Just screwed myself by paying down debt

[City of Mills]

Well, another dream shattered :)

I signed a purchase agreement (well within my means) on a modest condo, preapproval in hand. Now the bank is telling me I need to put down 10% rather than 5% because I do not have enough active lines of credit open to satisfy the PMI lender. Because I consolidated my debt to one credit card and paid it down to almost nothing, I only have that line of credit, and my rent counts as a non-traditional line of credit. For 5% down, they want to see 3 active traditional lines of credit. Does this make any sense???

So, I wouldv'e been better off keeping more outstanding debt, or splitting the debt among my credit cards, paying interest on each individual debt amount, to qualify for a 5% down loan???

I think I have to call around, maybe some DU bank gurus can shed a little light on this...

[rucky]

1. Find another bank.

This policy is unusual in my experience.

[dugaresa]

2. i am shocked that you have this problem

you would think more open lines of credit would be a risk.

[RKP5637]

11. It would seem less open lines of credit means less risk, but...

I agree, it certainly seems less open lines of credit means less risk but it doesn't to the rating companies. If you close a line of credit it effects your debt/credit ratio. I made that mistake. In trying to get my finances in order I paid off in full some credit cards and then closed the accounts. It lowered my credit rating because there was less credit available so it made me look more in debt that I was in reality. It's a dumb system to me! I should have just paid off the credit cards but not closed the accounts.

[OffWithTheirHeads]

3. Corporate America likes debt slaves

If you're not in the hole you might not obey.

[RKP5637]

18. RIGHT ON TARGET!!! EXACTLY!!!

Frankly, the system is rigged to often screw those trying to get debt free. It's all a game.

[Statistical]

4. Second the find another bank idea

If you have good credit & 5% down the banks should be lining a path to your door.

If and only if another bank says the same thing look into opening 2 new accounts but understand

1) it will lower your credit (new accounts & inquiry always lower credit score).
2) there is a 99% chance it isn't necessary.

There are lots of banks and you only need one.

Here is a funny story. Countrywide/BofA wouldn't lower our rate. We found another bank who refinanced us at 4.25%. Once the loan closed they sold the loan to guess who.... Countrywide/BofA. :)

[arikara]

5. That seems rather insane...

I would try a different bank for sure, I wouldn't deal with that one. And perhaps the cards you paid off are still active or can be easily reactivated with the cc company, you can use them for the rating and then cut them up or put them into a safety deposit box.

[City of Mills]

6. And this is credit union telling me this

I'm in shock, with pristine credit and little debt, having paid off two condos in the past 9 years, I thought I'd be a good candidate... now I gotta call around and scramble to get financed for a very modestly priced condo (sales price about 2.6x my gross annual pay). Unbelievable!

[Craftsman]

7. I bought a home this summer put 20% down in rolled over equity from my old home

No trouble getting a loan.

[kirby]

10. 20% down...

A 20% down loan does not require PMI insurance like the poster needs. The insurance is required to cover the banks potential losses for loans with a down payment of less than 20%.

[Craftsman]

13. I know, that, this why my wife and I insisted on 20% down

And we bought the house in a nice area that is exactly what we wanted but only 1/2 the top amount we were approved for in the loan. Putting more money down is always a good idea, if the bank balks find a new bank.

[kirby]

8. You didnt 'screw yourself'...

One doesn't screw themselves by paying down their debt. You are in better situation and will be able
to weather a rainy day much easier than someone who didn't.

And if you could afford 20%, you wouldn't need PMI (insurance) at all.

Maybe if you need to, you can 'reopen' two of the cards you closed. As some other have said look for a second opinion. And then before reopening any accounts, get the lender/broker to confirm that by doing so and getting a letter, it will satisfy the PMI insurance company. It may or may not depending on how many months you had those accounts closed.

[City of Mills]

15. That's the kicker

The dormant cards are technically active, I have two through Chase, both w/zero balance, one through AMEX, and a line of credit through my credit union, I have current plastic cards for all of them, both perfectly usable if I ran out to a store, but since I'm not making monthly payments they're not considered 'active'. Unreal.

I was just hoping to take advantage of the stimulus package, I've been homeshopping since June. I finally find a place, now this crap happens. I'll be calling other banks to see what they say...

[Mojambo]

9. I've read that your credit rating can actually go down

If you regularly pay off your balance.

[RKP5637]

20. I'm also read where you shop affects your credit rating...

I've read even buying groceries, for example, with your credit card can lower your score even if you pay off your credit card each month.

[Thickasabrick]

12. As long as there are no fees, it's always better to keep the credit

card line open even if you never use the credit card. It's stupid and wrong but that's how you play the FICO game.

