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Level 2

House Loans and Down Payments

How do I get approved for a house loan if I have a very low credit score and quite a bit of debt?
52 Replies
Level 20

House Loans and Down Payments

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.

Level 2

House Loans and Down Payments

This sounds like personal technicque, but not a bank or mortgage company metric whatsoever.  

Level 8

House Loans and Down Payments

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.

Level 7

House Loans and Down Payments

You need a credit card to improve your credit score, Carl. It does not help when you close your credit card accounts.
Level 8

House Loans and Down Payments

In all fairness to Carl, he said to stop using the credit cards.  He did not say to close them.

Level 7

House Loans and Down Payments

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.
Level 20

House Loans and Down Payments

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.

Level 20

House Loans and Down Payments

In response to Article, it's your payment history that has more impact on the credit score. Not the charging history so much.

Level 7

House Loans and Down Payments

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.
Level 7

House Loans and Down Payments

Right! You can close some accounts and leave a few open. If you pay off all. Then you will have frozen your payment history.
Level 8

House Loans and Down Payments

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.

Level 20

House Loans and Down Payments

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.

 

Level 8

House Loans and Down Payments

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.

Level 20

House Loans and Down Payments

 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.