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Dear Dr. Don,
When applying for your first mortgage and purchasing a home, is it better to pay off all credit card debt beforehand (approximately $13,000) but then have no down payment available?
Or, is it better to continuing slowly paying down the credit card debt while accumulating a small down payment of $10,000?
-- Amanda Accumulate
 Dear
Amanda,
Don't use all your spare cash to pay off your credit cards. Put the money into savings for the down payment on your new home.
One of the certain outcomes from the subprime mortgage lending debacle is that lenders are going to be more careful. That means a no-money-down mortgage will be much harder to find, and more expensive if you do find one.
Also, try to make a down payment that is at least 20 percent of the purchase price. If you cannot do this, a first mortgage lender will require private mortgage insurance, or PMI. Homeowners hate paying PMI because they're paying an insurance premium to protect the lender's investment. However, it's one way for a homeowner with a small down payment to qualify for conventional financing.
A PMI calculator can help you estimate the monthly PMI expense.
A piggyback mortgage is one way for a homebuyer to avoid PMI. With this option, a second mortgage is taken out at the same time you close on the first mortgage. The first mortgage is for 80 percent of the home's value, so no PMI policy is required. The second mortgage, either a home equity loan or a home equity line of credit, finances the balance remaining after considering the down payment.
An 80/20 piggyback may have been possible before, but traditionally a piggyback loan has been structured as an 80/10/10 loan, meaning the homeowner puts10 percent down.
FHA loans give homebuyers the ability to finance a home with a small down payment. The
homebuyer pays a mortgage insurance premium and the size of the loan is limited based on
housing costs in your county. You can look up the limits on
the FHA "mortgage limits" Web page.
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