[Dr.Phool]

24. I just lost two high limit cards.

One was through Advanta, when they went under in June. Another was with Chase(I had 3 of them), because I hadn't used this particular card in 2 years, and had a 0 balance.

[Thickasabrick]

25. That's happened to me too. Once a year I will pull out my "drawer

cards" (that's what I call the ones I don't use) and run up 10% by buying groceries or whatever I normally pay cash for. I still don't carry a balance but it records the usage, doesn't hurt my scores and keeps me playing the game.

I would love to join a movement that did away with FICO and the Credit Reporting Agencies and this whole scam. But until then, I continue to play the game.

[aikoaiko]

28. This is correct AFAIK.

[quiller4]

14. The problem comes from closing accounts rather than reducing balances.

Closing an account almost always is a negative. Paying down a balance is positive. Thus, you make large payments but don't inactivate the line of credit.

[Craftsman]

16. My Grandpa once told me, "Debt is the ugliest 4 letter word there is."

[librechik]

17. paying off cards and then closing the accounts is what gave you the bad credit

Whenever you pay off a card nowadays, don't close the account--even if you never use it--that can go down as negative on your report.

I did that to myself last year--now I'm paying them off but allowing the accounts to stay open (unless there are annual or monthly fees involved--that can get expensive!) I just put the card away in my file and don't use it.

[City of Mills]

23. You're absolutely correct

But I didn't close the lines of credit, they're just not active :) Closing the lines of credit only increases your debt to income ratio, it's counter intuitive but makes sense from an accounting perspective.

[TexasObserver]

19. It seems counter intuitive, but that's correct.

By paying off credit lines, you actually lowered your creditworthiness.

It's Bizzaro World credit practices.

As for the condo, find another lender.

[T Wolf]

21. Of course the financial game is screwed up to the point where it is "upside down" in many

cases.

Kind of like the incentive to spend like crazy to show increased financial need when applying for aid for university. Don't save for your kid's education. Buy a brand new car with their summer-job money.

As the movie line says - just look for the rich white guy behind the scenes. Whatever works best for him is what will happen.

[City of Mills]

22. Let me be clear, I haven't closed the credit lines

I have paid them off, but I still receive montly zero balance statements, they still send me the plastic in the mail...I can still use the credit - I've only closed one active account but that was back in 2002, I'm familiar with the debt-to-ratio game, and keeping open lines of credit...I have a little less than $3K debt, $45K in open credit lines and no car payment (paid off). So my ratios are great, I haven't opened any new lines of credit in at least 4 years, and my overall credit score is very good.

The problem is, my remaining debt is all on one card - the PMI lender would have financed a 5% loan if I had, for example, $1500 on one credit card, and the remaining $1400 or so on another credit card. If I was paying interest on TWO lines of credit instead of ONE, I'd qualify for the loan.

Keep in mind, I'm not trying to buy a $400,000 McMansion here, I'm looking to buy a well-appointed $162K condo. That I would have to put down 10% is ridiculous, I can afford (and have paid rent on) $1600-1800/mo, and the loan on the place (PITI) would be just above $1200. Go figure!

[Blue_Tires]

26. you did NOT 'screw' yourself

you did the right thing...the system is still a racket and wants to frequently inconvenience those who break free...

If you can, I would suggest finding a credit union

[City of Mills]

27. This is a loan through a credit union

The one that enjoys depositing my biweekly checks :)

And in some ways, yeah I'm not screwed, I still have little debt, I don't have a six-figure mortgage to pay off...

But what I'm looking to buy vs. how much I pay for rent would be a wash, I'd get a $8000 credit, and I've saved enough to put down 5% while retaining enough left over to pay 3 or 4 months of expenses...it seemed to make sense to me to buy? LOL well, we'll see!

[City of Mills]

29. Hahahah, here's the rub

OK I called back and got the numbers to work, I had to convert from conventional to FHA loan. The catch? Higher interest rate.

[Fla Dem]

30. If you have credit cards keep them, but keep them paid up.

Your credit worthiness is based on your debt to credit ratio. In other words if you have three cards, each with lines of credit worth $5000, your line of credit is $15,000. They then look at you outstanding debt vs your credit. The ratio should be low. If you pay up a card and then cancel it, you are in effect reducing your available credit and increasing your debt to credit ratio, even though you have no more debt than you had before canceling the card.

[lib2DaBone]

31. But if you leave Credit Cards Open ...(even if completely paid up)

..They claim that the "open" cards use up your available line of credit.... which is deducted from you total available mortage credit.

Moral: You can't WIN against the banks. They make the rules and our Public Servants Rubber stamp the legislation.. it's called LOBBYISTS..... BOHICA (Bend Over.. Here it Comes Again..)