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Special section Beat the bad credit blues

The worse your credit, the more you're likely to pay for a mortgage loan.

Don't let bad credit ... impact your mortgage

Your credit history and your mortgage
 

Why it's important
Good credit is particularly important when you are seeking a mortgage. It can either open or close the door to financing options and a dream home.

Lenders are looking at your ability to repay a loan, the likelihood you'll make timely payments, the amount you can put down and the value of the home. They factor in your credit scores and credit history, the loan-to-value ratio and your debt-to-income ratio.

Credit issues, such as recent delinquent payments, charge-offs, foreclosures, bankruptcy filings or credit scores in the 600s and below often force consumers to pay higher origination fees, interest rates and down payments.

At worst, consumers will be denied a mortgage at any cost.

What you can do
Get your free credit reports from the three major credit bureaus. Review them and fix errors, and check your credit scores so you know where you stand.

Consumers newly discharged from bankruptcy especially need to check their credit reports to make certain accounts with debts that were discharged show a zero balance.

Work to improve your credit score, limit new credit and save up a sizable down payment.

When you are ready, get preapproved for the mortgage. A mortgage can come from a bank, savings and loan institution, credit union, or mortgage broker. Make all your loan applications within a few weeks so that they will be treated as one credit inquiry, says John Ventura, a bankruptcy attorney and author of "The Credit Repair Handbook." If your problems were related to circumstances beyond your control, such as a medical situation or a job loss, make sure to point that out to the lender.

The Federal Housing Administration's insured loans offer more latitude for low- and middle-income families. Benefits for homebuyers include down payments of 3 percent, more flexible credit ratings and the ability to use money from sources such as family and nonprofit groups to make a down payment. Also, potential borrowers are allowed to carry more debt.

Those who have declared a Chapter 7 liquidation bankruptcy probably will have to wait at least two years after discharge to qualify for the insured loan. Those with Chapter 13 repayment plan bankruptcy claims should make a year of timely payments during the payout period before they try to obtain the loan.

A damaged credit history often will stop you from getting a conventional loan, so Ventura suggests four additional alternative financing options.

Possible financing options for those with problem credit:
Large down-payment, high-interest loan: A consumer puts down a large down payment, such as 40 percent to 50 percent, and receives a high-interest loan.
Owner financed: The seller of the property finances the sale and will hold the mortgage on the property.
Lease/purchase: A lease agreement that includes an option to buy the property at some future date. The person with bad credit may have to get his or her own financing but would have time to fix his or her credit, or the owner may agree to finance the home. If the owner finances, make sure the property is clear of any liens and mortgages. You could be at risk of the seller defaulting and you losing the home.
Assumable loans: Find someone who wants to sell by allowing you to assume the mortgage. However, you may have to get approval from the mortgage company.

Most of these methods would be difficult to pull off, particularly for subprime borrowers, but buying a home might be worth making the attempt.

-- Posted: Oct. 10, 2007
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