Overcoming a Bad Credit History
Disclose past credit problems to the loan officer before applying. One of the worst approaches to overcoming past credit problems is trying to hide them. Describe the steps that you have taken to solve those problems. The loan officer knows how strict his or her underwriters are with respect to credit problems. If your credit history would disqualify you with this lender, the loan officer should know and give you advice.
Seek a Hard-Money Lender
If your past credit situation prevented you from qualifying for a mortgage from a traditional lender, you have to seek out a “hard- money” lender. The stereotypical hard-money lender has been the last-talking, polyester-clad salesperson with a burly bodyguard. Today, that is no longer the case. Many traditional mortgage lenders carry a line of mortgage products for customers with “less than perfect credit.” These products are known as B-C-D loans. In most cases, lenders advertising B-C-D loans are able to find a loan to overcome credit problems.
If your past credit problems are severe enough (bankruptcy, foreclosures, or unresolved lawsuits), you may want to seek out a lender that specializes in loans for borrowers with credit problems rather than a traditional mortgage lender. Hard-money lenders do not use the national standards, and they find loans for people with credit problems. Their rates are quite a bit higher than traditional lenders, but they can lend money to people who have been turned down elsewhere. Beware of a lender that charges a large upfront fee (more than the $300 to $400 appraisal and credit report fee). As with all lenders, be sure to check the reputation of hard-money lenders. Check with your real estate agent and call the Better Business Bureau.
Wait Until You Reestablish a Good Credit Record
Depending on the nature of your past credit problems, it may be best to put off the purchase of a home until after you have reestablished a good credit record. The National Foundation for Consumer Credit (800-388-CCCS) is a nonprofit organization that can direct you to one of 617 local agencies. They can put you in touch with a local agency that will help analyze your finances and give you good advice about whether you're ready to buy a house. Generally, two years of clean credit is enough for conventional lenders. In reestablishing your credit, consider that although late payments should always be avoided, some late payments are worse than others. Never, ever miss a mortgage or rent payment. Be particularly sensitive to installment payments such as car payments, bank loans, student loans, and any government obligation (delinquent government obligations are important for FHA and VA loans). If you must be late on something, let the credit card or other revolving debt (except home equity loans) be the first to go.
Correct Mistakes Early
Occasionally, a dispute with a store over an incorrect billing or returned or damaged merchandise shows up as a detrimental comment on your credit report, even after the dispute has been re-
solved. Sometimes creditors report incorrect information to the repositories, which may incorrectly lower your score.
Unfortunately, it can take a long time to get mistakes corrected. If you can document the error with a letter on the creditor's letterhead, you can submit the information to the repositories to get a “re-score.” If you do this yourself, you need to submit the information to each of the three repositories in a process that may take several weeks. There are a number of credit reporting agencies as well as private services that can expedite the process for a fee. Depending on the type of error, the correction may change your score by as much as 10 to 20 points, a number that can make the difference in whether you qualify for a mortgage, or qualify for a better mortgage that may save you thousands of dollars. Unfortunately, all the explanations in the world can not overcome a poor credit score.
If you are turned down by a lender, even if a mistake on your credit report was the cause, your rate lock-in commitment (see Chapter 5, “Shopping for a Mortgage”) may expire before the mistake is resolved. Correct mistakes on your credit report as soon as possible.