Let’s Check in With Suze Orman - Ranking Your Debt Payoff to Increase FICO/Home Loan Eligibility

Suze w/ Girlfriend - Weren't You Dying to See What Her Partner Looks Like?

For all the rich kids out there who are avid readers of my blog, you know that I am obsessed with Suze Orman. Maybe it's her highlighted wedge cut, those oh so stylish "jackets" that she wears each week, or maybe it's the satisfied feeling I get when she shrilly shouts "DENIED" to someone who wants to purchase something that they simply can't afford. At the end of the day, I find there is something oddly comforting about her.  At least to me, her financial information is easy to understand and entertaining at the same time (which is my goal when I write each of my blog entries).

As Suze would say in a very loud voice, "listen up boyfriends and girlfriends (she is saying this as in a "you go girlfriend or boyfriend" manner vs.  literally meaning partner - just wanted to clarify that), because it is time for a Suze smack down". Today's topic is how to rank the debt that you have accumulated in order of payoff and then we are going  to spin that to make it applicable to the home buying process.

1. IRS Debt - I would say the bulk of my clients either have traditional salaried jobs or are still students/just getting out of school and their parents are helping them with their new home purchase. If you are an independent contractor (1099) or business owner like myself,  you are responsible to pay your own taxes. As someone who has experienced this first hand in my early days, it is easy to not set money aside reserves for your taxes and find yourself with a huge bill from the IRS come April 15th. One word of advice that will serve you well in life: Don't F%$# with the IRS. They will stay after you until you pay, can garnish your wages, and literally empty your bank account to retrieve the money owed to them. This is debt that needs to be paid ahead of everything else. Side Note: for those of you who are salaried employees, I know the fat refund after the new year is something you look forward to, but you have just given the government an interest free loan for the year. Your goal (per Suze which I wholeheartedly agree with) is to basically break even each year without owing nor getting a refund. Put the money you would get as a refund from each check  into an interest bearing account and make a little money on the side!
2. Student Loans: For the rich kid who has a hard earned degree from USC and the $150,000 bill to prove it, make your student loans a priority the moment you graduate. Student loans are one of the easiest things to ignore because unlike the IRS, they are not quite as hard core about their means of collections although they can still garnish wages and make your life miserable. Like a bad case of herpes, student loans will stay with you forever until you pay them off (I guess the same thing cannot be said about herpes - just ask half of Hollywood). Even if you are forced to claim bankruptcy (in which case now is probably not the best time to buy a home), the student loan will not be pardoned. Like the IRS, the US Department of Education should be pretty easy to work with and can come up with payments that are budget friendly while still allowing you to continue to save for that house with a drop dead view in The Bird Streets.
3. Credit Cards - From High to Low: OK - so you bought or leased a condo from me at The Rob Clark and did so while salivating at the fact that you were mere moments away from LA's shopping district mecca. Did you go caca for Chanel? Does D&G make you pee pee (that was bad - I just wanted something that rhymed)? Trust me, I get it! Well, it's time to pay off those credit cards starting with the one with the highest interest rate and then working your way down the ranks. Once you've paid down the card with the highest interest, then compound the payment you were paying on that card on top of the payment you are making on the next card you are tackling. Keep doing this until you are debt free and learn your lesson. No more spending money on these items if you can't afford it!
4. Home Loans -If you are a rich kid who pays for your home with cash, then "girlfriend/boyfriend" you've just scored a home run when it comes to the game of life (Suze often likes to use clever little puns - what did think of that one - it's all me) because cash is king in this current market. If you're like most, you will need to obtain a loan. This is why the above mentioned pay off strategies are key to keeping your FICO or credit score high so that you are eligible for the best interest rates. With that said, once you lock in a low interest rate and get a killer deal on a hot prop that I have negotiated for you (which is why now really is the time to buy), there is no rush to pay it off ASAP. An affordable home loan is considered good debt and just making the monthly payments on time is often the best strategy for most first time home buyer
5. Eight Month Emergency Fund:Don't even flatter yourself to think you are clever enough to slip something as simple as $50/month gym membership past Suze for approval if you don't have eight months of emergency funds saved up. Your are going to be greeting with a large "DENIED" stamp across your forehead. I have mentioned this many times in a bunch of posts as well as my Rich Kids Guide to Buying a Home. In this economy, you absolutely must have this cash in reserves or your parents must be a reliable back up plan that never fails. Either way, do not proceed to buying until you have this in tact.

The Amazing Kristen Wiig as Suze Orman

When you go through the pre approval process, your chosen lender is going to go through your finances with a finetooth come. They want to see a consistent salary history (which is making it harder for those of us in commission based businesses no matter how well we are doing), they want to see where your money is being spent, and they will ask you for every last check stub/debit purchase before they approve you. A client I have in escrow who is absolutely the perfect loan candidate on every level still had to go through this process. Having all your ducks in a row really helps!

One last little bit of Suze advice. We agents often say why pay xyz amount to lease when you can get a mortgage at that price. I myself am also a firm believer in this. HOWEVER, I always have my buyer's sit down at length with a lender to see what additional fees are incurred on top of your basic payment (principle) and interest: monthly codo fees, money for home repairs if needed, condo assessments if applicable, insurance, closing costs, etc. What Suze and I (don't we make a great team, but in all fairness, this came straight for her lips) advise is to get a pretty detailed budget of what your monthly costs are for a purchase price you are comfortable with. When you pay your monthly rent, add those  additional costs that you'd incur paying a mortgage/ownership fees and put it into a savings account. If for six months you can comfortably make that payment, not only do you know that are good to go purchase wise, you have a nice little "kitty" (Suze often refers to a savings as a "kitty" which is comically ironic coming from her) saved up for your down payment.

I will leave you with the amazing Kristen Wiig doing her impersonation of Suze: it takes a few seconds to load but worth the wait! Enjoy!!!!