Loan to pay off debt vs. own plan?
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| Sat, 09-18-2004 - 1:23pm |
We (hubby and I) have over $15K of debt (everything from late fees at Blockbuster from three years ago to Bally's). Neither of us were fiscally responsible in the early years of our relationship. Therefore, our credit scores are awful. Between the two of us, there are 35 accounts that are seriously overdue/in collections. However, we want to be in a position to get a house (about $150K in our area) by January 2006.
I sat down with all my files and made an Excel spreadsheet with all of our debt on it. I also made a spreadsheet based on my current income (I'm the primary breadwinner and have a consistent income) through December 2005. By then, if we're able to stick to the plan, all but the six largest accounts (totaling almost 12K) will be paid off. Then it will take until December 2009 to pay off the six largest. My concern is that I've read in several places that companies won't give you a home loan unless all debts in collection are paid off in full. And I REFUSE to still be living here in five years.
Would it be better to try and get a loan for the $15K (assuming that anyone will give us one with our credit ratings) and pay off all of our debt so that only one current account will show up on our credit score by Jan 2006? Or should we just keep at it and see what happens in the next fifteen months? Maybe try to get as many paid off as possible by June 2005 and then apply for a loan for the rest?
Also...does it hurt my credit to pay off old debts that do not appear on my credit report? Several are to doctors and hospitals, and ethically speaking I know I have to pay them back, and I am going to. I just want to know what to expect on my credit score by doing so.
Thanks for any help you can offer.


I was going to say, do as much as you can and then if apply for a loan to take care of the rest when you get probably within 6 months or so of the mortgage.
I'm not sure how paying off debts that aren't on the credit report will affect the credit report???
Becky
CL of 4th, 5th & 6th grade Scoliosis
www.goodmortgage.com
They have a section titled "Learn" with some really good articles about credit reports and cleaning yours up, and what the most important things are you can do to get your credit up to par for a mortgage. Also, when it comes time to apply, they can help. They have some good programs and the people are really helpful.
Although goodmortgage.com had some competitive programs that we seriously considered, we took our mortgage through a bank that we've had a relationship with for several years. Because they knew us and we had always handled our debts with them well, we got a fairly personal touch. Also, it's a relatively small bank and they have excellent customer service. Our loan officer sat down with us and basically pre-qualified us without a fuss based on our statements about our income and debts, and was very helpful.
So, when the time comes, try several different options--you will be surprised how many options there are out there.
In the meantime, some thoughts that might help you:
Lenders don't give a flip about any debts that don't show up on your credit report. But, be sure they aren't *eventually* going to show up there in a bad way--because banks will balk, even at the last minute, at negative items added to your report recently. So, my first step would be to get everything current, including items that are not yet on your credit report, so you won't have any current negative marks. But don't worry about paying off the ones that aren't showing up--as long as they are current and not likely to report you just for spite, it won't matter to lenders the amount that you owe that isn't on your report.
Now, for the debts that do show on your report, the absolute first thing you need to do is get them all current. That may mean calling each creditor and making payment arrangements that you can honor and getting them to make your file current. It may mean getting a consolidation loan (if that's even possible for you) and paying off some of the delinquent accounts. You might, since it seems you have quite a few accounts that are past due, want to look into a non-profit credit counseling agency like CCCS. Others here can offer you advice and suggestions on that--just be careful. There are pitfalls, so research before you do it.
Once your accounts are all current, you should focus your efforts on getting as many as possible down under 50%. By that I mean, whatever your credit limit on each debt is, try to get the amount you owe under 50% of the credit limit. Creditors (such as mortgage lenders) see this as a sign you can handle your credit responsibly--because you have credit available that you haven't delved into. Small debts matter less to them than large debts.
Also, creditors like to see older accounts rather than new ones, and they don't like to see you applying for a bunch of credit all at once--they see that as a sign of desperation and the inability to handle your finances responsibly. So don't borrow money if you can help it, and I would recommend even against playing "credit card shuffle" where you shuffle your debts from one card to another to get better interest rates, at least until you've gotten your mortgage. (Now that we are in our beautiful home that we love, we have started applying for 0% balance transfers and taking advantage of them. But we waited until *after* the mortgage finalized so it wouldn't look like we were just shuffling debts around.)
You *can* get a mortgage, even with bad credit, but you'll do a lot better the cleaner your credit. Also you'll need some money in the bank. Even if your seller covers your closing costs and you get a 0-down mortgage, you will have expenses--most mortgage brokers will require you to have at least a little cash at closing, plus they like to see that you have a cushion in case of emergencies. Also, you'll have other expenses, such as a lawn mower, weed eater, and the million other little things that homeowners have to take care of.
So, once your debts are current and you've begun paying down at least one of them to below that 50% level, start setting aside money in the bank as well.
Now time for the disclaimer: I am not an expert, a financial professional, nor do I claim any special or definitive knowledge on the subject. These are simply the experiences we have had and the things we have been told or read along the way. My advice is based purely on personal experience and the advice I was given by mortgage professionals.
Good luck, and I wish you the best. We are so happy in our home, and I hope you will also have a good experience.
Blessings,
Heather
P.S. Also don't hesitate to go ahead and call a mortgage broker or two and your bank's mortgage loan office for advice. Tell them your goals and ask them what you can do to best reach those goals. They may have really good suggestions.