Basically, so long as your debt to income ratio is 70:100 or higher, nobody will loan you money. You need to do two things:
- Lower your debt. Stop using credit cards and get them paid off as fast as possible.
- You'll need to prove that you can make mortgage payments. You do that by putting money every month without fail, into savings. The amount you deposit each month needs to be 'at least' the amount of what you think your mortgage payment will be. You'll need a two year history of this that will need to be consistent.
This does two things. First, it gives you the minimum 15% down payment you will need. (down payment requirement can be as high as 30%, depending on your credit score at the time you apply for the loan.) Second, with a consistent history of putting say, $1000 a month in the bank, it indicates that you most likely can afford the $800 month mortgage payments, and that most likely, you will make those payments without default.
This sounds like personal technicque, but not a bank or mortgage company metric whatsoever.
Lenders don't care how much debt you already have. They are concerned about your ability to repay a loan. People with low credit ascores can still get a loan to purchase a house. There are FHA loans specifically designed to do this with a minimum down payment. Your ability to get one of these loans depends upon your ability to repay the loan and to service all your other recurring obligations at the same time.
You need a credit card to improve your credit score, Carl. It does not help when you close your credit card accounts.
In all fairness to Carl, he said to stop using the credit cards. He did not say to close them.
Dave, when you do not use your card i.e when you stop using your card and pay only the monthly due. You will pay off the credit card balance. So, “stop using your card” is also as same as close your credit card. Unless, one keeps the credit balance at around 80% i.e spend about 20% of the credit limit.
Hey, when you're trying to get out of a debt hole or fix your credit, the absolute first thing you *must* do is...
STOP DIGGING!
That doesn't mean you throw the shovel away.
In response to Article, it's your payment history that has more impact on the credit score. Not the charging history so much.
Right, Carl. It’s your payment history and not the charge. So, there will not be any payment due if you do not owe even 0.01% of your credit line to pay for.
Right! You can close some accounts and leave a few open. If you pay off all. Then you will have frozen your payment history.
Not quite correct. If you pay off a balance then close a credit card account, the available credit for that card no longer contributes to your utilization rate. Closing the account may make your credit score drop if closing the account increases your utilization rate for the credit cards that are still open. Closing a paid off account is usually not a good idea. Better to keep a zero balance for a credit card that is just used once or twice a year to keep the account active.
Hi Dave,
We just have different views and outlooks on credit is all, and I'm okay with it. For me, I used to have a lot of debt in the form of credit cards, signature loans, car loans, and more. (I'm not including the three mortgages I have on three of the four properties I own). One day, I came to a realization that while the wife and I were making good money, We wern't getting to keep hardly any of it, yet I was paying taxes on it. It just didn't make sense to me.
So I had a "heart to heart" with the wife and we cut up all the credit cards. All of them. Every single one. That was just over 10 years ago. With the exception of 3 mortgages (I have one rental property I paid off about 2-3 years ago) we have no debt. We've never been happier and now we are no longer a slave to all those lenders. The "relief" that has overcome us is indescribable and impossible to put into words. Yes, I've still got those three remaining mortgages. But 95% of the rental income from the paid off rental is going towards paying off another.
Even as it stands now, if we want something, we pay cash for it or go without. Just four years ago my wife's 1999 Nissan Quest with just over 300K miles on it finally "bit the dust" and was way, way, way beyond anything close to what I would call "economical repair". So it was nice to walk into the Nissan dealership in Feb 2014, buy a brand spanking new 2013 Rogue with only 6 miles on the odometer, write a check for the full amount we negotiated and be done with it. Now we're not anything close to "rich" making roughly 50-60K a year between the two of us. But we've basically "changed the family tree". When we die, we will not be leaving a lot of debt behind for my kids to have to deal with. But on the other side of that coin what they inherit won't make them rich either. They'll have to do like we did (and they are doing it) and earn their wealth by working smarter, more so than just working harder.
As it stands now, it's looking like I'll have the other three mortgages paid off in 7 years, give or take. So am I bragging here? You bet! Why? Because I can! Why else? Do I care the neighbors think I'm cheap? Not a bit! I no longer concern myself with keeping up with the Jones'. In a few years, we'll have the Jones shaking their heads in a stupor while wondering how we did it on our meager income, and wanting to be like us.
Carl,
Congratualtions on being nearly debt free. We don't really have different views on credit. Even with our different personal financial management practices, our credit scores are still calculated the same way. I don't subscribe to the Dave Ramsey approach to credit use but his debt free goal is one everyone should aspire too. Unlike Dave Ramsey, I believe in using credit. I am not a pay cash for everything guy but instead purchase everything on a cash-back-reward credit card then pay off the credit card balance in full each month. My FICO is 800+ even with six active credit cards and 11 mortgages. Even when I am totally debt free in seven years, I will still use credit cards, I will still finance my next car with a zero-interest loan, I will still finance the next property I purchase. I will continue to use credit responsibly and, like you, my heirs will not inherit a debt laden estate. Even if I pass away today, my estate plan includes a detailed pathway to satisying all my debt.
I will continue to use credit responsibly
That is the key! For most, of which I was one, by the time you realize you've been irresponsible with credit, you're already in pretty deep and it's difficult to find that line between responsible and irresponsible use to get back to the right side of that line. So the line has to be redefined. To redefine it for me, the only way was to get rid of all the credit and outstanding debt I possibly could. Once that was done I discovered I really didn't need any "new" credit.
