debt

Bad credit is expensive

Overview

Late payments hurt credit scores
While she has a goal of improving her credit score to over 700, she needs some help with her payments. Angel recently was late on a couple of credit card payments because she lacks a systematic payment plan. Her credit report has also been hurt by an old outstanding dispute over a $500 medical bill resulting from a worker's compensation claim.

She does have $15,000 in an IRA that she rolled over from her previous employer's 401(k) plan. She is intending to use the first-time home-buyer exception and use up to $10,000 of that IRA to fund her down payment and closing costs on a new home. She is not eligible to participate in her employer's 401(k) plan until August when she will receive a 100 percent match on the first 6 percent of her deferred income.

Mortgage loan choices
Angel is looking to buy her first home using an FHA loan. She has been prequalified and believes she can afford a home in the range of $150,000 to $175,000 with a 30-year fixed mortgage at 6.75 percent. She intends to make a maximum loan-to-value purchase of 97 percent and include her closing costs in the mortgage. While this will allow her to purchase her first home, she will be highly leveraged and still in need of budgeting and credit repair.

One area that Angel seems to have adequately covered is insurance: She is covered for renter's, car, life, disability and health. The term life insurance will cover the home payments if something should happen to her after she is married. She is currently covered by her employer's disability policy of 1.5 times her salary to protect her mortgage if she becomes injured or disabled at work.

Except for the money that Angel has saved for her wedding, she does not have an emergency fund. Instead she must rely on the remaining available credit on her credit cards to finance any emergencies that arise. This might be a last-gasp measure, as all of Angel's cards are at very high rates. Angel needs to reduce this debt and build her savings as soon as possible.

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