Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com.
Dear To Her Credit,
I am trying to buy a home and my husband and I are having some credit issues. My husband got into an accident in 2006 and was out of work for a year, and we are just now trying to get back on track.
What can I do to remove judgments and start raising our credit scores? Can I open new credit accounts to start getting a better history? -- Kristina
Dear Kristina,
You can still buy a house, even with credit issues from your husband's time of unemployment. Yes, you'll have to work harder at it and not be in a hurry. But don't give up -- you can do it!
It's a great time to buy, as housing prices in many parts of the country are lower than they have been in years. The lower the home prices are in relation to your income, the easier it is for you to qualify for a loan.
Before you start looking for a house, you'll want to work on your credit history. You can't remove judgments and other unfavorable items from your credit history, but you can look for mistakes and get them taken off. Don't be tempted to pay someone to clean up your credit for you. There's nothing they can do that you can't do yourself. Read the CreditCards.com "Help" section feature titled "8 legitimate ways to raise your score now" for instructions on how to raise your score as quickly as possible.
Once your credit is as good as you can get it in the short term, it's time to get preapproved for a loan. Robert Keller, mortgage consultant at Embrace Home Loans, says, "She may have more options than she thinks." It depends on exactly what is on your credit report and your credit score. Keller points out that a mortgage credit report does not show exactly the same things as other types of credit reports. The best way to find out is to go ahead and make an application.
Although many lenders require a credit score of 740 or more for their best rates, borrowers with scores as low as the high 500s have other options. (The average Vantage score is 769.) "I would advise her to make a credit application with a mortgage banker who has access to FHA financing as a direct lender and can still finance FHA mortgages with a 580 FICO score. I cannot speak for other mortgage professionals, but the bank I work with can work with a 580 FICO score for a mortgage applicant," says Keller.
If one of you is a veteran, you should definitely look into VA loans, as well.
Expect to pay higher interest or discount fees than if your credit were stellar. "She should expect to pay in the neighborhood of 100-150 basis points more than a similar borrower with a FICO above 620 might expect to pay," says Keller. A basis point is one-hundredth of 1 percent. "This means that she would either pay 1 to 1.5 discount points in fees or expect a slightly higher interest rate." Discount points are one-time fees paid by home buyers; 1 discount point equals 1 percent of the mortgage amount. Don't pay more than 200 basis points (2 discount points) or accept a very high interest rate. If you can't get a reasonable rate, you're better off waiting until you can.
As a borrower with credit issues, be aware that you may be required to show more documentation and make a higher down payment or pay private mortgage insurance.
You might also want to look at more creative ways to get into a house:
Lease to own. This tactic has gotten a bad name, thanks to outfits that let people sign up for lease-to-own programs they have no hope of following through on. Done carefully, however, it is a legitimate way to secure a home while you are still building your credit and perhaps saving a down payment.
Get a co-signer or co-owner. Perhaps your parents are willing to help you buy a house.
Owner financing. Sellers who are having a hard time unloading a house sometimes take on the role of lender.
Get qualified legal advice if you decide on any of these options. A real estate lawyer can help you avoid problems that could otherwise dash your homeownership dreams.
Take your time, but keep trying. "I would avoid the mistake of doing nothing and assuming that she cannot move forward," says Keller. "Even if borrowers find themselves in the position where an approval cannot be obtained in the immediate short term, they'll end up at least knowing what needs to be done so that they can move toward that goal."
Sally Herigstad answers questions about credit every week for CreditCards.com. Herigstad is a certified public accountant, author and speaker. She also writes regularly for MSN Money, Interest.com, Bankrate.com and RedPlum.com, and has been a guest on Martha Stewart radio and other programs. You can read more about personal finance and download free budgeting worksheets at her website: www.sallyherigstad.com
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: October 1, 2010
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