Difference between revisions of "Buy Your First Home With Bad Credit"
m (Update ref tag) |
|||
| Line 20: | Line 20: | ||
#* You absolutely '' must '' make sure that you can afford to pay back your loan. Take into account the fact that interest rates can change over time. If the lender is forced to foreclose on your home, your credit will plunge even worse than it was before you started. Before taking a high-risk loan, consider simply repairing your credit profile through a few years of financial responsibility. | #* You absolutely '' must '' make sure that you can afford to pay back your loan. Take into account the fact that interest rates can change over time. If the lender is forced to foreclose on your home, your credit will plunge even worse than it was before you started. Before taking a high-risk loan, consider simply repairing your credit profile through a few years of financial responsibility. | ||
#* As a first time home-buyer, you will have no record of mortgage payments in the past, so your baseline "default" risk will be higher. | #* As a first time home-buyer, you will have no record of mortgage payments in the past, so your baseline "default" risk will be higher. | ||
| − | #Consider seller financing. Seller financing is a real estate agreement where financing provided by the seller is included in the purchase price using house as collateral<ref>http://www.investopedia.com/terms/s/seller-financing.asp</ref>. | + | #Consider seller financing. Seller financing is a real estate agreement where financing provided by the seller is included in the purchase price using house as collateral<ref name="rf16689">http://www.investopedia.com/terms/s/seller-financing.asp</ref>. |
#*Interest might be higher, but down payment may less. | #*Interest might be higher, but down payment may less. | ||
=== Salvaging Bad Credit === | === Salvaging Bad Credit === | ||
| − | #Know where you stand. Don't let bad credit sneak up on you. Keep an eye on your credit score as you attempt to work around it . You can check your credit score on free credit score reporting websites such as Credit Karma.<ref>https://www.creditkarma.com/</ref> You want to have a realistic view of your current credit profile so that you can set your goals accordingly and judge the successes of your efforts to improve your credit. A good first step is to get a credit report from the three major credit agencies: Equifax, Experian, and TransUnion. The credit scores that these agencies give are used when banks decide whether to approve you for loans. Higher credit scores mean you're more likely to be approved for a loan '' and '' that your loan may cost less. | + | #Know where you stand. Don't let bad credit sneak up on you. Keep an eye on your credit score as you attempt to work around it . You can check your credit score on free credit score reporting websites such as Credit Karma.<ref name="rf16690">https://www.creditkarma.com/</ref> You want to have a realistic view of your current credit profile so that you can set your goals accordingly and judge the successes of your efforts to improve your credit. A good first step is to get a credit report from the three major credit agencies: Equifax, Experian, and TransUnion. The credit scores that these agencies give are used when banks decide whether to approve you for loans. Higher credit scores mean you're more likely to be approved for a loan '' and '' that your loan may cost less. |
| − | #* Federal law in the United States dictates that these three credit agencies must provide you with a free credit report every 12 months if you ask for it.<ref>https://www.annualcreditreport.com/yourRights.action</ref> Visit AnnualCreditReport.com to get started requesting your free credit reports. | + | #* Federal law in the United States dictates that these three credit agencies must provide you with a free credit report every 12 months if you ask for it.<ref name="rf16691">https://www.annualcreditreport.com/yourRights.action</ref> Visit AnnualCreditReport.com to get started requesting your free credit reports. |
| − | #* Credit scores range from 300-850, with 850 being hypothetically "perfect" credit.<ref>http://money.msn.com/saving-money-tips/post.aspx?post=91c66988-1c0b-47ed-9b83-a61861325399</ref> Generally a credit score above 700-720 is considered "good," while anything below about 640 is considered "poor."<ref>https://www.creditkarma.com/faq/what-is-a-good-credit-score</ref> | + | #* Credit scores range from 300-850, with 850 being hypothetically "perfect" credit.<ref name="rf16692">http://money.msn.com/saving-money-tips/post.aspx?post=91c66988-1c0b-47ed-9b83-a61861325399</ref> Generally a credit score above 700-720 is considered "good," while anything below about 640 is considered "poor."<ref name="rf16693">https://www.creditkarma.com/faq/what-is-a-good-credit-score</ref> |
#Work to fix your credit if you have [[Fix Your Bad Credit Rating|bad credit]], work to fix it. Your '' best '' chance of buying a home doesn't come from navigating the obstacles created by your bad credit. Rather, it comes from turning your bad credit into good credit so that you don't have to deal with those obstacles in the first place. It's a simple fact that buying a house on good credit is always the smartest move. With good credit, you're more likely to get approved for loans, and, as a general rule, the loans you get will usually have better interest rates and/or down payments associated with them. Take the time to improve your credit - in the long run, it's always your best bet. | #Work to fix your credit if you have [[Fix Your Bad Credit Rating|bad credit]], work to fix it. Your '' best '' chance of buying a home doesn't come from navigating the obstacles created by your bad credit. Rather, it comes from turning your bad credit into good credit so that you don't have to deal with those obstacles in the first place. It's a simple fact that buying a house on good credit is always the smartest move. With good credit, you're more likely to get approved for loans, and, as a general rule, the loans you get will usually have better interest rates and/or down payments associated with them. Take the time to improve your credit - in the long run, it's always your best bet. | ||
