Thank you for all of the details you provided. Because you were so thorough with providing your situation and background, I am going to break out the different credit details you submitted, and quote them below in an effort to make this flow better for later readers. You have a lot going on with fixing your credit in order to get yourself in shape to buy a home next year.
I see the three primary concerns you have to address in order to get a mortgage loan approved as:
- Your debt to income ratio (DTI) impacting the dollar amount of the mortgage you can qualify for.
- Unresolved collections that are showing on your credit reports (some deleted by a credit repair company, but maybe not for long).
- Your credit scores. While they are lower than you want, this is the lowest priority given the details you shared, which I expand on below.
Spoiler alert… I do not think you are that far off from qualifying for a new home loan.
Hire a credit repair company to fix your credit.
Anyone reading this site beyond a single article can see that I am a big fan of the DIY approach to debt and credit issues. I am not against hiring a credit repair company. I have had customers share great stories of working with credit repair organizations, and some who have gotten little to no results, but who knew credit repair was going to be a long shot anyway, as there was a bit of a stretch to disputing accuracy and completeness of the negatives that they needed removed.
In your question submission you said:
I’m working to repair my credit; however, I don’t really know where to begin. I first hired a credit repair company to the tune of $100 a month. Since then my credit scores have been bouncing all over the place and I suspect some of the items “removed” may have re-appeared. I have since stopped their services and have been concentrating on paying off debt before it reaches collections.
Keeping your focus on the debts you can keep from going into collection, or that you can pay off for less and get to update as zero balance owed, is where I would want to focus my energy too.
Paying a credit repair company is something I would reserve for when you have only settled and paid accounts to contend with. Trying to challenge legitimate unpaid collections on your credit reports is an uphill battle. And it is the unpaid collections that have, in my experiences, more of a tendency to reappear, than paid or settled collections.
Resolving unpaid collection debts required to get your loan approved.
Before the economy hit the skids several years ago, I had customers with unpaid bills on their credit reports that could still get approved for home loans or a refinance. Underwriters could somehow look beyond debts that, while still owed, were passed the SOL to be sued. That just is not happening any more.
In part of the background detail you submitted, you said:
Thinking my credit was fixed, I visited a mortgage broker. The mortgage broker I visited with said I would absolutely NOT qualify for a mortgage (FHA) until all the collections were paid, but I’ve been told by other people that paying them won’t do a thing for my credit score. I just have to wait until they fall off, they say. That might be 2019!! Some folks even told me to file bankruptcy, which made me guffaw.
There is a-lot-a right in what you are being told, but the conclusion of it all should be far more optimistic for you reaching your goals than it sounds. You cannot realistically expect to get a home loan approved these days if you have unresolved collection accounts showing on your credit report. And while paying the collections may not do anything to improve your credit score right away (it can given some time), paying or negotiating lower lump sum settlements can clear the way for your home loan to go through.
You do not have to wait for collections to fall off your credit to get a home loan, but you do want to take care of unpaid debts so that they update to show resolved on your credit reports. Paying debt collectors is not necessarily credit score centric when it comes to reaching your home ownership goal.
Oh… and I should point out that even a chapter 7 bankruptcy on your credit report does not prevent you from getting a home loan, but it generally will keep you out of the market for the first 2 years after you file.
Debt to income ratios are a bigger deal for home loans.
Your Debt to income (DTI) can hold you back from getting a home loan just as much as unpaid bills and low credit scores. You said:
The mortgage broker also mentioned that my debt to income (because of my student loans) may disqualify me for a mortgage altogether (get an education, they said). I do have stable job history (5 years with main job ($65K) and 3 years with part-time job ($6-10K).
Your DTI can impact the size or location of the home you can afford to buy with the minimum amount of money down, or could mean you have to come to the table with a bigger down payment.
So far, of all that you have shared, it is your DTI that could mean waiting a little longer than next year to buy a home. And that would be so that you have more time to pay down debts, and save up money to pay down the size of loan you will need.
Low credit scores can be good enough to get a mortgage.
Some of the largest national banks set 620 as the low score they will accept to do FHA loans. In limited situations, you can have an even lower score than 620 for FHA loans, but they do not happen often, and few banks will process them under the 620 minimum.
