We have a relatively large amount of credit card debt (about $25,000) for the amount of credit we could get (very little; I don’t apply for credit cards, but if I do, they either get rejected or give us $500 worth of credit at 26% APR). My credit score is not good - 641 - because of the high amount of debt. We basically only have my income (which is good but doesn’t go as far in San Diego as it might elsewhere) as my husband’s still in school. I was checking my credit score and various other info and I realized that a person can get a much better rate on a home loan than on a car loan with the same credit score. Maybe I should be embarrassed to admit this, but I never realized this before. We just got a car loan about six months ago (fairly inexpensive, used car, we needed it; our other car is paid off) and the rate was unfortunately high (11%) due to our our poor credit scores. I always assumed that a house is just out of the question for us for now because of the terrible rate we got on the car. But the FICO score report I just got says we could get a 4.628 rate on a house with my current score. Obviously, with a good score, we could get a much better one. But does this mean a house is not as far off a dream currently as I would have hoped?
Score Rate for 30-yr mortgages
760- 850 3.585%
700- 759 3.807%
680- 699 3.984%
660- 679 4.198%
640- 659 4.628%
620- 639 5.174%
We live within our means currently but are not paying off the credit card loans at any fast rate. We are making a plan to do so. Trouble with the income situation is my husband is just in undergrad and he’s not exactly sure if he will go on to grad school or not. (Different story and thread.) Is it true that I could try to get a home loan even as we speak with my credit score of 641? It is not vital that we get a home this very moment, but what I would like to do is just monitor the market for the next two years and be able to jump on a house if the right one comes up. I know we don’t have forever to buy a house while prices are low AND mortgage rates are low. And as for the fact that the rate we would get now is not as good as if we had a better score, we could just re-finance once our credit scores get better, right? What if we wait till we have a better score but rates go up anyway? So there’s no real downside to that gamble, right? What am I not considering in this equation? (I know there is actually plenty I haven’t mentioned such as having savings to deal with house issues that one does not have to worry about as a renter, property tax, etc., etc.; but I mean, as far as getting the loan and trying to get it even with our current scores?)
Down payment? If you have that much credit card debt, do you also have enough cash for a down payment? And if you do, you should really pay off the cards first.
My mom is an RE agent, retired but she still works a bit. She sold a few condos last year - I think around 7-8. Yesterday I was talking to her and she complained about the current deal she is working on and the difficulties with mortgage application (with 30% down payment etc). I asked her how that was with the deals last year.
Her response: all the deals last year were cash only. No mortgages. Mortgages are apparently are a huge hassle to get nowadays, incredible amount of paperwork and very high requirements.
Renee - that is also part of my dilemma - we want to save for a down payment and can start doing so and hopefully use my bonus next year for part of it. (But, operative word start - we don’t have one yet - only other option would be to cash in 401K which sounds like a dumb idea…) Then I think, if we can save for the down payment, we should pay down the debt - but obviously no one is giving out mortgages without a down payment these days. But yikes Terr - I didn’t realize it was that bad. Wow. OK maybe it is a little further off than I thought. Nose to grindstone, pay off the debts, save for a down payment, and encourage husband to work first instead of school. I guess. But is it really that bad? Nobody gets mortgages? Or nobody wants to sell to people who don’t have cash?
The sellers really don’t care much exactly how you’re going to give them the big wad of cash - whether the cash is yours or the bank’s (well they do care a bit because getting a mortgage may complicate the deal and kill it if the mortgage falls through).
It’s the banks that are extremely tight with giving out mortgages right now. I would suggest, if you’re set on buying a house, that you go to your favorite bank, sit down with a mortgage officer and figure out whether they will approve you for a mortgage, what is the max they will give, and on what terms. All this before you house-hunt.
Then you are living too high if you want to cut your debt.
We don’t know your specific financial situation so what follows is only a guide. Live less than your means. If you are holding steady with income but unable to reduce credit card debt that well, it’s time to reassess and cut out everything that isn’t essential. Essential as in life and death: rent, utilities, insurance, home cooking food. Everything else should be on the table for cutting costs.
I think being able to buy a house is far away in your future. Sorry.
Buying a used car using a bank loan is not even in the same ballpark as a home loan except for the fact that they both use the name LOAN. The risk to the bank is not linear as repossession of a car is much easier than repossession of a house, etc.
I think a visit to a bank and a mortgage specialist there would be very helpful to try and work towards one. But I suspect what they are going to say is: you need at least one set (if not two sets of parents) to cosign any form of a mortgage. Your husband (judging simply by his being an undergrad) has little credit history so while yours is already questionable his is effectively non-existant.
If you want to buy a house:
Have your husband graduate and get a job (grad school is fine as long as he does one with a stipend/pay and is not paying tuition)
Pay off your credit card debt immediately
a. Your visit to the bank will give you an opportunity to take a small loan at a better interest rate that you can use to pay down some of your CC debt and at the same time improve your credit score by paying off a loan and keeping it in good standing.
Pay off your car ASAP (not as pressing as CC as car loan rate is lower, I presume)
Never take a car loan again, if you can’t pay cash, find a cheaper car or ride a bike, seriously.
2-3 years after these debts are off the books, start the home buying process. The better rates and mortgage that you can get there will be so much better than anything today that you will end up with a better house for less money. BUT you have to work for it now.
The thing they don’t tell you about these fantastic rates is the size of the downpayment they require you to have to get these rates.
I bought my house 8 years ago for $190K with $40K down and got 4.75% for a 20 year fixed.
Because of the economic downturn my house is now worth about $140K. I owe about $107K on it. I just went to refi to a 10-year fixed and have a 795 credit score so I thought I’d be getting an awesome rate. Even though they waived all closing costs the best they could give me was 4% and said it was because I still owed too much on the house.
One other thing to consider in rent vs. own question is how long you intend to stay in the house. Once your husband graduates and looks for a job there is a good chance that you may need to move to another city. Selling your current house and buying another one somewhere else is quite expensive. There will be costs involved in preparing your house for sale and the typical 6% commission takes quite a bite.
And as others have mentioned, you need $25,000 in savings, not $25,000 in credit card debt before you even think about buying a house. Have you considered borrowing against your 401K to effectively pay a lower interest rate on your C.C. debt? There are risks involved with this strategy, but if you can live below your means it should work.
I don’t mean to pile on the OP here, but running up $25,000 in credit card debt means that she can’t live within her means almost by definition. So I think dipping into any retirement savings is a terrible idea.
Lots of excellent advice here though. Just to add an incentive to paying down the debt - a credit card debt of $25,000 almost certainly means you’re incurring interest at over $100 per week. Or to think of it this way, say you husband got a $40k-a-year job right now. If every penny he earned (after taxes) went straight towards that debt for a whole year you still won’t have paid it off.
As pretty much everyone else has already said you need to dig your way out of your current debt hole before loading yourself up with more.
