Goal: Buy a house. Obstacle: Credit Disaster
January 31, 2014 8:12 AM   Subscribe

We want to buy a house but my credit is less than perfect. How bad is it? Well, you'll have to look inside.

Here's the situation: my wife and I would like to buy a home at the end of July when our current lease expires. Her credit is good (710), we have a solid income ($75k), and we'll have about $15k saved up for a down payment by then. What's the problem? I'm a recovering financial disaster.

I made horrible choices in my previous "life"/marriage which have resulted in some problems that linger to this day. First, I have about $25k in student loans that defaulted and are now in collections. I'm paying $500 a month, every month, but they are still listed as is collections which is a huge negative mark on my credit. They were TERI loans through AES, and I can't find anything about getting them into loan rehabilitation. They've been passed off to a collector (WWR) who has been handling them the past two years.

I had a rash of collections accounts (6-8), all of which have been paid and are closed. I had two credit cards that were in the 2k-4k range that went into collections and I was taken to court - settled and paid both of those. I have a medical collection from three years ago I just barely found out about - it was worker's comp so I should be able to clear that up. I've had two auto loans in the past and paid them on time for the duration. All of these things factor together to give me about a 560 credit score, which is abyssal and embarrassing.

So here's the question: what can I do to get myself mortgage-ready in the shortest amount of time? I feel like we're in good shape with our down payment and income; for the price of home we're looking at, we'll actually be paying less than we currently pay in rent. We've been putting $1500 a month in savings to get that down payment built up while also paying off all these other debts I mentioned. We both have relatively secure jobs, so going forward I feel like we are on (relatively) strong financial footing.

My first step is going to be to take $500-1000 of our normal savings deposit next month and get a secured card for small purchases (gas, etc) to get my good credit built up. It has also been suggested that I get added as an authorized user on my wife's CC. The card is in good standing and at 10% utilization; we use it regularly for small transactions and always pay it back down to that 10% amount. Besides these two things, what else can I do in my current position to help myself out?

I feel like an idiot for getting into this hole. We've made really good progress over the past few years getting things in order, but I have a hard time staying motivated when it feels like nothing has really gotten better. Any advice/input would be greatly appreciated. I'm willing to do what it takes - write letters, make phone calls, etc. if it helps me out. I'm just not sure what to do other than keep paying the student loans and wait.
posted by anonymous to Work & Money (17 answers total) 6 users marked this as a favorite
I recommend that you join a credit union, and ask their loan officers for assessment and advice.
posted by thelonius at 8:20 AM on January 31, 2014

I guess this depends on your state but can't you just not be on the mortgage note? Your wife buys the house?

Also if oyu have 15k saved up for down payment, how much are you looking to put down percentagewise? Because with that credit, I would guess most conventional loans are going to require 20% down, which puts you at a 75k house price. You probably won't qualify for a FHA.
posted by MisantropicPainforest at 8:21 AM on January 31, 2014 [8 favorites]

Time and payments are the only way to repair bad credit.

The housing market isn't going anywhere, and it may be a good idea to rent for another year, pay down your student loan debt and get your credit score up.

I'm notoriously anti-house right now, but I do have some thoughts you might be able to use:

1. The lower your credit score, the shittier your mortgage loan terms will be.

2. I recommend that you be 100% debt free before buying a house. A $500 month payment for student loans is SO much!

3. I also recommend that you have a 6 month savings to cover any expenses should you or your wife be unable to work.

4. Houses are costly, you have a lot more maintenance and insurance costs and other expenses. Have you budgeted for this?

5. Pull all of your credit reports and know what your fico scores are. Knowledge is power.

6. Meet with a loan officer to discuss all of this.

7. If you plan to stay in your house for 10 years, then it may be worth it to buy. If not, keep renting.
posted by Ruthless Bunny at 8:22 AM on January 31, 2014 [2 favorites]

Why does this all sound so familiar?.... oh, yeah, this is very similar to the situation I've been in for quite a while.

My first step is going to be to take $500-1000 of our normal savings deposit next month and get a secured card for small purchases (gas, etc) to get my good credit built up.

