Q: I have a friend who lives in the District of Columbia who really wants to buy a house in Maryland to move her children to a better school district. She has a good job making decent money, at least $45,000 to $50,000 a year. She has credit scores between 500 and 700. She does not have money for a down payment. She has some credit card and student loan debt. I have suggested that my friend rent in Maryland until she is ready to buy. What advice would you give her?
A: You are a good, good friend, giving great advice. Your friend is not ready to buy a home and would probably have trouble doing so anyway with the tougher lending standards. At any rate, let's look at her financial profile:
-- She has credit scores in the 500 to 700 range. That's a huge range. In the case of a mortgage, the lender will take your middle credit score. Still, having a score in the 500 range is not good.
-- She has credit card debt. Not good.
-- She has student loan debt. Not good.
-- Her income is decent, but it will be hard finding a home in Maryland in a decent neighborhood with that income.
So you are right. She should rent and build up her emergency savings, pay off the credit card and student loan debt and get her low credit scores up.
Q: Why did you say student loans are not good? As long as you're paying them back, what's the deal?
A: The deal is, it is debt.
Debt (equals) bondage.
I added that last question from the chat to illustrate one of the reasons people make bad decisions. Too many people blindly follow conventional wisdom -- a student loan is good debt -- when that wisdom is and has always been wrong.
As I pointed out in the chat, lose a job, get sick, etc., and no loan looks good at that point.