In your questions submission, you said:
She also said I need to have a SOLID 640+ credit rating. In 2013, my scores were approximately 480-540. Recently, they have been bouncing between 612-687. I plan on spending no less than $500-1000 a month to repair my credit and begin saving.
My goal is to have a solid 700+ and buy a house with a decent interest percentage by this time next year (2016. I want my own stinkin’ home before I turn 40 next year); however, I’m not sure that I will be able to realistically achieve that goal…much less ever own a home.
Your lowest credit score is within a few points of qualifying for FHA financing with many major lenders. When you get to number crunching time and you have a 620 credit score or higher, I am optimistic that FICO will not hold you back.
You have many options for shopping your mortgage rate and lender. Do not feel stuck with someone, even if you like them. If the loan officer or mortgage broker only processes FHA loans at a 640 minimum, and you are just under that, you can take your business elsewhere.
If you are able to obtain a 700 or higher credit score to get a competitive rate on your loan, that will be great. But know that you can get good rates through FHA with a lower credit score.
Your good credit history can help offset the bad.
The work I do has shown me that someone who can maintain, or add positive accounts to their credit reports, will be able to rebuild and recover from collections and financial setbacks faster than someone who had virtually all of their accounts go to collections.
You posted your recent and positive credit history as:
- $22000 car loan. $350 month. Current. Never late. One year old. (My first “new” car—3 years old or less–ever).
- 0 balance GE Money/Synhcrony card. Never late. 3 years old. Required a co-signer for this first credit card ever.
- $221 balance with a $1400 limit Discover card. 5 months old. Never late. My first all by myself credit card.
- $450 balance with a $3000 limit Mastercard. 2 months old. Never late. My second all by myself credit card. We’re finally getting somewhere.
- 0 balance with a $6000 limit installation loan furniture company. 1.5 years old. Never late. Didn’t pay a dime of interest either.
It goes without saying that you want to keep those accounts in good standing between now and when you pick out and get approved for the home you will own.
For the credit cards, keep your credit utilization below 30 percent, or better still, under 10 percent come home loan shopping time.
All of your regular monthly car payments you make between now, and reaching your goal, will help to bring your debt to income ration closer to what you need for a qualified mortgage.
Collection accounts holding you back from approval for a home loan.
I have no doubt that some of the collection accounts on your credit reports must be dealt with. Your mortgage broker was spot on. I am going to quote each item individually, with my feedback and questions underneath that.
Negative account history:
$2376 in 6 medical collections from 2012. All are placed with a law firm collection agency (which sued me years ago for medical debt…twice…they scare me). I recently began paying them $75 a month. I’ll thank the credit repair service for alerting them to my location and contact information.
I hear you on the unintended consequences of hiring a credit repair company. Debt collection law firms are not a patient lot. You mentioned your plan of committing 500 to 1,000 dollars a month to resolve collection accounts and improving your credit. This account should be a priority.
- It will take 31 months to pay this at that low of a monthly amount. You have to accelerate your payments to meet your goals anyway.
- You already do not trust these guys based on past experiences. You’re scared and paying this off quickly will help relieve that.
- I do not trust collection attorneys not to sue, even though you are making payments. They may be able to earn more in fees by suing you, so why not. Putting this one behind you quickly, even if they will not accept a lower lump sum offer, makes sense.
$890 medical collection at local collection agency. From 2013. Was unaware of the bill until recently. Again, thanks credit repair service.
If you can still connect with the original medical service provider, ask if you can come in and pay them directly. If you can do that, and it is the collection agency showing on your credit, you may be able to get this one removed with a later dispute.
Getting this off your credit reports is not critical. A paid medical collection has less of sting to your score these days.
$694 Car repossession with original creditor Progressive Finance in 2012.
You can likely settle this for half or less the balance owed. Priority on this one would be behind the other 2 collections.
$984 gym membership sent to Millennium Financial collection agency in 2012. Let’s hear it for the credit repair service!
Similar to the repossession collection balance, this one could be settlement for half or less, and lower on the priority list.
$591 charged-off bank account showing as a bad check (see recently removed below) with original banking creditor in 2012. Contacted and attempted a settlement. They flat out denied me and advised I pay the balance in full or make payments.
Pay this off at the earliest opportunity, but after the medical debts above. This could create more than just collection and credit reporting issues for you. This type of thing can keep you from opening new bank accounts.
