General Question

prolificus's avatar

What’s a creative, effectively efficient way to improve credit score and save money in order to buy a home?

Asked by prolificus (6583points) March 20th, 2010

Scenario: First time homebuyer, not-so-great credit, no savings, excessive student loans (consolidated), no other major debts, steady income (not poor, not rich).

Given this scenario, any suggestions?


If you’ve already succeeded at improving your credit score, saving money, and buying a home, what worked?

If you’re in the process of improving credit, saving, or buying, what’s your plan? How do you stay on target?

If you wanting to start, but haven’t taken any steps, what prevents you?

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10 Answers

missingbite's avatar

Start saving you will need a down payment. I pay myself first and them my bills and the leftover is play money. Pay all your bills on time. NEVER LATE. Poor credit can stay with you for years. You may have to wait a while for the home. It’s not the best time to purchase now anyway unless you have a lot of money. Whatever you do, don’t get some tricky loan. 30 year fixed that you can afford is the only way to go. If you have car notes, consider selling the cars and buying outright an older good used car. Your income to debt ratio needs to be very low to increase your score.

Good luck

thriftymaid's avatar

As far as the score, close credit accounts that you do not use and charge very little and pay it off each month except for a small amount. If you pay if completely off each month it does not help your score. An interesting and odd thing about the score is that if you have never had a home mortgage your score is reduced. I’ve never quite gotten that. Don’t be late paying any of your bills, not just credit card bills, utility bills count too. If you have a hard time saving, have an amount deducted from your check for saving.

jaytkay's avatar

I have been told by a “credit coach” that closing accounts hurts your score. If you pay them off, leave them open, as a low ratio of balances/credit limits helps your score.

CyanoticWasp's avatar

@thriftymaid DO NOT CLOSE CREDIT ACCOUNTS. Keep your accounts “open”, but don’t use them. Cut up the cards, but don’t close the accounts. Closing accounts will lower a credit score in the short term.

@jaytkay has the right information.

Pay all bills on time, obviously. Avoid taking on new debt—every new inquiry into your credit history by a creditor seeking to extend credit will lower your score somewhat.

Pay off as much of your debt as you can. Pay off the higher interest rate loans / balances first. If you can use credit as “convenience only” (pay the balance in full each month), then you’ll be in a good place.

Definitely work on saving a hefty down payment. That’s going to be key to home loans (and having an offer on a property accepted by a seller) in the future.

thriftymaid's avatar

@jaytkay @CyanoticWasp I recently read that when you leave unused accounts open it can lower your score and diminish the possibility of acquiring a mortgage because of having so much credit available to you. I don’t use credit very much anymore, but I read that just recently.

YARNLADY's avatar

Adjust your financial attitude completely. Always live below your means and put all the excess in savings. When you buy, you will not only have to come up with the down payment, interest, taxes and insurance (PITI), but also the maintenance. Many people forget how much money it takes to properly maintain a house. Do not commit all your ‘housing budget’ to the house payments.

galileogirl's avatar

I closed all my credit cards in the 80’s because I was changing to a lower paying career and didn’t want the temptation. The problem arose when I traveled. hotels and rental cars sometimes didn’t take debit cards and when they did they took a “deposit”. At one time I had $thousands in the bank but when I rented a car the put a hold on $250 and the hotel tried to do the same thing. Since there was a limit on the amount of purchases/day when I tried to pay the hotel bill, the $500 on hold was over the daily limit.

When I applied for credit cards with none for over 5 years (I even paid cash for a $10,000 car), all I could get were the ones with annual fees. At one point I moved to another bank with checking and savings accounts and CD’s. They offered me a credit card for $5000. After a year they sent me a platinum card. I applied to Discover and my old bank that still had an IRA and stock account offered me one. They had turned me down for lack of credit history before. Then Macy’s and Sears offered discounts if I opened up accounts. Since I pay my balances the minute the bill arrives I now have credit on cards of over $50,000 which bumped me up to a 788 FICO.

Not paying interest and being frugal (I save 10% of my gross) allowed me to be in a position to make a 20% down payment. Although I qualified for a $250,000 home, I looked for what I needed now and found a short sale property for $120,000. Of course the mortgage was a slam dunk but the short sale process took months.

So here it is.
1. Make a multi-year plan.
2. Start serious savings
3 When you have a healthy bank account, get a credit card from your bank. Then pull in a platinum card and store credit
4. Use the cards for purchase you normally would pay cash, gas, groceries etc
5 Pay bills online the day they hit your mailbox, remember you had cash in the bank for all your purchases.
6. Save specifically for a down payment.

After 3–4 years you should be ready to buy a home. Your mortgagepayment, insurance and taxes should be no more than 30% of your take home pay. Your realter will tell you to stretch that because you will grow into a higher monthly payment. If your income does grow save that money and when you need a bigger place you will have the cash to keep the mortgage reasonable.

I know 3–4 years seems like a long time but remember the higher your FICO, the lower your interest. 1% less in interest can easily be $50,000 or more saved over the life of the mortgage.

missingbite's avatar

@galileogirl GA. The only thing I will add is that depending on a persons income, you can have too much credit. In other words, If your income is $55,000 per year and you have $50,000 of available credit with credit cards, it may be a good idea to CX some of them. The mortgage company will look at the persons available credit along with income to determine the loan amount regardless of FICO. The last thing a mortgage company wants to do is give a loan and then have the homeowner run up $50,000 additional for furniture on credit cards.

galileogirl's avatar

@missingbite That was approximately my income to available credit ratio but also on the credit report they indicate past high balances and if they are mid 3 figures for a 30+yo shows good self discipline.

missingbite's avatar

@galileogirl I agree. I wasn’t trying to say it was a bad thing, and they will know you have cx’d credit cards. My point is you may be able to “qualify” for more money if your debt to income ratio is a little lower. It’s obvious you did some great things to help yourself. I wish more people had your understanding.

I look at it like this. Let’s say I have four credit cards with $50,000 dollars worth of available credit and my income is $42,000/yr. I owe nothing. Even with good credit and FICO score, my mortgage company may only feel comfortable loaning me $150,000 because I could charge up more than I can afford with the other available credit. They will look at long term history of debt and payment. But. If I were to only have $24,000 of available credit from credit cards, with the same good credit and FICO scores, my mortgage company may feel comfortable loaning me $175,000. I could then borrow more at a lower interest rate and use some of the money to purchase essentials for the home.

These numbers are just an example for ease of understanding. If I am wrong on my understanding of how loans are calculated please educate me. I am almost positive this is how I bought my home many years age.

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