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margog85 · Oct 16, 2009, 07:48 PM

I am 23 yrs old and accumulated some bad debts when I moved out of my parents house about 5 yrs ago and had trouble finding a job. I checked my credit score tonight via myfico.com and learned I have a score of 555. From what I understand, I need a score of 620 or higher to qualify for a mortgage loan, which is something I hope to do within the next year. Is this a feasible goal?

I have paid off the majority of my debts- a charged off car loan of approx $2k, and a charged off line of credit of approx $1500, and a handful of small bills (book club subscriptions, medical bills, etc.). I still have $800 or so remaining that I am working on paying off, mainly utility bills (gas company, electric company, sprint, verizon... )-

Last week, I was approved for a car loan (with, of course, an extremely high interest rate). I have already looked over my finances for the next year, and have developed a plan to ensure that EVERY payment is made not just on time, but early, and make large payments toward principle... and, if all goes according to plan, I hope to have the entire loan (13,700) paid off by Sept 2010. (Looking at the interest rate, it seems to be the best option- at 22% interest, I'll end up paying almost as much in interest as I purchased the car for!)

With this plan of action (paying off remaining debts, making regular on-time payments to an auto loan, and paying the loan off within a year) does it seem likely I can raise my score enough within a year to qualify for a mortgage? How much can my score potentially increase in that time? Would getting a secured credit card help at all?

Thanks for any info or input on this.

stevetcg · Oct 21, 2009, 01:17 PM

Its certainly possible if you are able to pay off any defaulted or outstanding debt. Paying off the car is fine, but won't help THAT much. Its far more important to have all old debt paid. Having a year of clean credit matters more than anything. Having a secured credit card with a balance less than 30% of the max will also help.

Time is your biggest ally though. The longer your report is clean, the better.

620 - while that might be the magic number, its (currently) unlikely you are going to see a mortgage for that. Im not saying impossible... just unlikely. Your debt to income ratio is going to pay a huge factor in that along with the amount you plan on putting down.

margog85 · Oct 22, 2009, 05:41 AM

Do gov't student loans factor into my debt to income ratio if they are in deferrment (since I'm still in school?)

stevetcg · Oct 23, 2009, 04:59 AM

Originally Posted by margog85

Do gov't student loans factor into my debt to income ratio if they are in deferrment (since I'm still in school?)

I believe so. But I am not 100% on that. They did with me, but I wasn't deferred. I had, however, previously defaulted on them.

Purdue2010 · Nov 18, 2009, 12:38 AM

No, if you are in school the student loans do not. If you get a secured card get it now, because it will ding your credit score initially. Generally after paying it off for a year it will help. It sounds like you are on the right track. I have to agree with Steve, 620 may sound like a good number, but you shouldn't even consider doing anything with scores below 700. If you can wait a couple of years then you can save so much money in interest just by waiting that extra year, given that your scores actually reach 700.