I keep a 4-figure balance in the emergency account and have a check/debit/credit card for that. But mine is one of those cards that if you don't use it for 6 months, they deactivate it. Now I make periodic and consistent contributions to the emergency account, and I'll use that card as a credit card about once a month, to do something cheap and simple, like fill up the gas tank, or maybe to buy birthday presents for someone having a birthday that month. But while I may use it as a credit card, that card would not work and would be declined if the money wasn't in the account it's tied to. Now I don't know "how" it works, but I do know that card number shows up on my credit report. Of course, it's always got a "perfect" payment history with a zero balance due. I don't know why it's there, but I don't care really.
The nice thing is, if I really "needed" money today and didn't have enough in the emergency fund, I could walk into my credit union and walk out a few hours later with whatever it was I needed to borrow - within realistic limits of course.
For example, if I needed a new roof on my house which would cost about $20K, I don't have that much cash. But I know I could have it by the end of the business day. But like you said, the key to using credit is using it responsibly. Is credit bad? Only if used irresponsibly and the borrower makes it bad. But when used responsibly it can be a real life saver in times of need, and contributes to that "financial peace" with the comfort of knowing if you need it, then you got it.
Question if I'm putting an amount in the bank greater than what I would be planning on paying for a mortgage where do I live, unless I am mistaken monthly rent generally accounts for at least 1/3 of the average Americans income. So if I am paying say 875 for rent couldn't I put just an additional 400 in the bank for to show an ability to pay a 1200 a month mortgage?
That generally works just fine. All you do is provide a copy of the current rental contract along with your mortgage application for what would be your primary residence if the loan is approved. The only real thing that would matter to the lender is how much time you have remaining on the current lease, and/or what the early out options/costs are to break the lease early to move into your new residence. The early out options don't really matter all that much though.
Listen the banks care about 4 things, 1st how long have you been at your job or in the same career field, typically they need a 2 year minimum. 2nd they want to know how much money you make gross yearly. 3rd how much all your bills total monthly, thats all the minimums added up. The minimum due not what you may send in case you send extra on your bills which is a good thing. 4th of course your credit scores from Equifax, Experian and transunion. They will take the middle score of the 3 and use that as your basis. Which FHA or VA or Fani Mae or who ever programs have different score minimums. They will look at your history and any missed payments mostly in the last 2 years. More to follow out of space
There are so many factors to consider. Let me give my scenario. Three years ago my CS was 564 and I had a moderate amount of debt. First thing I did was make a plan. Where did I want to be financially one, two, five years from that point. I also factored in where I wanted to be physically and mentally. I was not happy with the job I had at that time and knew that I had to make that number one priority within my plan. I was making good money but not happy. I was commuting over 2 hours a day to and from work. So I said what the heck and changed my career path. Pick a career that will at the least have you wake up and not dread going to work. It now takes me 25 minutes each day to go to work and back ( about $50 a week in gas ). My new job pays less but their benefits are much better ( about $80 a month ). I get more exercise in my new job and I am happier.
Now let's touch on your CS. Once I got the first phase of my plan in motion the second was all about numbers. I started by getting a small personal loan. Just enough to pay my credit cards down to zero. I kept my balances at zero for about two months ( remember most creditors look at your revolving credit ). With that one loan my CS jumped to 648. Now I had credit card companies wanting to give me credit. You have to realize that at this point my CS had gone up almost a 100 points. At that point I realized that your utilization of credit and the percent was more important to the creditors than how many inquiries you have. So I took advantage of those offers knowing that my score would drop but at the same time my utilization would drop. The higher your credit limit, the more you can put on credit and be at an acceptable limit ( 15% of $3500 CL= $525 ). Guess what. It worked. I now make only $32000 a year with a CL of $30000. ON TIME PAYMENTS IS/ARE A MUST.
So here we are now. It took me three years to get to this point. I finally closed on a house.
To Crysi329,
Hang in there. I know you will own a house/home one day. Sooner than later.
@Crysi329 Have you downloaded the Turbo app to keep track of your Credit Score and Debt to Income ratio? These are very important metrics to track on your quest to getting approved for a home loan. You got this!
Honestly how could you possibly put that amount into savings every month if you're already paying 1000$ a month for rent
I have a very low score, but I can always afford my place of living. I have 3 kids so life gets the best of my income.
I just did this same thing. I started with a 417 credit score. I now have a 706 and just bought a house in August. The whole process took about 18 months. I started with a secured card which I used less than 10% of the available credit monthly (ie. reloaded my starbucks card). I paid the bill before the statement arrived so that there was always on-time payments but never carried over a balance and never paid interest. I disputed every little thing on my credit history, and hey, a few things were removed. It doesn't hurt to try. I paid off a few pesky delinquent bills but I also racked up some student loans. Once my wife and I had enough reported gross income, we paid off our car loan and applied for an FHA 3.5% down loan. We were approved for a brand new 280k house. Credit doesn't have to be scary. There are many resources like nerd wallet that can help you get on track fast.
it is the having the available credit card limit that marginally helps your credit score, not the use of the card. Stopping use of your credit cards is in no way equivalent to closing your card account for credit scoring. Want to improve your credit score stop building your credit card balances, pay them on time and reduce the balances owed. not only improves your credit score but will allow you to start saving.