Six Tips for Buying a Home After a Credit Crisis

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When it comes to your credit report, not all problems are created equal. Major blips like foreclosure and bankruptcy can seriously jeopardize your chances of getting a mortgage -- and even if you're approved, you could wind up with a sky-high interest rate or subprime loan.
"Any public records on your credit report are big red flags," says money expert Lynnette Khalfani-Cox, founder of TheMoneyCoach.net. Along with foreclosure and bankruptcy, charge-offs, collections, tax

When it comes to your credit report, not all problems are created equal. Major blips like foreclosure and bankruptcy can seriously jeopardize your chances of getting a mortgage -- and even if you're approved, you could wind up with a sky-high interest rate or subprime loan.

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"Any public records on your credit report are big red flags," says money expert Lynnette Khalfani-Cox, founder of TheMoneyCoach.net. Along with foreclosure and bankruptcy, charge-offs, collections, tax liens, and repossessions can all cause your FICO score to plummet -- and that can quickly quash your lendability. Khalfani-Cox notes, "From that one number, lenders can sum you up. Fair or not, right or wrong, that's how the system works."

But if your credit score reflects a past financial foul, don't resign yourself to an eternity of renting. It's surprisingly simple to get your credit score back on track -- and once you've done some damage control, lenders are usually quick to forgive. Here's how you can recover from a credit crisis and get a loan for your home sweet home.

Review. "Before you talk to a mortgage lender, you should already know what's in your credit file," Khalfani-Cox advises. After all, if a financial disaster has already slashed your score, a small mistake can cost you even more precious points. "Believe it or not, about 70 percent of all consumer credit reports have mistakes on them. That's a lot of errors, and it's costing people money," Khalfani-Cox says. Request a copy of your credit report and check every line for accuracy. If you spot an error, notify the credit bureau or contact the creditor directly.

Repay. If you have outstanding debt that's affecting your score, contact your creditors and ask if they can help you lower your balance. "You might start by offering 10 or 20 cents on the dollar, and then negotiate from there," Khalfani-Cox suggests.

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Repair. While you're combing your credit score for mistakes, make sure it's not missing any positive information that could improve your score. One common mishap: If your credit card company hasn't reported your credit limit, the credit bureau may assume that your highest balance is your credit limit. So if you've only charged $5,000 on a $25,000 credit line, it may assume you're using 100 percent of your available credit, not 20 percent.

Rescore. Adjustments to your credit report typically take up to 30 days, but mortgage applicants can take advantage of a process called rapid rescoring. Notify your lender of any errors, and they'll be corrected -- and a revised score will be generated -- within 48 hours. "That's the single fastest thing you can do to boost your credit score," Khalfani-Cox says.

Reason. If you just can't seem to make your number climb, Khalfani-Cox notes that certain "compensating factors" can offset a low credit score. Have you held the same job or same apartment for several years? Did you get a raise recently? Do you have money stashed away in savings? Write your mortgage lender a letter, and bullet-point any information that might demonstrate your good fiscal sense. If you only have one major hiccup affecting your credit score, this addendum might make a bank more likely to approve your application.

Restore. If you still can't get your score -- or your lender -- to budge, your best bet may be to wait it out. Be vigilant about paying your bills on time, trim your debt, and resume your house hunt in a year. "Many major banks will extend mortgages to people who are one or two years out of a foreclosure or bankruptcy," Khalfani-Cox says. It's not as ideal as getting your dream home today, but it could save you thousands in interest down the road.

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