What house to buy?

[wolf_Q]

House #1 belongs to my fiance, he paid $135k for it when the market was high, I'd buy it to get the $8k credit and to lower the interest rates. I think it could sell for $120k but I could buy it for what he owes ($107k). It's a nice house just very small and he wants a garage. There's not enough room with the lot to put $80k into it to add on and it wouldn't add $80k worth of value I don't think.

In house #2 he could do a lot of the needed work, wouldn't have to hire anyone I don't think. We've thought about putting a basement apartment in it. We would have to purchase it together but we can still get the $8k credit if we buy it before we're married. I have a good down payment I'd be willing to use for this house. He wants to keep house #1 if we buy house #2 and rent it out but we really couldn't rent it for much more than the payment.

[wombat2u2004]

Well, then sounds like House No.2 might be the better option.
But do keep in mind, that if you keep House No.1, and rent it out, the rent receivable could be classified as income, and taxed accordingly. I'm not sure if your taxation laws allow for rent received becoming untaxable if the entire amount goes to pay the mortgage on that house.
We have a system here in Australia called "Negative Gearing", which does allow that. Best check that with a lawyer or your taxation office first. You don't want to be faced with a great big tax bill each year.

[pomtzu]

I would go with #2 if you can afford it. The other is a pretty small house and lot, and you would outgrow it in no time. I'd keep looking for a while tho - you might find something else that would suit you.

[BitsyNaceyDog]

I'd either go with house #2 or keep looking IF you're planning on having kids. Of corse if you're not planning on kids then this won't be an issue. But if you are house #2 will be a lot more comfortable. Even if you're not planning on having kids for several years you can be paying down the mortgage and fixing up the house in the meantime.

[wombat2u2004]

Yeah, and the extra land would be more suitable for your pets.