That's likely to take longer than you think. Average age of your open lines of credit has an impact on your score; very new credit (less than 2 years old) can drop your score as much as 20 points from credit lines that are 2-4 years old. Consistent payments will help, but that's calculated on a 'percentage of late/total payments', so if you have very few monthly payments, one late payment can be devastating.

Make sure the accounts that have been in collections and paid off have been removed from your credit reports. Derogatory remarks, even one or two, have a significant effect.

Hit creditkarma.com; grab their iPhone or Android app, if you've got the phone to support it. Keep an eye on your score over time, as you make your payments and get derogatory but old marks removed.

Remember, it does get better. I'm floating around 630 now, which is not great, but no longer poor.
posted by hanov3r at 8:32 AM on January 31, 2014

One option you didn't mention was having your wife be the sole mortgage holder, removing your credit issues from the picture completely. I know more than one couple who has purchased a house that way for similar reasons.

If I were in your shoes, though, I would use the money you've saved up for a downpayment to put toward getting completely out of debt before buying a house.
posted by something something at 8:38 AM on January 31, 2014 [6 favorites]

we'll have about $15k saved up for a down payment by then

What about closing costs? Maintenance?

You are not in a position to be buying a house right now.
posted by melissasaurus at 8:39 AM on January 31, 2014 [9 favorites]

For stupid reasons, I didn't technically have a credit score when we were looking for a house. I'd paid off all my debt, and gotten rid of my credit cards in preparation and as a result had some kind of non-credit-worthy status, which according to the bank guy was worse than bad credit.

We ended up buying a house on my husband's financial info alone (bank accounts were shared and counted as "his" by whatever metric they use), and I was still able to co-sign and co-own everything. If you need every cent of both of your salaries to qualify, obviously this won't work for you. But I would recommend talking to someone to see what your options are--we went to our local bank and they were really great and practical.
posted by tchemgrrl at 8:39 AM on January 31, 2014

I have done this!

Here's what *NOT* to do: open new credit card accounts.

Here's what to do: Hire a mortgage broker who knows how to deal with this sort of thing. He'll know what to tell lenders and which lenders will sign for loans for people in your situation. I had to show that none of my accounts were currently delinquent, which in your case would mean bringing the student loan current in some fashion. I also wrote a letter explaining some part of why I had gotten into that mess in the first place.

If you want to buy a house, start talking to someone who knows how to do that, don't just try shot-in-the-dark methods to bring up your credit score, like opening random accounts. For one, it may or may not work as well as you want for raising your credit score, and also, even if you have a good credit score, lenders still may refuse to end to you when they see delinquent accounts on your credit report.

If you actually want to get a house, start talking with the experts.

BTW, I bought my house with a horrible credit score, at several percentage points higher than the going interest rate, and then refinanced as soon as I could into a lower rate. I currently have a credit score of about 775 (because it's been over 7 years since I defaulted on things, and I've done well since then), and a mortgage at 3.875%.
posted by tylerkaraszewski at 8:58 AM on January 31, 2014 [2 favorites]

The main problem with your credit score is delinquencies and defaults. This is not something you can correct by opening new credit accounts. It is only something you can correct by establishing a new pattern of timely payments and lowering your overall debt-to-income ratio.

Also, stop carrying a 10% balance. That isn't helping you at all. Take that $500-1000 out of your savings and pay off your credit card.

If you still want to buy a house, go talk to your local bank/credit union and see what your options are. You are not the first person to want to get a mortgage with bad credit, nor will you be the last. It's not impossible that you'll qualify for some kind of FHA loan.
posted by valkyryn at 9:14 AM on January 31, 2014 [1 favorite]

Just to give you an idea, it took a year to improve my husband's credit score from in the mid-500s to in the high-600s after he missed two credit card payments in a three month span.

The only thing that will really help here is time. If your wife can go for a loan on her own, then that might be the way to do it, but your income would also have no bearing on this, so you'll want to combine any assets you possibly can so she looks better on paper.
posted by zizzle at 9:19 AM on January 31, 2014

Like others have said, you could put the mortgage in your wife's name. Depending on your state, both the house and the debt will still be half of your responsibility. But legally, you wouldn't even be able to check on the balance of the loan or verify a payment had been made. And I also agree you are probably not prepared to buy a house right now, but sounds like your are on the path to buy in 1-2 years if all holds the same.