Problem bills related to your DTI today.
You provided some details about problematic accounts. I do not interpret them that way per say. They are current expense realities, and are more related to your qualifying for a mortgage based on your DTI.
You said you have:
3-6 inquiries within the last 2 years depending on reporting agency.
You have the positive credit trade lines and some of the diversity of credit you need. I would not be looking to apply for anything additionally from now until when you get into your new home.
A few hard credit inquiries are normal, and the amount you have today is not out of the ordinary. If these are affecting your score right now, it is only marginally. When the time comes to submit your loan application the older inquiries may have been deleted.
$140,000 in 4 consolidated student loans. Each with a 90-120 day late on them from 2012. I am wrapping up my final degree this summer, and I will most likely qualify for income based repayment &/or consolidation. This will make my loans roughly $400-500 a month and hopefully remove the late payments.
$17000 in interest from above loans.
Congratulations on nearing completion of your degree! If you get these loans consolidated, or can get approved for an IBR plan, it will help.
Your student loan late pays from 2012 on your reports may not impede your mortgage loan if they are still on your reports come approval time.
$466 current hospital bill I pay $100 month on to the hospital, and it is NOT in collections.
$358 anesthesiologist bill I pay $50 a month on that I just found out got turned over to collector even though I have paid it every month since March 14 except October then resumed in November. Original creditor turned it over to TransWorld one week before I paid it in November, but they say they won’t put it on my report since I religiously pay. I asked for a settlement of half. Waiting on a response from them.
$420 therapy bill for child. Pay $40 month on it regularly.
I would just continue to pay these three bills on schedule. If/when cash frees up in coming months, pay them off quicker than you had arranged.
Old collection accounts deleted from credit reports can reappear.
And we come full circle back to credit repair and some of the bad credit and collections having been deleted. There is a very real problem with getting negative stuff removed from your credit, only to have something come back on later. Some of the accounts you listed as having been deleted are a source for worry, while others should not be a concern.
You listed the following accounts as having been recently removed from your credit reports:
$1100 payday loan defaulted in 2012.
$1010 payday loan defaulted in 2012.
$550 payday loan defaulted in 2012. Settled in November 2014.
$108 DVD club defaulted on in 2006.
$275 hospital bill from 2007.
The movie club and the hospital bill are now too old to legitimately be reporting. You will obviously be monitoring your credit moving forward, so keep an eye out, but I doubt these old collections will be a problem.
The payday loans could be something to worry about reappearing on your credit. You have to keep an eye out for those as well. If one of the unresolved ones do pop back on your credit, you can look to negotiate settlements on those so that they are reporting a zero balance owed.
I took a different approach to responding to your questions. I have not done that on this site before, but very few readers offer up the details you did, so thanks!
As I mentioned above, your debt to income is likely to be the larger concern of everything you listed. That is the one thing I see that could result in your needing a bit more time than 2016, but that will also depend on the price of the home you are looking to purchase. As of today, what percentage of your take home pay goes to pay your rent?
You can post additional questions in the comments below and we can continue the discussion.
Anyone working on fixing their credit reports, or trying to raise their credit scores to get approved for a mortgage, is welcome to participate in the comments below.
