How Bad Credit Affects Your Home Loan and What You Can Do About It

by Kelly Richardson Columnist

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If you have bad credit, you know first hand the frustration of tedious discussions with lenders. And if you've tried to obtain a new home loan or refinance your current mortgage, bad credit can cost you in high percentage rates and an elevated down payment. Here are some tips on getting your credit rating turned around.

Now that the mysterious credit score is out in the open and available to the borrowers that it affects, perhaps you're not too proud of yours. Don't feel alone. Credit scores range from 300 to 850, with only about 40 percent of the American public with a score of 750 or higher. But the relationship between your credit score and your borrowing power can't be denied. According to the Chicago Tribune, "Borrowers who earn a poor score are likely to be offered mortgages with an interest rate higher than market rates."

Bad Credit and Your Mortgage

  • » The Numbers. If your score is in the 500s, expect to pay 1.5 percent to 3 percent more in interest.
  • » Late Payments. If you have a history of late or missed payments, this can seriously lower your credit score.
  • » Here to Stay. The credit score is viewed as a valuable tool for determining credit worthiness and won't disappear.
Fixing your bad credit rating is so very important because a host of agencies outside of the real estate lending market are using it to determine your credit worthiness. Not only will you not get a home loan or mortgage refinancing, but you might not be able to get insurance or rent an apartment.

Steps to Repairing Bad Credit

  • » Obtain a Report. Write one of the three main reporting agencies (Equifax is the most well-known) and get a copy of your credit score and report.
  • » Settle Debts. Either through paying them off or negotiating them with your lender, lowering your debt is the quickest way to fix a bad credit score.
It normally takes 60 to 90 days before a bad credit score reflects your efforts, so hold off on applying for that home loan or mortgage refinancing.

Don't let your credit score strike you out, USA Today
Credit Repair: Self Help May Be Best, Federal Trade Commission
Credit score has key part in loan decisions, Chicago Sun-Times
The rating game, Chicago Tribune

About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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