When you're in debt, you need to look at all your options. One thing we were looking at, was the possibility of selling the house and downsizing.
We have enough equity in the house to pay down 60% of my consumer debt, and still have enough left over for a 10% down payment on a new house, plus closing/moving costs.
Trouble is, I am self employed, and the past few months for me have been rough and my FICOscore is now down to 576, so I needed to find out if we could get a mortgage in spite of the positives.
I called my mortgage broker today to ask him what he thought, and he told me that my chances of getting a new mortgage, even with my current lender With whom I have been since 2001, and to whom I have never missed or been late with a payment, were just about nil. My only chance would be with a subprime lender, (and there are fewer of those around than there once were!), and the mortgage , if i got it with that score which was dicey, would be prohibitively expensive.
So what to do? First understand what affects your FICOscore, and then take immediate action to start setting things right: Timetable 1-2 years to get the score up to 650-680.
How did I get to this miserable state in the first place? There are three main reasons:
1) I have gone over the limit on two of my cards.
2) I have made too many applications for new credit. (this happened last December and January when I was shopping around for 0% -2.9% balance transfer deals) every time someone makes a hard enquiry to the credit bureau, it costs you 15 points. That alone has done me in.
3) Most of my cards are at or near the limit. Ideally they should be at 35% of the limit.
So the advice I was given:
Priority 1: On cards where I am over the limit,get down below the limit as soon as possible.
Priority 2: Pay at least the minimum payment on all accounts and pay them on time insofar as that is possible.
Priority 3: Spread the payments around your accounts with a view to bringing down the debt ratios to 50% and then 35% of credit limits. If you can top off any minimums with extra,all the better
Last week, It was suggested to me that I reduce my income to debt ratio by asking for credit limit reductions on some cards, which I did. However, by so doing, my debt to credit limit ratio became far worse than 35%, so I called them back to have my decision reversed without their consulting the credit bureaus. One creditor complied, and the other did not.
Priority 4: Do not make any applications for new credit for at least 6 months, and then only, if I have been paying all acounts on time for that period, and then only with serious lenders who can offer really low balance transfer deals, preferably an increase on a line of credit, and then transfer your high interest consumer debt over and attack them aggressively.
This goes against the popular theory of the debt snowball advocated by Dave Ramsey and his followers, but I guess it all depends on what your goals are. In our case we were thinking about moving within 2-5 years anyway, so our kids can be closer to a university, so being in a position to get a mortgage is a priority for us. While it would have been nice to downsize and pay out debt and have our freedom back sooner, it is not an option for us at this time. If you are thinking of a downsize to get out of debt , make sure you talk to a trustworthy mortgage broker first, and find out what's what. Get your credit report and know what's there, most notably the FICO score, and speak to your broker or banker, armed with the facts. The last thing you want is to sell your house, then get turned down for a mortgage and end up apartment hunting instead.
When you ask for your credit report it does NOT affect your FICO score.
This is my online journal documenting my attempted escape from debt hell. If you think that applying the term "hell" to being in debt is too extreme, you've probably never come close to the point of no return.Please feel free to follow me on this escape mission, maybe all of us will learn a thing or two along the way.