Credit Repair: Steps To Getting A Mortgage After Bad Credit

After a period of bad credit, home ownership may seem out of reach. These steps will help you repair your credit and get a mortgage.

Getting a home mortgage after a period of bad credit is not impossible. It may be more of a challenge, but with a little work and proper planning, you can repair your credit and buy the home of your dreams. Here are eight steps to help you get a home mortgage loan after a period of bad credit.

1. Take stock of where you are at. The first thing to do if you want to repair your credit and get a home mortgage is to take stock of your current situation. Get a copy of your credit report and see what problems are referenced in it. List what references you may have that are good and positive. For example, do you have good rental references? Have you been paying utility bills, such as gas, electric, phone and cable, on time? Do you have any personal loans that you have paid off or paid in a timely manner? Chances are, your credit situation may not be as bad as you think it is. Once you take stock of where you are at, you will have a better picture of your current financial situation and a better idea of what needs to be fixed.

2. Correct errors on your report. The next step is to correct any errors on your credit report. There are generally a number of errors on the credit reports of those with even the most exemplary credit. You can do for yourself the same thing that many high-priced credit repair services do. Find any errors, such as incorrect amounts owed, bills that have been paid but are not listed as such, or bills that do not belong to you. Write to each major credit reporting agency. Currently, these are Equifax, Experian and TransUnion. List the specific items that are inaccurate, noting the reason for the inaccuracy. The credit reporting agency must then contact the creditor and ask for either confirmation that the item is correct, or that the item be updated so that it is corrected. The creditor has only a 30-day period of time to do so. If no response at all is received within the 30-day period, the credit reporting agency must remove the item completely. With diligence and follow-up, you can have the items on your credit report corrected, and there is the chance that a negative item can be removed completely from your credit report.

3. Write explanations. If you are unable to get something completely removed from your credit report, you may still be able to do some damage control by writing an explanation. Under the Fair Credit Reporting Act, you are permitted to write a 100-word explanation regarding any adverse item on your credit report. This explanation must be provided to anyone who requests a copy of your credit report. Sometimes, there are very good reasons for a negative mark on a credit report. If you have a good explanation, take advantage of this opportunity to explain the situation to your potential creditors and mortgage lenders.

4. Pay remaining creditors. If you have outstanding bills that have not been paid, then now is the time to pay them. If the balance is small, you may wish to pay it off all at once. Make sure to get a letter from each creditor indicating that the balance has been paid. If the balance is larger and you need to make payments, contact the creditor and make payment arrangements. Once the balance has been paid, get a letter from the creditor acknowledging repayment of the debt. Also, ask that your credit report be updated to show that you paid the balance according to a repayment agreement with the creditor.

5. Get retroactive forbearance's. If you have certain types of loans, such as student loans or, in some cases, automobile loans, and if your contract with the lender provides for forbearance's, you may be able to get a forbearance retroactively. For example, if your car loan provides that you may obtain a two-month forbearance in emergency situations, you may be able to obtain the forbearance retroactively with respect to a period of time when you were having financial difficulty. This may not allow you to skip two months' payments now, and this is not in your best interest anyway, as you are trying to establish an ability to pay your bills at this time. But, it may remove two months of previous negative reporting on your automobile loan from your credit report. Student loans often permit lengthy forbearance's during periods of unemployment or financial difficulty, or if you are attending school. If your student loan is in default, or if the lender has reported a number of past-due, negative comments which are now on your credit report, you may be able to get a forbearance retroactively, bring your student loans current so that you have a fresh start, and completely wipe out any negative remarks on your credit report.

6. Establish new credit references. When you are ready to do so, begin to establish positive credit references. Even after a period of bad credit, a mortgage lender will work with you provided you have a period of, perhaps, two years with decent credit. The mortgage lender will want to see that, during that time, you have had new credit extended to you and have managed it appropriately. Consider applying for a secured credit card to help you establish good credit. After a period of paying on the secured card balance on time, you will be better able to qualify for an unsecured credit card. Consider making a purchase on an installment plan. Start small at first, with perhaps a new home appliance your family needs, such as a washing machine, dryer or refrigerator. Once you have established that you can make the payments for this item on time and have repaid the balance in full, you will have a positive credit reference that will allow you to apply for future credit and, soon enough, a home mortgage.

7. Lower available credit. If you have just been through a period of bad credit, particularly credit card debt, and have managed to pay off all of your credit card balances, this is wonderful and is quite an accomplishment. However, if, for example, you now have $50,000 of available credit on a dozen or so credit cards, this is going to work against you. If a lender sees that you have this much credit available to you, there will be a concern that, after you are approved for a home mortgage, you could go out and run up those credit card balances again, getting yourself into financial hot water and hurting your ability to repay your mortgage loan. If you are fortunate enough to still have your credit cards, close out all but two of the credit card accounts so that you have no more than about $5,000 in available credit. Keep one credit card put away for emergencies. Use the other credit card to make small, regular purchases, paying the balance on time each month and rebuilding a good credit history.

8. Establish a savings account. One thing that will impress a mortgage lender is if you can show the ability not only to pay your bills, but to save money. Before you purchase a home, you should be in a position to not only make your monthly bill payments on time and live comfortably, but to put at least a small amount of money away in a savings account each month. Open a savings account and have a certain amount automatically transferred from your paycheck or your checking account into your savings account each payday. This way, you will show a potential mortgage lender that you are really ready to buy that new home. You will also have a nice stash of cash available to help with a down payment or with closing costs when the time comes to buy your new home.

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