Poor credit sets the stage for many problems, including difficulty being able to buy a house. Lenders use credit scores to determine the chances of you defaulting on the mortgage and generally refuse to finance anyone with a substandard score. In most cases, a credit score under 650 is considered poor. If your heart is set on buying a home, even though your credit is poor, there are several things you can do to improve your chance of success.
Work on improving your credit score. Go to annualcreditreport.com and obtain a free copy of your credit history. It will list all debts for the past 7 to 10 years and whether you paid them on time, were late with payments or had them charged off as bad debts. The more negative entries you can clean up the better, but paying them will not remove that entry from your report immediately.
Pay all debts that have not yet been charged off, even if you are behind in payments. Call the companies on the report and set up a plan to pay them off. Ask them to make it part of the deal to not report you negatively to the credit bureaus once the debts are paid. They may offer to give you a favorable report if you pay the terms as agreed on the new payment plan.
Maintain all current monthly bills in a timely fashion. While you are paying off bad debts, you need to pay current bills on time. This will help counteract the negative entries and show potential lenders that you have corrected past financial issues and are now able to handle your monthly bills.
Increase the size of the down payment. While couples with good credit can often get into a home with little or nothing down, you will need to show a good faith effort by putting up a sizable down payment. This lets the bank know you are confident in your ability to handle mortgage payments are are putting up a large down payment to prove it. If you default on the mortgage, you lose the down payment. Putting cash on the line makes a powerful statement.
Get a co-signer. If your efforts to clean up your credit and offering a larger down payment fail to get the lender's nod, get a co-signer. A co-signer is someone who has good enough credit to qualify for the loan and is willing to sign on the contract with you. They will be responsible for making the mortgage payments if you default, so be sure you can pay the monthly payments before going into the deal with a co-signer. Offer to refinance as soon as you can qualify to get the cosigner's name off the contract.
Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.