How Do People With Bad Credit Get Homes?
Mortgage lenders avoid giving loans to people with bad credit or charge penalty interest rates that add up significantly over time. MSN Money columnist Liz Pulliam Weston warns that a higher rate translates into as much as $100,000 more over the life of a 30 year home loan. There are certain preparatory steps before buying a house with bad credit that help you qualify for the financing.
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Credit Repair
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Your credit may not be as bad as you think because your Experian, TransUnion and Equifax credit reports may be full of errors. Mistakes are so common that 27 percent of consumers who checked their records in a 2007 Zogby study found inaccurate information. The Federal Trade Commission website advises using annualcreditreport.com because it provides free reports annually with no purchase obligation, unlike commercial websites. Dispute every negative error through the credit bureau websites, which forces them to verify or erase those items within 30 days.
Account Settlements
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Accurate negative credit report entries are not removable through disputes. You may be able to erase charge-offs and collection agency accounts through negotiated settlements. Creditors and debt collectors sometimes agree to accept a reduced amount and remove the entry from your credit reports once you pay according to Brigitte Yuille of Bankrate.com. Insist on total removal rather than "settled" status, which still hurts your ability to get a mortgage and have the firm put this agreement in writing prior to payment.
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Credit Score Repair
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Keep your bills current while you work on credit repair and settlements, and pay as much money as you can on your highest credit card debts. These actions raise your credit score, according to Liz Pulliam Weston, a writer for the MSN Money website, which helps you qualify for a home loan. Items that fall into the "payment history" section of your credit score, like timeliness of payments, are 35 percent of the total score, according to the MyFICO website.
Applications and Inquiries
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Your mortgage applications are considered "hard inquiries" on your credit reports. These inquiries deduct points from your credit score, which is especially harmful when it is already borderline. Bad credit means you may have to shop around quite a bit to find your home loan, so consolidate your applications into a week or two. The MyFICO site explains that several mortgage application inquiries done in close proximity do not hurt your score as badly because they are considered as a single inquiry when the number is calculated.
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References
- MSN Money: Lifetime Cost of Bad Credit, $201,712
- Zogby International: Why the Credit Bureaus Can't Get it Right
- Federal Trade Commission: Your Access to Free Credit Reports
- MyFICO: What are Inquiries and How Do They Affect My FICO Score?
- MSN Money: 7 Fast Fixes for Your Credit Score
- Bankrate.com: How to Settle With a Debt Collector
