Dear Debt Adviser,
I’m past the seven-year mark, and all the debts that are negative have been removed from my credit report except for one rental debt I had to pay to rent an apartment. Can I buy a house now that my credit report looks good? Or will those old debts come back to haunt me?
You worry me. Yes, there is more than one way to get a clear credit report. And outliving your debts may be one of them. But there is more to homeownership than outliving your debts. I didn’t hear anything about changing your ways, saving for a down payment or having an emergency fund. These items need to be in place before I can recommend you buy a house, or you may have more to worry about than old debts haunting you.
Given that you had negative items on your credit report, you have obviously had some issues with managing your finances in the past. I want you to be sure you are on sound financial footing. Your monthly mortgage payment doesn’t include routine maintenance issues that come with owning a home. You also need to factor in home insurance and property taxes. Check out Bankrate’s mortgage calculator to help determine how much house you can afford.
In general terms, your total debt — including your new mortgage loan — shouldn’t exceed 40 percent of your gross income. Total debt may include a car loan, credit cards (minimum payment amounts), student loans and any other installment or revolving credit accounts. So a quick way to determine your maximum mortgage loan amount is to multiply your gross monthly income by 0.4 (or 40 percent), and then subtract your current monthly debt obligations.
Next, I want you to find out exactly what your credit will look like to potential mortgage lenders. To do that, get copies of your credit reports from all three of the major credit bureaus: Equifax, Experian and TransUnion. You can get a free copy from each bureau once every year at AnnualCreditReport.com. If you find any errors or out-of-date negative items, dispute them with the bureaus that reported the incorrect information. Lenders may use a different credit score than you have access to, but if you order a VantageScore from all the credit bureaus, you will have a good idea of where you stand.
Every time a mortgage lender inquires about your credit, it lowers your score unless you do your loan shopping in a short period of time — generally between 30 and 45 days. So an idea I like is to choose one or two local banks, and bring them your credit reports. They can let you know in general terms what type of mortgage loan at what terms you would qualify for. This way, the lender wouldn’t cause a credit inquiry on your credit file, and you would have some useful information to help you with your goal to purchase a home. I also recommend you prequalify for a mortgage loan before you ever start home shopping. Falling in love with a home you ultimately cannot afford is no fun.
Lastly, to answer your haunting debt question, although those old debts may no longer affect your ability to buy a home, they may still raise their ugly heads in the form of debt collectors calling to collect. Most of the debt may be past the statute of limitations in your state and unable to be collected using the courts, but some may not be past the expiration date. Be on the lookout for attempts to collect in the future.
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