Question

Present Value of an Annuity Carrie and Miranda earn the same salary. However, miranda has been far more financially responsible. she pays her bills on time and pays off her credit card debt quickly. Carrie has been less financially responsible. she often buys too many shoes and she allowed her credit card blance to ballon. if she is short on cash for a month, she simply decides to not even pay the minimum balance due on her credit card. now they both are looking to buy apartments. Miranda decides she can afford to make 2,500 payments but carrie can only make 2,000 payments and pay off her credit card debt, too. Miranda qualifies for a 6.5 % 30 year mortage but because of her bad credit rating Carrie will be charged 8% on a 30 year morage. both will put 20% down. how is carries bad credit going to impact her apartment search?

Answer 1

Solution:

How Bad Credit going to impact apartment search for buying:

The below are the disadvantages of bad credit while Carrie (with bad Credit) purchases an apartment:

1) The interest rate charged for Carrie (bad credit applicant) will be higher than for Miranda, the good credit applicant. Since interest rates are higher, the total interest outflow or interest burden will be more compared with the good credit applicant for the same loan amount.

2) The quantum or amount of loan approved will be lesser than the good credit applicant, since the eligibility will reduce due to the higher monthly mortgage payments for a similar salary.

3) The lender will expect a larger downpayment compared with a good credit applicant. This is because lender will know that the bad credit applicant is serious about the house purchase.

4) There is a higher possibility of lender rejecting the bad credit applicant's loan proposal due to the credit score below cut off or benchmark i.e. no bank financing for the apartment purchase.

5) Sometimes the loan might be approved with additional loan covenants like guarantor with good credit score etc.