27 comment(s) for this post:
- Kit:
23 Feb 2015 Hello, Thank you for your prompt response to my mini-novel. You asked "what percentage of your take home pay goes to pay your rent?". I spend roughly 22% of my post-tax, or net, income on rent. - Michael Bovee:
23 Feb 2015 Any idea about the current prices for the size and location of the home that would appeal to you? - Kit:
25 Feb 2015 I'm not interested in a home worth any more than $150,000-$180,000. I'd like to keep any future mortgage payments around $800-1200 per month. - Michael Bovee:
25 Feb 2015 Based on everything you shared, if you resolve all collections on your credit reports as quickly as possible, and your income stays steady, and your credit scores are higher than 620 at the time you are house/loan shopping, I think you can meet your 2016 goal. Use this FHA mortgage calculator to give you an idea of where you may be with loan requirements and affordability next year. - Kit:
25 Feb 2015 Excellent! Thank you for your guidance, Michael, it is most valuable. I'll respond periodically to let you know how I'm progressing with these little roadblocks. :) - Kit:
26 Mar 2015 Woot! I made big strides, Michael! *I negotiated the $984 gym membership gone bad down enough, so I paid it off!!! I made certain to get a PAID IN FULL letter from them! *I negotiated the$694 car repo, and I'll be paying it off next week! *I negotiated the surprise medical bill $890 down to less than half, and I'll be paying it off within the next two weeks. *I paid off the three medical bills I was making payments on, so I didn't risk them going to collections. *I received a letter from the law firm collections agency stating they would NOT take me to court as long as I pay as agreed, so I'm paying one payment in general to be distributed over all the bills, and I'm snowballing the debts individually. As of now, I only have 5 of them left to pay off. I had 7. *So, that means I only have the bank to pay off to the tune of $591. They refuse to negotiate...as of now. *I paid off the balances on my credit cards. This means the things I had on my credit report will either disappear or show 0 balances. I can't wait to pull my credit scores next month!!! - Denise:
26 Mar 2015 I'm trying to purchase a home, finance company says they can't finance me until I clear 2 derogatory accounts on my credit report. They are both gas cards issued through Conoco Phillips and Shell which are issued out of Citibank. It states the accounts were closed on 12/2009 and purchased from another company. But they list no phone number or company name. I called them to find out who they were sold to and both said they have no record of my name or account. They referred me to the Recovery Dept. which is an automated system. It asks for my SSN and zip code related to the account. It then says do not call Citi they cannot assist me. and that my account is being handled by a citi approved vendor. It says hold for a representative and my call is being transferred. A recording says "phone service on this number has been suspended your call is being disconnected there is a temporary problem processing your request. Problem with system please hang up and try again". I called Lexington Law who deal with credit repair problems and even they said they cannot help me because the account is being listed on my credit report in good standing. I can't see how with a past due balance of $603 on one and a past due balance of $604 on the other. The mortgage lender says no one will finance me until these two accounts are cleared up. But yet no one will tell me who they were sold to so I can pay these accounts. Does anyone have any advice on what to do next Thank you - Michael Bovee:
26 Mar 2015 Wow! That is quite a bit accomplished in a short period of time! Please do update with additional comments as you go along. This thread should provide a good amount of inspiration to folks trying to dig out and get home loan ready. - Michael Bovee:
26 Mar 2015 I understand the credit repair company did not accept your file? They did not send credit report disputes? Have these two accounts ever been disputed? With the accounts showing closed and sold off in late 2009, when is that you last made a payment to these accounts? Charged off credit cards are not always immediately sold. The accounts could very well be older than 12/2009 for negative reporting time limitations. I moved your comment to this post as it is more relative to cleaning up credit to get a home loan approved. Post answers to my questions and I can offer more direct and actionable feedback. - Denise:
30 Mar 2015 Lexington Law said they could not help me because on my credit report these two accounts are not listed as derogatory but in good standing. The accounts were opened in 2006 and listed as closed and sold to another company in 12/2009. It list on the credit report that these will remain on my account until 2019. We hadn't made a payment since late 2008 because my husband was laid off from his job. I know these accounts were sold because I remember over the years receiving collection notices from somewhere other than Shell and Conoco Phillips. Lexington Law said they could not get involved because they can only handle cases of negative status. They had told me they had never seen anything like this before. This was from one of their Senior Attorneys. To see an account with a closed/sold, past due 600 and still listed under accounts in good standing. I opened a dispute with Equifax as this is the only of the three credit bureaus that have this listed. Of course it will take 30 days for a response. I listed my dispute as "Refuse to tell me who this account was sold to" All I can do is wait now. Thank you so much for responding. - Michael Bovee:
30 Mar 2015 Post what you learn. Equifax should respond with who they contacted to verify the information with. If they don't, you can take another approach. - Amanda:
