Better to have more downpayment or less CC debt?

Anonymous · ‎07-07-2017

My wife and I sold our home a couple of years ago and netted about $27,000 from the sale. We are now hoping to buy a home after renting in our community for the past few years. I'm not exactly sure what my FICO score is, but the "free scores" I get from my credit card issuers put me at between 540-550. I've checked to see the reason for such a low score and it appears to be related to my credit card debt. I am maxed out on cards, over the limit on some, and can't seem to get them paid down. We have a few late payments, but the thing that's really hurting the score is the high credit card utilization.

Now my question: Would it be easier for me to qualify for a mortgage if I were to take some of the money from our home sale and pay off the credit card debt in the hopes of raising my FICO score? Or is it better to have a bigger down payment?

What are the chances of qualifying for a mortgage at this point if I do nothing but continue to pay minimum payments on my cards but have $27,000 available for a down payment?

Thanks for your help.

Anonymous · ‎07-07-2017

If your mortgage scores don't put you in the qualifying range, it really doesn't matter how much credit card debt you have, but you really need to get your FICO scores to see where you are at. Some people have lower mortgage scores than FICO, others are close, and some their mortgage scores are higher. What is your timeline for purchasing? What does your wife's credit look like? Do you live in a community property state, where even you both aren't on the loan your information is taken into consideration? How much credit card debt do you have? Depending on what type of loan you are looking to get you may be able to qualify with little money down, but either way (bad credit or small down payment) your interest rate is affected. In my opinion, you need to focus on paying down your credit cards and not using them while you are doing so. Banks also don't like to see you making just your minimum payment (seems kind of silly to me, but it also makes sense).

Anonymous · ‎07-07-2017

Thanks. Some additional information -- Credit card debt is less than $5,000; wife's credit is in about the same shape as mine; annual income is roughly $90,000; looking to buy in about a year's time

StartingOver10 · ‎07-07-2017

@Anonymous wrote:
My wife and I sold our home a couple of years ago and netted about $27,000 from the sale. We are now hoping to buy a home after renting in our community for the past few years. I'm not exactly sure what my FICO score is, but the "free scores" I get from my credit card issuers put me at between 540-550. I've checked to see the reason for such a low score and it appears to be related to my credit card debt. I am maxed out on cards, over the limit on some, and can't seem to get them paid down. We have a few late payments, but the thing that's really hurting the score is the high credit card utilization.
Now my question: Would it be easier for me to qualify for a mortgage if I were to take some of the money from our home sale and pay off the credit card debt in the hopes of raising my FICO score? Or is it better to have a bigger down payment?
What are the chances of qualifying for a mortgage at this point if I do nothing but continue to pay minimum payments on my cards but have $27,000 available for a down payment?
Thanks for your help.

Agree with the prior poster. In sum, pay down your current debt.

First thing to do is to pull all of your scores here. The free scores are not the FICO mortgage scores. You can get either the monthly program (~$30/mth) with monitoring or a one time report and scores for about $60. You will need to do that for eveyone that will apply for the mortgage loan (you and your wife if applicable). The lender uses the lowest mid-mortgage score of all of the applicants on the loan.

It is far easier to get a mortgage with a high LTV if your score is in good shape. If you have lower scores you run the risk of not qualifying at all. There is middle ground of course.

One of the things that makes a huge difference on your scores is the credit card utilization (30%) of your score. Another 35% is based off your on-time payments. If you are over the limit you are getting dinged hard by the scoring algorium.

You might want to go to the Rebuilding Your Credit subforum here to get tips on increasing your score. In general you want to have all of your cards below 30% of their credit limit and to optimize your score have all report zero except one card and have it report 1% to 9% of your credit limit for that card. Sometimes we can't optimize scores either especially if you need to save for down payment funds.

What are your credit card limits and balances? Maybe we can help you decide which cards to pay down/pay off.

StartingOver10 · ‎07-07-2017

Now that I see what you have - pay it off except about $50.

You don't have to carry a balance at all.

Pull your mortgage scores, I bet they are better than the scores you posted.

Anonymous · ‎07-07-2017

I think you should easily be able to pay that debt off, and see a decent score improvement. You would still have a pretty substantial down payment, not sure what kind of price range you are looking at. Any other major derogatories? Start writing goodwill leters for your late payments. Keep credit card utliization low and all reporting $0 except one, which should report under 9%. There is hope! Check your reports and if anything looks off, look into it and dispute it if you think it does not belong to you.

Spider07 · ‎07-07-2017

This is a no brainer. Pay down the credit cards-- TODAY!! Keep them at a low balance. If you are a year out, keep paying all your bills on time, every month. In a year times, you will see substantial improvement in your scores and the late payments won't prevent you from getting a loan. Also, get on a budget and save as much money as possible. Get a second job, I delivered pizza and made around 1500 a month PT at night. But at 90K income, you should be able to save a good bit every month. You can do this!!

Anonymous · ‎07-07-2017

What others said above is what you should do. My concern is how you got into this position. Was there something out of your control, or is it just poor decision making? If it's the latter, you may want to consider postponing a home purchase until you get that under control. It only gets worse once a mortgage is involved. With $90k in income and almost $30k in cash, you should never let your cards get near their limits. Have you looked at your monthly expenses for opportunities to trim?

Anonymous · ‎07-07-2017

Thanks MidwestCoast. The money from our home sale has been tied up in escrow pending the outcome of a lawsuit, which is now over. So we haven't really had access to it. The 90,000 is before taxes and deductions, and a big chunk of take-home goes to rent in a part of the country where it's very expensive to live. As for the credit cards, well ... I'm sure there have been one or two extravagant purchases, but mostly helping kids and paying bills. I hear you, though -- we could definitely use some belt tightening. I'm hoping over the next year we'll get all of that under control and then we can look for a house.

Anonymous · ‎07-07-2017

And a big thank you to everyone who took the time to respond. You guys have some great advice and I appreciate it a lot.