A Couple's Debt, Down-Payment Goal, and Rent-to-Own Offer
You are a financial counselor at a nonprofit. A married couple, both 34, have gross income $68,000 and take-home pay $4,650/month. They rent for $1,450, have $22,000 in credit-card debt across four cards (APRs 19.9%, 22.9%, 24.9%, and 27.9%; minimum payments total $610), a car loan $310/month, student loans $180/month, and $1,200 in savings. They have two children, ages 3 and 7, and pay $420/month for child care. Their other monthly spending is $1,480 for food, utilities, insurance, and gas. They have no retirement match. Their stated goal is to buy a $210,000 house in 18 months with 3.5% down. A rent-to-own promoter has offered a $230,000 house with a $7,000 option fee and $1,900 monthly payment. They ask whether to stop saving, borrow from a retirement account, or use the promoter.
1. Build a monthly cash-flow statement and determine whether the 18-month home purchase is realistic. Show the arithmetic.
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Cash flow: Income $4,650. Expenses: rent $1,450; credit minimums $610; car $310; student loans $180; child care $420; other $1,480. Total = $4,450. Surplus = $200. Cash needed to buy: 3.5% of $210,000 = $7,350 down; closing costs about 2-3% = $4,000-$6,000; reserves about $2,000. Total roughly $13,350-$15,350. Savings of $1,200 plus 18 months at $200 = $4,800. They would be short roughly $8,550-$10,550. Housing ratio: estimated PITI on a $202,650 loan at 6.5% for 30 years is about $1,281 principal and interest plus $350 taxes and insurance = $1,631. Back-end ratio = ($1,631 + $610 + $310 + $180) / $5,667 gross monthly = $2,731 / $5,667 = 48%. That is above the conventional 36% guideline and typical FHA 43%. The purchase is not realistic in 18 months without a large income increase, a much cheaper house, or debt payoff. They should not stop all saving; keep the $1,200 emergency fund and build it while attacking debt.
2. Compare the avalanche and snowball methods with their $200 surplus, and explain why not to use the $1,200 savings or a retirement loan.
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Avalanche: pay minimums, then send the $200 to the 27.9% card, then the 24.9% card, and so on. It minimizes interest and shortens payoff. Snowball: pay the smallest balance first for motivation, but with four high-rate cards it costs more interest. A reasonable compromise is $50 to the smallest balance and $150 to the highest APR, but the pure avalanche is mathematically better. Do not use the $1,200 emergency fund: one car repair would push them back onto cards. Do not take a retirement loan: if the job ends, the loan may be due quickly, and withdrawal penalties and lost growth are costly. Before buying, target consumer debt below about $5,000, a 3-month reserve, and a back-end ratio near 36%. They also need to cut spending or increase income; $200 per month cannot close a $10,000 cash gap and pay down $22,000 in 18 months.
3. Evaluate the rent-to-own offer and list three protections or alternatives.
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Concerns: the $7,000 option fee is often nonrefundable and can be lost after one missed payment. The $230,000 price is $20,000 above the stated market house, and the $1,900 payment is higher than the estimated mortgage. Ask who pays taxes, insurance, and repairs; if the seller holds title, the couple builds no equity until purchase. Lease-purchase contracts can also be voided for minor defaults. Protections: independent appraisal, title search, attorney review, a written purchase price and credit terms, escrow of the option fee, a professional inspection, and a right-to-cure clause. Alternatives: rent while paying off debt, then apply for an FHA or USDA loan if eligible; or negotiate a lease-option only with transparent terms and a housing counselor's review. Given their cash flow, renting and reducing debt is safer than a promoter's offer.