Advice for buying a home

[Tyler Christensen]

Here's the situation that we're in. I am a doctoral student with:
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little debt (car loan and 35k in student loans),

little assets (3k in an index fund, 7k in a target retirement fund/Roth IRA, 1k in individual stocks, 5k in cash),

little income (just my student stipend of less than $20,000/year and another $2-3000 from web design and illustrating jobs on the side),

and a little family (wife and two kids).

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We've decided to buy a townhome (we'll be here for at least three more years) and found one at a great location for an amazing price. Our offer was accepted and the bank will pre-approve a loan for us provided we pay our car loan down from $8,500 to $2,500. We really like this bank because they will work with multiple first-time home buyer programs (HANDS and HOP), programs that will match our down payment and then some, giving us an additional $8,000 to put down on our home (with our $5,000 cash). We've contacted a dozen or so banks and mortgage lenders in our area and this is by far the best option we have. So we have to figure out how to pay down our car loan without using the cash we have saved for a down payment and hopefully keeping as much money as we can in our meager retirement account. Here are a few possible scenarios. We could:

1) Cash out our $3,000 index fund and $1,000 in individual stocks, taking a loss (this loss won't help us with taxes, our income is so low we get everything back anyways), and scrounge up loose change for the rest.

2) Ask our bank to lower the interest rate on our debit card credit line (currently 9.75%), extend our credit from $1,000 to $5,000 and live off credit this summer until we can take out more student loans in the fall. If they won't lower our rate we could get a second credit card and use it.

3) Try to get some extra work pronto. I do a little web design but don't have a ton of free time (between my research and school). My wife is an illustrator, already extremely busy on a project that won't pay her until the summer time.

4) some sort of combination on the previous three.

So, what do you think? What would be our best option or is there something I haven't thought of? (I have no rich uncle).