As a Realtor, I have a good sense of what Americans are going through financially. The truth is, many people have old, unpaid bills. Get control of your money and take these three steps to get your credit back on point.
While I can’t give you any financial advice (that falls way outside of the parameters of what a real estate agent actually does) I can share with you my personal experience.
When I met my husband at age 32, we both had things in our financial pasts which had slipped through the cracks.
Collectively we had medical expenses, student loans and various personal accounts that required immediate attention.
We wanted to purchase a home and reduce our monthly bills. Rent costs a lot more than owning a home in our city. When you own your home, you save hundreds of dollars per month and build equity. When you rent your living space, you give your money to someone else and never see it again. In essence, you are paying off someone ELSE’s mortgage. None of that made sense to us.
Some of those accounts were in collections and some were not. The accounts that weren’t in collection were still a problem. They threw our “DTI” out of whack. Debt-to-Income Ratio is a calculation done to assess how much income you have and determine if you will be able to meet your monthly obligations and actually pay the new debt. It is used to determine “credit-worthiness”.
These are the two things to handle first. Before you apply for a mortgage, you need to handle these things:
Obtain your credit report and find out if you have any “open collections”. Forgotten, unpaid bills usually show up in the “collections” section of your credit report. In a minute, I’ll tell you what options some people choose when it comes to old, collections accounts. Facing the facts is the hardest part. The good news? After this step you will begin to feel empowered and in control of your finances.
Pay off your credits cards to zero. WHAT? Who can afford to do that!?! Most people cannot afford to pay off all of their credit card debt all at once. If you have smaller accounts, such a credit card with a $200-$2000 balances, pay those off in full before applying for a mortgage. Paying down debt to get your DTI in shape is the task that costs the most - in terms of money and time - when you are working to get your credit back on track. Getting rid of these small amounts greatly impact your DTI because DTI is based on a percentage calculation. It is an easy way to jumpstart your efforts and feel better fast when it comes to paying down debt!
Don’t open any new accounts or make any major purchases. We had to purchase a car when our car went out of commission. Unfortunately, we had to wait a little longer to make our big move. That particular time, we wanted to refinance our home and use the equity to update the interior. Due to the unexpected purchase, we had to readjust our plan a bit. Don’t let these setbacks discourage you.
Don’t freak out about how much time it will take. Instead, plan ahead for your goals and you won’t feel so much pressure. It’s important to prepare for big financial purchases! It can make all the difference between failure and success.