Buying a home with bad credit

Dear Dr. Don,
If my credit score is only 575, how long will it take to increase my score? I want to buy a house. Should I wait until my score goes up to save interest or just refinance later after my score goes up? Thanks.
-- Okay DJ

Dear DJ,
While it takes seven years for negative information to drop off your credit report and 10 years for a Chapter 7 bankruptcy filing, it doesn't take seven years to improve your credit score.

The more months you can put between your last missed payment and your loan application, the higher your credit score. The higher your credit score, all other things equal, the lower the interest rate on your new mortgage. Raise your credit score from 575 to more than 620, and the interest rate could drop by up to three-quarters of a percentage point.

But your decision depends on more than just the interest rate on your loan. How are housing prices behaving in your market? Wait a year to buy a home and you may wind up spending 5 percent to 15 percent more than what it would cost you today.

Interest rates heading higher can also change your perspective on things. The 8.5 percent mortgage loan you can get today as an E credit might equal the mortgage rate you qualify for next year as a D credit. If rates stay low, then refinancing is an option. If rates move higher it may not make sense to refinance -- even with an improved credit history.

Review your credit report(s) to see how recent the negative information is on your report. If you have recent credit problems, then give it a couple of months to see how things shape up. A FICO® credit score simulator is available when you purchase a credit report and credit score for $12.95 at MyFICO®. Or use the FICO Score Estimator on Bankrate's site. The score simulator will let you run what-if scenarios to see how changes you make affect your credit score.

-- Posted: Aug. 12, 2004