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Besides lack of a down payment, bad credit is one of the biggest obstacles
to homeownership. However, just because you have blemishes on your
credit doesn't mean that it has to be a dream deferred. It just means
that you need to go into the homebuying process knowledgeable about
the challenges you may face.
One of the first things you should do is set a timetable for when
you would like to buy a home. Depending on how damaged your credit
is, you may want to put off buying a home for another year. Use that
time to repair your credit by paying off creditors and create a history
of paying your bills on time and consistently.
Next, find out what your credit reports say about you. I suggest ordering
a credit report from all three of the main credit reporting agencies:
Equifax (800-685-1111), Experian (888-397-3742), and TransUnion (800-888-4213),
because not all creditors report information to the same agencies.
Once you have the report in hand, study it to make sure that the information
is accurate. If there are discrepancies, make sure you follow the steps
provided by the credit-reporting agency to dispute the information
and get it changed. In addition, you may want to add a consumer statement
on your credit report to explain any late or non-payment to creditors.
When you are ready to apply for a loan, realize that your previous
credit history may limit your eligibility for prime loans and low interest
rates. When lenders are deciding on whether to issue a potential borrower
a loan, they use various criteria in addition to payment history to
evaluate the borrower such as employment, income, assets and liabilities.
Based on this evaluation, borrowers are offered loans rated on a scale
from A to D. The more damaged your credit history, the higher of a
risk you are to lenders.
Because of your blemished credit history, you will
more than likely have to get a “sub-prime” loan. These types of loans come with higher
interest rates and more points. Don’t assume that just because a lender
offers sub-prime loans, that you will automatically be embraced. Be
prepared to explain to the lender why you had credit problems and what
you have done to prevent the situation from occurring in the future.
Don’t feel pressured into going with the first lender
willing to make a loan. Doing so may cause you to pay more than you
should. Get to
know your mortgage market. Shop several lenders, comparing interest
rates and fees, to obtain the best loan. Compare loan costs line-by-line
for various programs through several prospective lenders. Also keep
in mind, that there may be other ways to get a lower interest rate,
such as putting down a bigger down payment.
During your search for a lender, don’t hesitate to
solicit help from your real estate professional. Be upfront about
your credit record,
so that he or she can best determine financing solutions that work
for you.
Remember your past financial problems don’t have to
stop you from experiencing the joys of homeownership.
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