Help me grow up, dammit.

April 19, 2008 9:52 AM

[GrownupFilter] Many credit threads on here, but I couldn't find one that really helped: I have shit credit, and I hate throwing money away with renting. In the next 12-18 months, what can I do to help me buy a house?

I suppose I could use a credit forum, but I know a lot of you have dealt with credit repair personally, and I trust you. So help!

My credit is so superbly horrible, it's insane. Neglect, a parent, and lack of funds have destroyed my credit. Mainly old electric bills, cell bills that were never paid - alot of it has fallen off with age, so right now there's only a handful of things on there that I'm dealing with now.

A bit more info: I can't get approved for any credit cards - the only ones I can find that will take me are cards with bad reviews that tell me to put $300 down and immediately take half of it for "setup" fees. I can't even get approved to get a laptop for work, I'm having to save up for it or use a rent-to-own place. Curiously enough, recently I was still approved for a new car with $500 down from a very reputable dealer in the area.

Every month, I pay for rent, electric, phone, internet, car. That's it. Yes, I know I'm in somewhat of an enviable position - I don't have any credit card debt or student loans or medical bills or anything like that. And what little bad stuff that's on my credit is probably only equal to a couple of grand. But every month, I'm throwing away cash on rent and renter's fees and I'm sick of it. In a year or so, I want to try to buy a house. Maybe it's a pipe dream, I dunno. But they wouldn't have approved me for a car if I was that big of a risk, right?

Here's my question. What can I do in the next year and a half or so to help me get a mortgage? And I'm not talking about the "oh, put $50k down and take a million percent interest and we can get you into a $200k house for $3k a month" bullshit. Do the Fannie Mae/whatever they're called programs work?

Side question: I presently work two jobs so as to stockpile cash - for the first time in my life, I'm almost at a point where I can save the cash from one job and live on the cash from the other. If I so desire, I can pay off my 5 year car loan in less than two years. From a credit-building standpoint, would paying off my car in two years behoove me, or should I stick with the five year loan?

posted by damnjezebel to Work & Money (17 answers total)

I've never worked in the credit industry, but from cursory glances at my credit rating once every year or two, I've noticed huge jumps when I successfully paid off large loans (cars and student loans). It doesn't sound like you'll be able to buy a house in the next year with bad credit and old bills to pay off -- remember that owning is like renting but you have to pay for everything that breaks or needs built and you'd be surprised at how something like a dog digging under a fence can turn into a $2k construction project.

I'd say pay off the car quickly, build up a $1,000 emergency fund, pay off any outstanding old debts, then start saving for the downpayment. It took me about 3-4 years to go from badly in debt and renting to owning my first house (and it still took another 2-3 years to pay off all my credit cards and student loans).
posted by mathowie at 10:06 AM on April 19, 2008

You might check out this article on renting vs. buying; I found it very enlightening.

I would think that paying off a car loan faster is better for your credit, because it reduces your overall debt (and you'll still have two years' worth of on-time payments on your history).
posted by korres at 10:07 AM on April 19, 2008 [1 favorite]

I'd recommend the Motley Fool Personal Finance forums. The ones on buying a home and managing credit have excellent, knowledgeable contributors who've been through it and give pretty good advice tailored to individual situations.
posted by ikkyu2 at 10:08 AM on April 19, 2008 [1 favorite]

Go here.

It sounds like you know what's on your credit report. You might want to do some cleanup of your record by paying old bills, etc. My guess is that you need a credit card as well as the car loan to get really stellar credit since I think they want to see a mix of revolving accounts and installment accounts. The forums linked above is full of advice on how to get a credit card in your situation. The car loan may also help your credit go up to a point where you can get one. If you're saving tons of money for a downpayment, that should help a lot toward getting a good interest rate on mortgage. But depending on where you live, you might be throwing away more money on mortgage interest, property taxes, and home insurance than you would be spending on rent.
posted by salvia at 10:19 AM on April 19, 2008

Great buying vs. renting calculator from the NY Times. Under many circumstances -- as others have said -- renting isn't really the money-suck that we've been led to believe, and owning isn't really the incredible tax break it's been pumped up to be. Also, keep in mind the hidden costs of owning, beyond mortgage and taxes -- plumbing, roofing, wiring, appliances, etc.... that will all be on your dime, too. Which is not to say, of course, that owning a home is never the right choice, personally or financially -- it certainly can be, but it has to be a place you can actually afford and that you intend to stay in for at least 5-10 years.

Housing Bubble blog entry on current situation in TX.

IMO, the best thing you can do over the next couple of years is to keep stockpiling cash so that you can make a good down payment -- I think we're returning to the days of 20% down and fixed-rate 30-year mortgages. As more of the bad stuff falls off your credit report, you should be able to get a secured credit card from a reputable company, even if the interest rate sucks. (Caveat: get one with low limit, and pay off your balance monthly. In other words, you should only use it to demonstrate your credit-worthiness; do not rack up debt that you'll actually have to carry.)

