Ask The Money Coach

Although homeownership offers many benefits – not the least of which are tax perks – buying a home should never be done just because you can get a tax break from the government. Making the leap from renter to home owner is best done when you’re financially ready, credit-worthy and personally prepared for the rights and responsibilities of homeownership. Having said this, let me first briefly explain the $8,000 tax credit and then tell you why I think you should definitely wait to buy a home later.

Some Basics About The $8,000 Housing Tax Credit

The First-Time Home Buyer Tax Credit offers up to $8,000 to individuals who sign a written, binding contract by April 30, 2010 to buy a new home. Then you must close on the home by July 1, 2010 in order to be eligible for that tax credit. The government’s definition of being a “first-time” home buyer is someone who hasn’t owned a home in the past three years.

The tax credit can be used as a down-payment or closing costs on a FHA-insured mortgage. In 2009, figures from HUD show, the typical FHA borrower had a credit score of 670. That’s because FHA loans are primarily based on your debt-to-income ratio, not your credit scores. In fact, there are no credit score minimums required to get an FHA loan – at least none imposed by the government. Most lenders do, however, want to see credit scores of 700 and higher amid the current credit crunch, in order to give you a mortgage with a decent interest rate.

Better to Wait and Prepare for Homeownership

In your case, unfortunately, several factors lead me to believe that you and your husband are simply not ready at this time for homeownership – and thus should wait to buy a house.

First, your message indicated that you have three credit cards that you’d like to pay off. You didn’t say exactly how much debt is on those cards, but you did state that the $8,000 tax credit can be used to pay off those cards. (That’s not actually true.) In any event, I’m assuming you have thousands in credit card debt.

I also assume you don’t have very much saved, because if you did, you likely would have used that savings to pay down debt. The ability to save money consistently over time is good preparation for becoming a homeowner because you will no doubt have to dig into savings to pay for the ongoing costs, maintenance and upkeep that all homeowners face.

Lastly, the poor credit scores that both you and your husband have tell me definitively that you’ve not yet learned to responsibly manage credit – or are in the early phase of re-building credit after past problems. Why take on the biggest form of credit there is – a mortgage of perhaps a few hundred thousand dollars – if it’s only going to potentially get you in more trouble or further damage your credit rating? Don’t run into buying a home under these circumstances. Worst-case scenario – for a couple that’s deep in debt, with no cash reserves and poor credit already – is that the two of you could wind up in foreclosure. We had 2.8 million foreclosures filings in America in 2009, according to RealtyTrac. Experts predict there will be between 3 million and 3.5 million foreclosure filings in 2010. I don’t want you to become one of those statistics.

I also don’t want to completely dash your dreams of becoming a homeowner, because I truly do believe that it’s a great thing – once you’re ready for it. But instead of rushing to try to buy a home in less than six months, take the necessary time to do what’s required to become a successful homeowner. This means get your credit together, work on becoming a disciplined saver, and knock out a good chunk of that credit card debt. If you can do those things, you’ll be setting yourself up to enjoy the joys of homeownership – as opposed to setting yourself up for failure.

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 Lynnette Khalfani-Cox, The Money Coach is a personal finance expert, speaker, and author of numerous books on personal finance. She appears frequently as an expert commentator on television, radio and in print.

One Response to “My TransUnion Credit Score is 580 and My Husband’s Credit is Worse Than Mine. Do You Think We Will Be Able to Buy a Home by June to Get the $8,000 Tax Credit or Should We Wait?”