A lot of people misunderstand what a credit score is. They think it has to do with how trustworthy or good you are with managing money. It's actually kind of the opposite. The higher the score, the more likely a lender will make money off of you if they lend. Obviously if you default and disappear or declare bankruptcy, they lose money, and that is bad. But if you default and pay your debts like you are now, they are going to make a lot more from the penalties and collections agencies than they would if you kept to your payment schedules. Once you finish paying your student loans, you will be a credit company's dream. Credit is so important to you that you will pay them back or settle no matter the cost. Some would argue the loan company lost money on your loan, but somebody else made a killing off your bad credit.

Until them, keep playing the game. tylerkaraszewski has some good advice. Put your own team together: Mortgage broker, seasoned real estate agent, credit union. See what your options are now and how they could improve in 1 year, 2, 3, etc... Know what you qualify for with your current scores, income, savings and how much house that will buy you. Figure 20% down plus closing costs, that $15k won't go very far. Agree, adding cards is usually not the answer, but in your case you want to have something active. What would be ideal would be if you owned a car outright and a bank or credit union would give you a small loan for a few years with that as collateral. It would probably be better terms than your payback of student loans and you could get that out of the way faster.

Even if you were to buy in July, you should already have known a lot of this info by now. You should be actively looking at houses now so you know when the financing comes in how much houses are really "worth" in your area. Start looking at asking price, what you would have been willing to offer and what the houses actually sold for to get a feel for this. Good luck.
posted by Yorrick at 9:41 AM on January 31, 2014

How much money are you looking for? If it is a moderate amount, you could look for private money. I do a lot of real estate investing. I currently own 21 homes, and all of them have some mortgage attached. Not one was financed through a bank.

There are people out there who have $100k or more in a mutual fund, and are earning less than 1% on their money.

You can offer them 8%. Plus, if you default or screw up, their loan to you is protected by the collateral of the house. Investments in the stock market are NOT backed by collateral. So, investing with you gives them a 7% greater return on their money, plus it is backed by collateral.

If you are in a non-judicial foreclosure state (where a mortgage holder can foreclose quickly and easily), you might be able to find private money without too much trouble. You need to create a little business plan presentation type thing to pitch to potential private money lenders.

Where can you find private money? Well, that does get tricky - but the first place to start is at your local REIA (Real Estate Investment Association). REIAs are all over the country, and they are networking clubs for real estate investors. There are almost always some private money lenders at every REIA.

Others posting here are suggesting a path where you can buy a house in a year or two. I don't know what market you are in - but in most places, the time to buy was last year (or two years ago). The market is moving back to being a seller's market. Interest rates are likely going up. In two years, the same home could cost 30% more, and the interest rate could be 6pts higher. If you can make it happen NOW, do it.
posted by Flood at 11:18 AM on January 31, 2014

I second the suggestion to put the mortgage in your wife's name only. You can still be on the title. I'm not sure how this is done, but I know it's an option: when my wife and I were buying our house, I was concerned that we wouldn't qualify for a mortgage because my wife's credit was bad. When I spoke to the mortgage company, they told me one option is that she could be on the title with me and the mortgage could be in my name only.

This ended up being a moot point, as her credit apparently wasn't as bad as we thought it was, and we qualified for an FHA loan in both of our names. But it may be worth looking into for you.
posted by tckma at 11:39 AM on January 31, 2014

FHA might be an option for you. My suggestion would be to find a mortgage broker who is experienced in FHA loans.
posted by rabbitrabbit at 11:44 AM on January 31, 2014

Under the new qualified mortgage rules (QM), you need to get to less than 43% debt-to-income (DTI) for it to be a QM loan. Some banks are still doing non-QM loans (smaller ones, mostly and their DTI requirements might be closer to 50%) but 43% is a good number to work with.

Take a look at some of the houses that you think are in your price range. Use a mortgage calculator to figure out what the monthly principle and and interest payment would be, figure out a high-ish estimate of the annual taxes and insurance and convert that to a monthly figure, then add up all of the payments as they are reporting on your wife's credit report.