I don't know quite what to advise re: paying off your car loan faster in order to improve your credit; I guess I'm a little confused as to how you got the loan in the first place if your credit is as atrocious as you say.
posted by scody at 11:09 AM on April 19, 2008

It will help your credit score to have a credit card that you consistently use (just a little!) every month and pay off. Your bank should be able to give you a secured card, so you would probably need to put down $500 to get a $500 credit limit, but the bank won't take your deposit for bogus fees.
posted by robinpME at 11:18 AM on April 19, 2008

I'd second looking at the Rent vs. Buy myths and facts before you decide that renting is throwing away money: I encountered the arguments reading Rich Dad, Poor Dad. Now, I'm still a youngin' without much creditworthiness myself, but I really dug the argument that buying one house and simply living in it is basically a liability, and not an asset. Not something you were probably hoping to hear, but I would recommend (as was told to me) to read it first and then decide if you still want to buy a house.

Obviously I'm no expert, so take it for what it's worth, but the author, Robert Kiyosaki, is.
posted by BenzeneChile at 11:37 AM on April 19, 2008

Use those renting/buying calculators, and be realistic in planning your expenses. I chose to buy after getting tired of renting, and am happy with it. But financially if buying is better for me it is only by the slimmest of margins. I don't know what you earn and what your tax situation is like, but for me there is zero tax benefit from owning -- the standard deduction has been bigger than itemizing my mortgage and other deductions in every year except the first year I bought the place. And then there is a phenomenally long list of additional expenses that renters don't have: buying and maintaining lawn/garden tools and machinery; furnace repairs; repainting; replacing cracked sidewalks; etc etc etc.

Now, a lot of those expenses are actually kind of fun (I like yard work and DIY projects), and there is a huge, huge value in not having a landlord saying what you can and can't do in your home. And when renting I always lived in apartments, where you could hear the people upstairs and downstairs and on each side, and where there were never windows on both sides to get through-ventilation, and so on -- not hearing other people 24/7, and having total control of my physical living space, is an enormous luxury, and one for which I would be willing to pay a pretty high price. (I will be a happy person if I never again have to listen to a neighbor have sex twelve inches from my head, through the flimsiest of walls.)

Anyway, the point here is that renting is not automatically a big money sink, and home-owning is not automatically a big cash-cow. A lot of the claimed financial gains that people talk about are really not very impressive, after you account for inflation and for all the cost of ownership. "The value of my house went up 40%!" sounds pretty awesome, but once you deduct $20,000 for the new roof, $8,000 for a new furnace/ac unit, and ten years of inflation, there may not be any actual appreciation. (Conversely, sometimes the pro-renting people don't account for the painful nature of rent increases, and the cost of having to move every few years when your landlord sells the place or rents the downstairs unit to a bunch of crack addicts -- make sure your numbers for each scenario are realistic, not optimistic.)

All that said -- you sound like an ideal candidate for one of those "first time homebuyer" programs that many cities have. A friend went through one -- with less terrible credit than you, but also with less savings -- and was very, very happy with the result. I also know people who did really well dealing with credit unions (rather than regular banks).
posted by Forktine at 11:48 AM on April 19, 2008

What I would tell you to do if you lived here is talk to my husband (he is in real estate management but also still sells on the side. ) A realtor who has been in the business awhile will have tons of suggestions for you to clean up your credit-because he or she will want to help you find that house once you get your credit squared away. Plus he or she will know which mortgage brokers will have an easier time getting you financed.

With the mortgage difficulties going on right now it is much harder to get financed-but while you are in the process of cleaning your credit up you will also have some time to save up a down payment which should help some.
posted by konolia at 11:49 AM on April 19, 2008

Owning a house costs money, too, as pointed out above. Property tax. Insurance (if you have a mortgage, there will be insurance, too). Garbage. Water. Electricity. All kinds of maintenance and repair costs, if you don't fix it yourself, or even if you do.

Learn about houses. This way, if you do buy, you have a better sense of what a particular house will really cost. Examples:

Heating/Cooling -
The cost of heating a house is typically higher than heating a condo, because in a condo, several of your walls are kept heated by neighboring units. But condos have association fees.
Does the house have an oil burner? Gas? How old is the unit? Will it need replacement soon? What's the cost of yearly maintenance on it?

Roof - how old? What condition?

Moisture - any leaks? Hidden mold/mildew?

Refrigerator - old, or new (and energy efficient)?

Duplex or a place with a built-in apartment - do you want to rent out a portion of the house?
posted by coffeefilter at 11:51 AM on April 19, 2008

Oh, about the car loan -- I don't think that that is any great measure of credit-worthiness. I got a car loan some years back, for 100% of the value of the car, while I was unemployed and had no savings. I didn't lie and claim to be working, either -- the manufacturer's loan company simply didn't care, and even gave me a top-tier interest rate. I guess they figure that they can always repo the car if they have to, and will earn enough money if you make even the first year or so of the payments, to justify the risk.

