How to best get out of a large debt hole when buying a house quickly is the goal?

Lexxi_Garcia · August 22, 2020, 11:27pm

Going to be super blunt here about my husband and I’s current situation. We moved to Texas from GA super unexpectedly in 2015 because my MIL was terminally ill. We moved into her house. It was built as cheap as possible in the 80s. We still live here with my brother in law. We currently have about 30k in collections together and more in student loans that are current. We both have a small loan and credit card each that have raised our credit from the 400s to the low 500s. We need a house. DESPERATELY. This house is tiny, run down, we’ve put as much money as we want to spend into fixing it up to make it livable for my brother in law. We want out ASAP so we can start a family. Here’s the obstacles we see when thinking of buying a home:

The debt in collections. It varies in age from 2-6 years old. Some will fall off, some will take years to fall off.
Our credit scores. We’re both just barely over 500 FICO.
Income. This is complicated. We own our own business. We make good money BUT we started in in 2019 and we’re able to write off a lot of startup costs so our AGI is very low according to our tax return. Most everywhere requires 2 years tax returns and then average it to get your income, which will still be low even with the amount of money we made this year just because of the items we’re able to write off.

It seems like no one wants to give us the time of day. I get it, we messed up and we’re in a black hole, but we have the money to get out we just don’t know how. Pay our collections? If so how, there’s SO much mixed info online. Let them fall off? Save up how much of a down payment? Where does our credit need to be? What creative options do we have? I feel like I see people all the time in worse situations than us get a house and I just don’t get how. At this point it almost just makes more sense to buy a house in cash in 5 years.

Thanks for reading and any advice you have!

Jeremy · August 23, 2020, 2:39am

Hey @Lexxi_Garcia!

I’m not sure you’re going to like my answer, but here it goes.

I think you guys are so far down this crazy rabbit hole of debt and payments that your mindset is all turned upside down. This should be your goal: Have zero debt and zero payments, spend less than you make and invest the surplus. When you’re in that situation, you’re building wealth and free from the chains the banks and lenders have put on you. Note that nowhere in those goals did I mention your credit score (who cares… having money is better than having a credit score) or figuring out how to get a loan. The goal should be to have money.

I worry about some of your language like how some people “get” a house, and how no one will give you the time of day. That’s backwards. I want YOU to be responsible for your future. I want YOU to get out of debt and build wealth and have money. (I do love your suggestion to buy a house in cash… see the POWER that has when you’re not jumping through the hoops the banks have set up?)

So if I were to make a plan for you, it would be something like this:

Until this mess is cleaned up, live extremely frugally. Dial spending down to nothing. That’s life. You don’t get to keep spending indiscriminately and also fix your spending from the past. Time to eat your veggies.
Figure out how to get rid of the debt in collections. I might call them and negotiate a settlement. i.e. if you have $30K in collections, offer them $7,500 to clear the debt. Get it in writing. Don’t give them electronic access to any of your accounts (send them a cashier’s check)
Pay off the rest of your debts. Use the snowball method
Save an emergency fund so you don’t ever borrow money again
Start investing enough so your retirement is on track. If you go from being in crippling debt to being house poor, you’re just setting yourself up for an even worse failure down the line.
After everything above is done, THEN save for a house. (Either buy in cash, or by this point you’ll qualify for a mortgage)

Track your net worth along the way. Make a spreadsheet. Keep it updated. Paying off the debt increases your net worth. When you have a big positive net worth, money starts working FOR you instead of against you.

I know you want a house now. If it’s not safe to live where you are, then find a very modest apartment. save money while you’re living there to accomplish the above plan. You can start a family in an apartment, I promise. People do it all the time. Your children will grow up humble, strong, and wise seeing the sacrifices their parents are making for greater long term success.

If you follow the steps above, which will require some short term sacrifice, you’ll be in a position of EXTREME FINANCIAL STRENGTH. If you go from being buried in debt to trying to get a big loan for a house, you’ll end up stressed, foreclosed, broke in retirement. Apartment living for a few years is a small price to play for such a great financial outcome.