#*Keep in mind that paying off your credit card debts is one of the faster ways to improve your credit score rapidly. | #*Keep in mind that paying off your credit card debts is one of the faster ways to improve your credit score rapidly. | ||
| − | #Avoid common credit pitfalls. If you're reading this article, you probably already have less-than-ideal credit. However, this doesn't mean you should let your credit profile go into free-fall! Further neglect will only damage your credit more and make it less likely that you'll be able to get the house you've set your heart on. Avoid the following credit-damaging behaviors at all costs:<ref>http://realestate.aol.com/blog/2013/07/31/qualify-mortgage-bad-credit/</ref> | + | #Avoid common credit pitfalls. If you're reading this article, you probably already have less-than-ideal credit. However, this doesn't mean you should let your credit profile go into free-fall! Further neglect will only damage your credit more and make it less likely that you'll be able to get the house you've set your heart on. Avoid the following credit-damaging behaviors at all costs:<ref name="rf16694">http://realestate.aol.com/blog/2013/07/31/qualify-mortgage-bad-credit/</ref> |
#* Late payments on student loans | #* Late payments on student loans | ||
#* Delinquent payments on other items (car, possessions, credit cards, etc.) | #* Delinquent payments on other items (car, possessions, credit cards, etc.) | ||
#* Short sales (selling a property for less than the amount still owed) or foreclosures. This is presumably '' your '' first home, but your partner or spouse may have been involved with other mortgages previously. | #* Short sales (selling a property for less than the amount still owed) or foreclosures. This is presumably '' your '' first home, but your partner or spouse may have been involved with other mortgages previously. | ||
#Have explanations for credit troubles. Sometimes, the negative effects of a bad credit history can be mitigated if there is a good reason for your difficulties. Be prepared to explain some the negative issues listed on your report, such as late payments, bankruptcies, or other issues. If your bad credit is due to a medical emergency, a job loss, or a divorce, be sure to know relevant facts and details surrounding this event so that lenders can consider the circumstances of your negative credit rating. | #Have explanations for credit troubles. Sometimes, the negative effects of a bad credit history can be mitigated if there is a good reason for your difficulties. Be prepared to explain some the negative issues listed on your report, such as late payments, bankruptcies, or other issues. If your bad credit is due to a medical emergency, a job loss, or a divorce, be sure to know relevant facts and details surrounding this event so that lenders can consider the circumstances of your negative credit rating. | ||
| − | #Dispute inaccurate information on your credit report. Even massive credit agencies make mistakes. Read your credit reports carefully - if you receive "bad marks" on the report based on information that is false or incomplete you can (and should) dispute it. Credit agencies are required by law to investigate your complaint within 30 days (unless they consider it frivolous.)<ref>http://www.consumer.ftc.gov/articles/0058-credit-repair-how-help-yourself</ref> Send a [[Write a Letter|formal letter]] to the reporting company notifying them of the inaccuracies. It's practically free, and, if successful, can seriously boost your credit score. | + | #Dispute inaccurate information on your credit report. Even massive credit agencies make mistakes. Read your credit reports carefully - if you receive "bad marks" on the report based on information that is false or incomplete you can (and should) dispute it. Credit agencies are required by law to investigate your complaint within 30 days (unless they consider it frivolous.)<ref name="rf16695">http://www.consumer.ftc.gov/articles/0058-credit-repair-how-help-yourself</ref> Send a [[Write a Letter|formal letter]] to the reporting company notifying them of the inaccuracies. It's practically free, and, if successful, can seriously boost your credit score. |
#* Include copies (not originals) of documents that support your claims. You may also want to include a copy of your credit report with inaccurate items clearly circled. | #* Include copies (not originals) of documents that support your claims. You may also want to include a copy of your credit report with inaccurate items clearly circled. | ||
#* Include, in your letter, a request for a "return receipt" - this way, you'll know if the agency has received your letter. | #* Include, in your letter, a request for a "return receipt" - this way, you'll know if the agency has received your letter. | ||