31 Mar 2015 I have some charge off accounts and collection accounts that are paid by settlement for less than full balance and the 7.5 year marks are coming quickly. I have heard that when you apply for a large mortgage or line of credit that the credit reporting agencies may report information older than 7.5 years. Is this true, and how will I know whether this information will be reported if I go for a mortgage or something after the collection accounts drop off my credit reports? - Michael Bovee:
01 Apr 2015 The credit reporting agencies may not really scrub the negative items that get deleted from your credit reports after the 7 years. It is possible for older deleted information to be seen in a factual. But I do not think they "report" this in the sense that your credit is being viewed using a risk weighted credit score such as with FICO or Vantage. If you are declined credit you are entitled to see the report that the refusal of credit was based on. You would know that way. What are your credit scores today? How many negatives are going to drop off your credit reports, and how many positives will there be? - Amanda:
01 Apr 2015 There were originally 5 credit cards that were settled, and some of those accounts were sent to an outside collection agency. They are all paid up and they should start falling off 2016/17 timeframe. I probably won't be looking to buy a home until 2018/19 timeframe. By that point, I should have my school loans paid off and have no debt except minimal credit card debt (using to maintain credit history) and maybe a car loan, depending on whether my car lasts long enough to not have to buy a new one. Because I would like to buy a home in 2018/19 timeframe, my husband and I are basically living on half our income and using the other half to pay down the rest of my school loans and remaining credit cards. We are using 1 credit card and paying it off like it were a debit card to pay for daily expenses. Is there something else we should do to get our scores up high enough to have a good loan rate? Also, I'm in the military, so I'll qualify for the VA Loan, which I plan to use to buy my first home. - Michael Bovee:
01 Apr 2015 I think you are right on track. I would not add any other loans if you have 2 or more current credit cards already. I wouldn't finance a car before you apply for a home loan if you do not have to. - Les:
02 Apr 2015 Judgement from Midland funding late 2008. Roughly 3200 with interest and legal fees. I'm not sure I was ever served the papers, also not totally sure the debt was mine. I don't recall having a Providian Card. It was filed in Florida, and I now live in NM. I want to buy a house now, and need it gone. What do I have to do? Also, does the class action lawsuit against them have and bearing on this? - Michael Bovee:
02 Apr 2015 Are you working under any time constraints with your home purchase goal? I ask because my feedback will vary based on the answer. Some of your options are going to consume time and money. And, unfortunately, without any guaranteed outcome, it may make the most sense to settle with Midland Funding because it could cost less, and help you reach your goal the quickest. I do not think there is a court approved outcome on the pending class action settlement with Midland Funding. There was, but enough objections were filed that it did not go through. Were you notified of the class action in the mail? - Les:
02 Apr 2015 Asap on the house, I called Midland today and they gave me the phone number if the attorneys who filed for the judgement. I was transferred twice and got a voicemail, I just left my name and said I would call again. I do question whether giving them my address will cause them to be able to garnish my wages? - Michael Bovee:
02 Apr 2015 Not necessarily, but you do need to be as proactive as possible to resolve this with some form of lump sum settlement (if that is the goal). - Les:
02 Apr 2015 Yes, I found the house and want to buy. In your experience, does paying it off create much of a dip in the credit score? Have you seen where they waive the 11% ( in my case) interest per year? If offering to settle in a lump sum do I start at 50% of the original amount or 50% of where it more than likely is now: about double the original amount. Sorry for asking so many questions, but I can't find it any where else. Thank you for taking time to respond. - Michael Bovee:
02 Apr 2015 I do have a post up dedicated to settling judgment debts. It is the longest page on the site. Most anything you could ask, with tips and tricks, is contained there. If your credit has already been run by the mortgage broker or loan officer, you can often expect some resistance to settling judgment debts at 50 percent. Debt collectors like Midland Funding will view your home loan goal as you being highly collectable. - Les:
02 Apr 2015 I guess I will see what happens tomorrow when I call and post to you afterwards. I was reading the other page last night and will look at it more tonight. Can they tell that the broker has already pulled the report? - Michael Bovee:
02 Apr 2015 Depending on the type of software they use, yes they can see that your credit is being run for home loan purposes. - Les:
02 Apr 2015 So I'm reading the other page and it has caused another question. Is there any point to getting the info on the judgement? i.e. when they say they served me or whomever? - Michael Bovee:
03 Apr 2015 If I were negotiating your debt, and trying to maximize the savings, I would want all of that information. If the wrong address was served, or some other abnormality, I would try to leverage that to get a lower settlement. - Les:
03 Apr 2015 So I need to call the clerk of the court and figure out how to get all the background info? Can I send a family member to pick it up? - Michael Bovee:
03 Apr 2015 You can, but call the clerk and ask if they have free online access, and for cases that long ago.