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Buying a Home with Bad Credit

By - 2006

What's the worst thing about buying a home with bad credit? It isn't that it is that difficult - it's the high fees and interest rates you pay for your home mortgage loan. Use these techniques to repair that credit and so lower the rates you'll pay. Can't take the time to do that? See part two for some other options.

Part One - Buying a Home with Bad Credit

If you have the time, fix that bad credit. This will make it easier to find a lender, and get you a lower rate. If you get a 2% lower interest rate, you'll save more than $70,000 in interest over the years (based on a 30-year $140,000 loan). Some ways to fix that bad credit report follow.

You need to see what's on it. Try an online search for "free credit report." Alternately, if you have been denied credit based on a report from a local credit reporting agency, you can request a free credit report from that agency within 30 days. Once you have the report(s), how do you fix what you see?

First, if there is something to dispute in the report, write a letter to the agency. Tell them what is incorrect, and why, and they must investigate. Send any copies of canceled checks or other documentation by certified mail.

By law, the agency must contact the source of the disputed information, to get confirmation of the debt. If they don't receive this within 14 days, they have to delete the item, and send you an updated report. Demand that they also send a corrected report to all creditors who received your credit report in the previous six months. It won't be done automatically, so be sure to ask for this step in writing.

If a disputed item is under $500, or over a year old, creditors often won't bother to respond. "Fixing" a credit report is therefore possible even if it is correct to begin with - and you also have the right to dispute the item again after 30 days.

Other things you can do to fix your bad credit? Stop buying things on credit. Pay all debts on time. Don't keep more than five credit cards. Maintain balances at less than half the limits on the cards, even if this means transferring debt from one card to another. Stop making things worse, and time alone will help (many items will be removed after seven years).

Part Two - Buying a Home with Bad Credit

Buying a home with bad credit doesn't have to mean accepting the higher interest rates and fees of sub-prime lenders. You can always buy a house in other ways, including the following.

- Rent-to-own or lease option. Some sellers are willing to lease their house to you with an option to buy. Make sure a portion of each rent payment applies towards the down payment on the home, and that you have enough time to prepare for the purchase. Suppose $200 of the rent applies towards the down payment. After two years you'll have just a $4,800 credit. Will that be enough, and will two years be enough time to correct your credit and save any additional money you'll need?

- Look for seller financing. Some sellers will provide the financing for you to buy their home. This could be in the form of a "contract for sale" or an owner-carried mortgage. Either way, you'll make payments to the seller instead of the bank - and with no lending fees and lower interest.

- Think creatively. I know of a case where the landlord was anxious to move, so the buyer offered him full price and a decent interest rate for him to carry the financing, but with very little down. They closed the first day of the month, so the small down payment came from the rents that were credited to the buyer (rent was paid on the first, and he was the new landlord). He moved into one of the units a month later.

- Reconsider "bad credit." Just having limited income or a new job isn't the same as having a bad credit score. Banks may not look at the income from your new business, for example, making it seem impossible for new business owners to get a loan. However, they will look at your credit score. If it is high enough, you can get "no doc loans," which require no documentation of income.

You don't even need a job. A high credit score - and nothing else - can get you up to 95% financing at many places. The interest rate can be anywhere from 1/2% to 4% higher than conventional loans, depending on just how high that score is. You may want to pay even higher interest to get a loan without fees if you'll be able to refinance at a lower rate soon (perhaps once your new business hits that 2-year mark that bankers like to see).

Buying a home with bad credit has become easier than ever (well, it was when I originally wrote this in 2006).


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