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 home buying 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.
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.
One more avenue might be an option. Seller financing of some sort may allow you to move in, stabilize your life, possibly build some equity, and buy some time to improve your credit score. Lease/purchase agreements are increasing in popularity with the current slow market. Owners are more receptive to leases with a "takeout" down the way. You eventually seek a permanent loan so that the seller can move on.
Remember your past financial problems don't have to stop you from experiencing the joys of homeownership.
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