My husband and I are trying to buy a house, but we both have low credit scores, so we’re having trouble securing a loan. We’ve heard you talk about getting a mortgage loan with no credit score. Is this the same as a low credit score?
No, it is not. No credit score, means you don’t have any credit or your credit score is “indeterminable.” A low credit score indicates you’ve had – or still have – debt in your life, and you haven’t done a good job of paying creditors on time.
Two things will help solve the problem of having a low credit score. One is time. If you’ve had instances of late payments from years ago, time will help heal that to a degree. The older late issues become, the less they count against you.
But my guess is you two probably have some bad debt. By bad debt, I mean things that were never paid, or accounts that are in collections. If that’s the case, you need to contact those people, and settle those debts in full – and in writing – as quickly as possible. Officially close the accounts, too, before you try to buy a home.
When it comes to buying a home, Laura, I always advise folks to first be debt-free and have an emergency fund of three to six months of expenses set aside.
Why not short-term disability?
Why don’t you recommend having short-term disability insurance while doing the first three Baby Steps of your plan? It seems like a good time for it, when you’re in the beginning stages of getting your finances in order.
You could certainly do that if you want, possibly even through your place of employment. I’m a big fan of folks having long-term disability insurance when they’re in their prime wage-earning years. But short-term disability is something I’ve always considered to be gimmick insurance, and that’s something I don’t recommend or buy.
I get the argument, too, that short-term disability coverage usually isn’t very expensive. But during the first two Baby Steps – getting a $1,000 beginner emergency fund set aside and paying off everything but the house – you’re trying to limit expenses as much as possible. Chances are you wouldn’t need it in Baby Step 3, because that covers your full emergency fund of three to six months of expenses.
Hope that helps, Bob!