Add all of those things up and then divide them by your wife's gross (pre-tax) monthly income. If that number is less than .43 (43%), congratulations, your wife doesn't need you and she can buy a house by herself. You don't need to be on the loan but you can still be on the title.

You might also find out that any accounts currently in collections need to be paid at or prior to closing so you might not be able to be on the loan for that reason too.

This assumes that you'll be putting 20% or more down so that you won't be paying PMI (or qualify for some other program like FHA that keeps you from having to pay PMI). Otherwise, you'll have to factor that into the total monthly debt load.

I wouldn't be surprised at all if the house that you think you can afford gets you a lower DTI than 43% even on just your wife's income. The bank (and the CFPB that made the QM rules) doesn't really care about the monthly budget of a real person, they just want to be reasonably sure that it won't go into foreclosure. If that means that you have to eat ramen noodles, cancel cable and internet, and stop buying clothes, that isn't really their problem.

When my wife and I bought a house, I was working for a temp agency. My income wasn't consistent and there was no reasonable expectation that it would continue so we couldn't include it. Rather than keep me on the mortgage with the debt on my credit report and zero income, I'm just not on the mortgage but I am on the title. Any bank/mortgage company will have no problem setting the loan up this way, they do it all the time and you'll be referred to as "a non-borrowing spouse".

There used to be states (maybe just Wisconsin) where you could include a non-borrowing spouse's income but I don't think this is true anywhere anymore and it might vary from bank to bank anyways but it's worth asking about.

It really does just take time to repair your credit and even if you can afford to get a mortgage with just your wife's income, you should start working on your credit now. The sooner you start, the sooner it will be better.
posted by VTX at 11:57 AM on January 31, 2014 [1 favorite]

I can speak to your TERI loan, but you will not like what information I have, I'm sorry to say.

While Federal loans entitle you to certain rights, like rehabilitation and consolidation, TERI loans are PRIVATE loans. They are NOT Federal loans backed by Federal provisions. But that is not all bad. In Pennsylvania, where TERI loans were done through AES, the statute of limitations for private student loan debt collection is 4 years.

Assuming this is where you went to school, on the date you made your last payment on that TERI loan before you defaulted, that statute of limitations clock would have begun ticking. After 4 years of non-payment, the SOL would have been up, leaving no legal recourse for the debt collection services to go after the money you owed.

But your default TERI loan was passed along from AES to WWR, which is known for being aggressive in going after debtors (WWR has even faced lawsuits before for allegations of not following Federal guidelines set up to protect consumers in debt and violating those consumers' rights . But you don't have a federal loan, and wouldn't have been able to use those provisions in your favor anyway. All you got was the aggressiveness).

WWR contacted you and got you to agree, under the very understandable fear of collections agencies most of us have, to a payment plan with them so that their client, AES, could get that money from you. Otherwise, AES would have been out of luck.

Usually, payment plans work in your best interest when you are in debt. However, the moment you started making those $500 payments on your defaulted TERI loan, that SOL clock reset back to zero. You cannot now argue that the statute of limitations is in effect, or that it has passed, since you have only been making payments for about two years now.

This is why you cannot find information on loan forgiveness or rehabilitation for that TERI loan. I do not see any way you can discharge that debt at this point other than paying it off completely, sorry.

Which is why I, like most other commenters here, would suggest you wait on that house! You need to pay off that debt you have first (both the student loans and the credit card stuff), monitor your credit rating and don't do anything (including opening up new cards) you aren't SURE will improve your credit score in the meantime.

Honestly, I would consider consulting professionals about how to properly go about repairing your credit, too. Your financial situation is unique and needs to be handled by someone who can give you advice individually tailored to you, not anecdotal stuff from people on the internet.
posted by misha at 2:06 PM on January 31, 2014

As a former wife who put the house in her name alone (to qualify for a Michigan-sponsored low-ish income mortgage), she can certainly put the house in her name alone, but it's a bummer if you guys ever divorce.

I agree with the above posters who said to pay everything off now and save for a house later. You need more time for your credit to recover.
posted by getawaysticks at 7:56 AM on February 3, 2014 [1 favorite]

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