs all kinds of stuff. If you can pay off first, then get into the house, I think you'd be in a great position to not only get a great loan but also not be house rich and cash poor.

If you pay down your CC debt you'll see a change in your score in one or two months - depending on when the cc company makes their reports. Whatever the balance is when they prepare your monthly statement is the balance reported - even if you pay that balance off in full.

I would try to knock down the cc debt to 30% or less - there's nothing magic about 25% or any other percent really. 50% or less isn't too terrible, but this portion of your score accounts for about 30% of the total score overall, so the less the better. This is all very general though. Many different things are taken into account when determining your score, and many things besides your 3 scores are taken into consideration by lenders - it's not a matter of one thing being cared about more than another, it a matter of your overall financial picture.

My advice to you is to wait until you've paid down your cc debt and also make sure you have an emergency fund in place - not only so that you can take care of yourself should you lose your job or become ill, but also so you can pay for the many emergencies that can befall a home. You can expect to pay an amount about equal to one monthly payment just on yearly maintenance alone - not counting any repairs or emergencies - and much more for an older home. Plus home owners insurance and taxes and possibly higher utility bills than you are paying while renting.

That you cannot both save for a down payment and pay off your debt tells me that you probably aren't yet ready for home ownership. Also, debt on one cc and a car loan don't account for such a low score (I assume that's an average of the 3 scores? 700 would be like a B- or C, low-good) - have you fixed whatever caused that score? Is it simply a short credit history ? (in general, it not good to close out an account unless it's fairly new and charges an annual fee) Most of all, most important to your scores, is to never, ever make a late payment on any bill - includes phones and utilities, etc.

Have you thought about getting a 2nd job clerking or waitressing or something like that? You could save a great deal in a very short time. In just 6 months you could earn that 10% down payment and still be paying down your cc debt with your regular income. My husband and I each worked a 2nd job in order to save for our first home on the schedule we wanted - it was hard, but fun and exciting, too.

On the brighter side - you can request that the PMI be removed once your home equity is high enough - so if the value of your home rises then that PMI may not last longer than a couple of years. Just remember that it's not getting into the home that you should be most concerned about - it's being able to stay in the home while remaining financially solvent - you want to be able to pay yourself (emergency fund, retirement), pay your bills, save for big ticket items (like a home, newer car, furniture, vacations), have some fun, and invest.

Do you have bank of america where you live? They have a no fee mortgage plus program worth looking at. It has NO closing costs and NO PMI. The requirements are at least 5% down, credit score of 680 and be a current customer. I don't know the loan amount restrictions though.

From your forum name, it sounds like you are in the Pittsburgh, PA area.

I think you have the urge to buy (completely understandable) and are possibly overstating the need to do it soon. Unless you have limited your market to some unique three-block area somewhere, there is nothing in the economic news that would point to a swift rise in prices anywhere in the country.

Regardless, I would pay down the debt and then look for creative financing when the right house comes along.

Does anyone think inflation factors heavily in the decision laid out here? Paying in tomorrow's increasingly worthless dollars? Too small to make a difference?

I agree w/graywings. I wouldn't be buying anything, almost anywhere, right now. This RE mess has a long way to go.

"Housing prices here have traditionally been bizarro-world low; until just this year, you could buy the perfect house in the perfect neighborhood for about $125K"

PMI on a house in that range is going only be about $40 to $50 a month, and even then it is usually cancellable once you reach 20% equity (even if it is not cancellable you should be able to refinance at that point). I'd pay off the plastic and not worry about PMI - its not really a burden until you get up above $150K or so.

Hi steelcitygal,

Wow... so many responses... so few answers to your actual questions ;~)

Paying the debt off will raise my credit score (it's about 700 now). Higher credit score = better interest rate. But a higher downpayment means no PMI (with my current savings, the highest downpayment I can afford is less than 5% of the cost of reasonable housing in the area).
What to do?

A) Pay down your revolving balances... zero reason to carry them if you have the cash to pay them off.
B) Get pre-approved for either an 80-15, or 80-20 combination purchase financing.
C) ALSO weigh either 95% or 100% single-loan financing with PMI.

PMI is tax-deductible now (for earners making $100,000 or less.) The new deductibility actually makes a single loan at a lower interest rate (but carrying PMI) often more attractive than the combination alternatives.... and *DEFINITELY" safer and better than entrapping your safety cash equity into your real estate as a down payment.

My intuition is that this summer is going to be the last hurrah for decent affordable housing in my city.

In *EVERY* real estate market there are *ALWAYS* unique deep-discount deals to be found... sometimes they are more prevalent (like right now,) but even when less prevalent they are there for the patient & diligent home shopper. Don't let FEAR (nor greed) impede your reasoning.

There will always be good deals to be found.

Most importantly, what do lenders care about most: total debt-to-income, or debt-to-card-max?

Back-end debt-to-income ratios... which is;
The total of all minimum credit payments, housing payments, and monthly housing taxes & insurance,
DIVIDED BY
Gross pre-tax average monthly income.

So what's worse overall -- PMI, a higher interest rate, or some sort of 80/15/5 home equity shenanigans? Do you need a high credit score to qualify for an 80/15/5 or 80/10/10?

Keep your scores north of 700, and you will be fine. 720 will be treated a little better, and 740 is the highest score the mortgage world cares about (higher scores than 740 gets no better terms or rates.)

Else, get a good trustworthy loan officer (not some retail clerk) to grind out the various ways your financing could be structured and priced, and add the tax considerations for PMI relative to your income.

Luck!
Dave Donhoff
Strategic Equity & Leverage Planner

.. so few answers to your actual questions ;~)

Says you? LOL

In general, I don't think it's wise to be advising someone who doesn't seem to be able to afford a home about how to get one anyway. That kind of attitude is partly to blame for the fiasco happening right now.

As you can tell by the replies posted here, there are a lot of different opinions and ideas steelcitygal, but you sound like you can sort it all out. I really hope that you can make your home ownership dream a reality soon.

Just an FYI due to the lending fiasco if you plan on using a conventional loan (fannie mae) and are in what is considered a "declining" market be prepared to come in with at least 5% down.

If you qualify for a 100% loan you will only be approved for 95%. Qualify for 95% you will be approved for 90%. This went into effect 1/15/08, so I would start saving up for a down payment!!!