Your Questions About Debt-free

George asks…

Does anybody know of a good credit repair service such as debt consolidators?

I want to renegotiate my debt, and I have seen financial debt free asistant programs on TV ads …are they any good?

John answers:

Choosing a credit repair service is an extremely important decision. Choosing the wrong service can mean you won’t receive the best possible results at best and at worst it may result in a fine or prison sentence for you. In choosing a credit repair service its important to know what to look for as well as what to avoid. This article will provide a brief overview of these characteristics to help you make a wise and informed decision.

Also, a good resource is…

Http://debt.123thebest.info/credit_card.html

Good Luck.

Joseph asks…

Is it a bad idea to close out credit cards and bank accounts once paid off?

I’m working on getting debt free. No car debt, only credit card. I’m winning the battle slowly but I was wondering if it’s a bad idea to close the cards out once paid off. Will that totally mess me up? Also does it mess you up if you close a bank account you no longer need?

John answers:

If you cancel the credit cards it damages your credit rating. When you close a credit card with a balance, your total available credit and credit limit are reported as 0. Since you still have a balance on that credit card with no credit limit, it looks like you’ve maxed out. A maxed out credit card, or one that appears to be maxed out, can have a very negative impact on your credit score. If you don’t want to use the cards any more, just cut them up, but don’t actually cancel them.

Mandy asks…

How much house can we afford if we’re making 72k/yr?

My parents and I (I’m 25y/o, im debt free, i own my car) are planning to get a house. We are first time home buyers and the lender that we’ve been talking to is offering 100% loan. We all have above average credit scores. We pay 1,500 debt per month. How much of a house can we get?

John answers:

Rule of thumb is a mortgage should be between 2x and 3x your annual income, but it’s only a rule of thumb!

It depends on what other debt you are carrying.

It depends on your credit rating (affects interest rate).

It depends on where the house is (affects real estate taxes and homeowner’s insurance rates).

Conservative underwriting would dictate a 20% downpayment and adherence to the 28/36 rule. The 28/36 rule is no more than 28% of your gross monthly income towards your housing payment (this payment should be all in – principal, interest, taxes and all insurance). $72,000 a year is $6000 per month in income. 28% of that is ~$1680 a month.

The 36 part of the rule states that all debt payments shouldn’t exceed 36% of your gross monthly income. This is $2160 a month. If other debts are greater than ($2160-$1680) $480 a month, then it will reduce your borrowing ability for a mortgage. If other debts are less than $480 a month, generally many lenders will let you go up to the 28% figure. So, you state you pay $1500 in debt a month, if those are minimum payments then it will reduce your acceptable housing payment to $660 a month which severely impacts your purchasing power.

With interest rates near historic lows, the rule of thumb is really closer to the 3x amount. Let’s run some numbers…

Starting with an assumption of a $100,000 mortgage. For this exercise you are putting 0% down, so the total house you are looking for is about $100,000. Althouth you say it is 0% down, that does not cover closing costs which can easily be 5-7% or $5000 to $7000. At 3.5% interest over 30 years the principal and interest payment would be $450 per month. Real estate taxes average ~1.5% of value (I have seen this anywhere from 0.5% to 4.0% of value, so this is a huge issue depending on where y ou live) so figure $1500 a year or $125 a month.

Homeowner’s insurance might be $600 a year somewhere in land and $2000 a year on a coast, but let’s assume you are landlocked. This is another $50 a month. If you put down less than 20%, you’d pay for private mortgage insurance which would add another $75 a month to your payment.

Ok the grand total is $450 + $125 + $50 + $75 = $700 a month. The 28% of your gross monthly income was $1680 a month which means you could easily afford a little more than double this if you didn’t already carry a heavy debt load, but $2160 – $1500 is only $660, so the 100k example is stretching it ($1500 a month on $72k a year is a heavy debt load).

Good luck!

Sharon asks…

How much house can we afford if we’re making 72k/yr?

My parents and I (I’m 25y/o, im debt free, i own my car) are planning to get a house. We are first time home buyers and the lender that we’ve been talking to is offering 100% loan. We all have above average credit scores. We pay 1,500 debt per month. How much of a house can we get?

John answers:

The rule of thumb can only be applied when you have no debt and a 20% down payment. It doesn’t work when either component is missing!!! And when you decrease your yearly debt, $18k from your yearly gross of 72k you have $54k left. Multiply this number by 3 equals $162k minus 20%, and you then appear to be able to borrow as much as $130k

The only 100% loan available in the US is a VA loan. If can’t qualify as a vet, you will have a down payment of at lease 3.5% (FHA).

Using an affordability calculator, see link, I estimate you will be eligible for a loan of up to about $105k-$125k with good credit and work history.

Chris asks…

What can I do about having nothing on my credit report ?

About 8 years ago, I made the decision to pay cash for everything and live debt free. Car was paid for, (I rent, and don’t have a mortgage), and have no credit cards.

I recently ordered credit reports from all three credit reporting agencies, and was surprised to discover that all reports show absolutely nothing. (I’m aware that things ‘drop’ off your credit report after a few years), but was surprised to see that the reports contained nothing.

Now, I’m looking to buy a house, but am concerned that when the bank looks at my credit report and sees nothing, they won’t lend to me.

Thoughts ?

John answers:

You’ll have to get a reporting product to start some activity on your credit profile.
It can vary from a utility or phone service to a credit and/or loan product.
If you have a cell phone or land line, ask if your service provider reports to the bureaus. Ask them to report your account. Get a credit card and it will by default start reporting. As you go along with lines of credits, mortgages, student loans, etc…. Your profile will grow.

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