And I agree with the poster above who said the days of 20% down and fixed rate mortgages are back. It might be more like 10% down and 40 year mortgages in some markets, but the days of easy 100% financing with no checking of income or savings is over, at least for a few years.
posted by Forktine at 11:54 AM on April 19, 2008

Response by poster: thanks for the comments so far.

scody - i'm not sure how i got it, either. My credit report has maybe 5 things on it, 2 are duplicates of one another, and all of it is negative. I didn't know anyone who could give me an "in" or anything like that at a bank or a dealership. The dealership that approved me actually denied me at first, and then two weeks later I got a call that said they were still working on it for me. The bank that ultimately approved me is a small bank based in Corpus and has one branch that's here in the Dallas area. My interest rate is 14.9% right now, and I plan on refinancing in a year or two- that is, if it's better for me to keep the car for the full length of the loan. I currently use Bank of America for my checking and savings accounts. I originally applied with them for both a car loan and a credit card and they all but laughed at me.
posted by damnjezebel at 12:02 PM on April 19, 2008

My interest rate is 14.9% right now

PAY THAT F@CKER OFF FIRST

As for buying, if history is any guide, now is a horrible time to buy since we're just starting a downcycle similar to the late 80s/early 90s one.

Rent the cheapest place you find livable for the next 2-3 years. Save a 20% downpayment + 5% closing costs + 6 month safety buffer.

With wages falling they way they are, prices will be cheaper in nominal terms when you're financially ready to buy.

If you think renting is throwing money away, try paying 5% interest & taxes on an asset that is depreciating $15,000 per month!
posted by tachikaze at 12:29 PM on April 19, 2008 [1 favorite]

If you want to get in good shape to buy a house, one thing that would help is to not buy a brand new car with $500 down and 15% interest. It might not hurt your credit score, but you are paying a lot of interest for an item that will be worth much less when its paid for than when you bought it. Given the likely direction of the housing market for a while, you may be throwing more money away on the car than you are losing money on rent. If you are thinking about trading it in before five years is up, that's a lot of money spend for the privilege of having a new car rather than a reliable used one. My finances started getting a lot better when I began paying cash for good used cars and getting out of the car payment game.
posted by Pater Aletheias at 12:33 PM on April 19, 2008

You need to get a credit card. Either try store credit cards, and especially look for places like the bike shop that I found which offered 0% financing for a year on a bike I needed to buy, generating a year of good credit, a needed investment, and no interest, or a retail joint that will give you a low-limit card, that's Express in my case. Lie about your income on the application. That goes unverified. Your other option is to be added as a signer on someone else's account. Do a lot of applications immediately, because the dings to your credit that come from them will sunset sooner than later that way, and and succesful attempts to get a credit account will start boosting your score right away. Just keep the balances below 1/4 of the limits, pay more than the minimum monthly, never miss payments, and with a couple accounts, you can pull your score up a lot in one or two years.

The car sounds like a money pit. Can you get out of the lease? Get a cheaper rate? A cheaper car? Your goal is buying a house; you need a down payment as well as shiny credit!
posted by Ambrosia Voyeur at 1:14 PM on April 19, 2008

Nthing everyone's suggestions about looking at rent vs. buy calculators. I'm no expert, but from what I've been reading, it seems like a hefty downpayment will be a real asset for househunters for the next several years. If you can pay off your car, use a secured credit card to build a better credit payment history, and amass a good downpayment, those things should help.

And be patient. If house prices continue to drop, you're not throwing your money away by renting in the meantime.

I agree with the gist of BenezeneChile's comment, but I must point out that Robert Kiyosaki's been pretty thoroughly debunked. I wouldn't waste my time on Rich Dad, Poor Dad.
posted by kristi at 1:17 PM on April 19, 2008

There's a very good chance that renting is actually better right now. Heed what others above have said.

A good way to work on your credit, if you do have some money saved up, is to do a secured loan, preferably with your credit union. If you have enough saved up to refinance your car, that's a perfect place to start. What happens is you say "I've got $X, and I'd like to take a loan out against it." They will take the money, put it in a CD or other safe vehicle, and loan you the money. If you don't pay, they already have the cash. But you get a low interest rate, usually indexed to the rate of savings on the deposit money. At my credit union, I believe they charge 2.5% above the current interest rate on the CD. So you can borrow money for a few years at 2.5% - and unlike a credit card, you can't just walk into a store and incur more debt. Best part? Once the loan is paid, you still have the savings, plus some interest. And better credit for it. I've done this a few times; paying 2.5% interest for three years on a car and still having my money beats either draining my savings or getting an 8% loan. (And credit unions, especially smaller ones, tend to be a lot more helpful than banks.)
posted by azpenguin at 1:45 PM on April 19, 2008