| − | #Don't fall for scams. When you've got bad credit and you're desperate to buy a house, it can be tempting to do something - anything - to eliminate your bad credit. A wide variety of quasi-legal predatory credit services and scams exist to take advantage of precisely this desperation. ''' Don't fall for them. ''' You can lose the cash that you '' do '' have and leave yourself in even worse straits than you were in before. If a deal seems too good to be true, it probably is. Services that offer to "erase bad credit" or give you a "clean slate" simply don't work. According to the Federal Trade Commission (FTC), no companies or agencies exist that actually do these things. The FTC recommends that you should stay far away from services that:<ref>http://www.consumer.ftc.gov/articles/0225-credit-repair-scams</ref> | + | #Don't fall for scams. When you've got bad credit and you're desperate to buy a house, it can be tempting to do something - anything - to eliminate your bad credit. A wide variety of quasi-legal predatory credit services and scams exist to take advantage of precisely this desperation. ''' Don't fall for them. ''' You can lose the cash that you '' do '' have and leave yourself in even worse straits than you were in before. If a deal seems too good to be true, it probably is. Services that offer to "erase bad credit" or give you a "clean slate" simply don't work. According to the Federal Trade Commission (FTC), no companies or agencies exist that actually do these things. The FTC recommends that you should stay far away from services that:<ref name="rf16696">http://www.consumer.ftc.gov/articles/0225-credit-repair-scams</ref> |
#* Require you to pay money before any work is done for you | #* Require you to pay money before any work is done for you | ||
#* Tell you not to contact the credit agencies directly | #* Tell you not to contact the credit agencies directly | ||
| Line 46: | Line 46: | ||
#* Contact your creditors. Let them know your situation - they don't want you to default, so they will probably work with you to re-structure your debt, making it easier for you to pay. | #* Contact your creditors. Let them know your situation - they don't want you to default, so they will probably work with you to re-structure your debt, making it easier for you to pay. | ||
#Give plenty of time for your credit to improve. Above all, repairing bad credit takes time. To go from bad credit to good credit usually requires you to be fiscally responsible for '' years. '' Work through your difficulties - get your expenses and debts under control and simply work on living responsibly for a while. You'll be amazed how liberating it is to get your fiscal affairs in order. Knowing that you're slowly but surely reducing your debt, rather than adding to it, feels great. Just keep at it! | #Give plenty of time for your credit to improve. Above all, repairing bad credit takes time. To go from bad credit to good credit usually requires you to be fiscally responsible for '' years. '' Work through your difficulties - get your expenses and debts under control and simply work on living responsibly for a while. You'll be amazed how liberating it is to get your fiscal affairs in order. Knowing that you're slowly but surely reducing your debt, rather than adding to it, feels great. Just keep at it! | ||
| − | #*Credit reporting agencies can report most negative information against you for seven years and bankruptcies for ten years.<ref | + | #*Credit reporting agencies can report most negative information against you for seven years and bankruptcies for ten years.<ref name="rf16695" /> |
| − | #* Unfortunately, some negative information has no time limit for when it can appear on a credit report. This information is:<ref>Ibid.</ref> | + | #* Unfortunately, some negative information has no time limit for when it can appear on a credit report. This information is:<ref name="rf16697">Ibid.</ref> |
#** Any criminal convictions. | #** Any criminal convictions. | ||
#** Information reported in response to a job you applied for that pays over $75,000 a year | #** Information reported in response to a job you applied for that pays over $75,000 a year | ||
| Line 58: | Line 58: | ||
== Warnings == | == Warnings == | ||
| − | Avoid predatory lenders. Getting a loan and buying a home is an intimidating, complicated process - more so if you have bad credit! Unfortunately, some lenders try to take advantage of this. Don't be a victim of mortgage fraud. '' Never '' sign any contract that you don't understand. '' Never '' sign a contract because your lender is pressuring you to do so. '' Never '' let someone convince you to lie on a loan application. Legitimate lenders will be happy to help you understand the terms of your loan completely - after all, it's in their interest for you not to default. Predatory lenders will rush you into an exorbitant loan because they want to get as much money out of you as possible - whether you default or not. The HUD recommends to look for these common-sense warning signs:<ref>http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/loanfraud</ref> | + | Avoid predatory lenders. Getting a loan and buying a home is an intimidating, complicated process - more so if you have bad credit! Unfortunately, some lenders try to take advantage of this. Don't be a victim of mortgage fraud. '' Never '' sign any contract that you don't understand. '' Never '' sign a contract because your lender is pressuring you to do so. '' Never '' let someone convince you to lie on a loan application. Legitimate lenders will be happy to help you understand the terms of your loan completely - after all, it's in their interest for you not to default. Predatory lenders will rush you into an exorbitant loan because they want to get as much money out of you as possible - whether you default or not. The HUD recommends to look for these common-sense warning signs:<ref name="rf16698">http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/loanfraud</ref> |
* Lenders that tell you they are your "only chance" to get a loan. Good lenders will let you shop around, even if you have bad credit. | * Lenders that tell you they are your "only chance" to get a loan. Good lenders will let you shop around, even if you have bad credit. | ||
* Lenders that ask you to sign a contract that has blank spaces (or untrue information.) If this information is filled in later, you may still be bound to the contract. | * Lenders that ask you to sign a contract that has blank spaces (or untrue information.) If this information is filled in later, you may still be bound to the contract. | ||
