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What If My Credit Isn’t Sterling?

Less than perfect credit doesn't mean that you should give up your dream of home ownership.  However, you may want to clean up your credit history before you dive into a pool of monthly mortgage payments.

• If you have only a couple of late payments in your past, lenders will usually look the other way if you can explain the reason why you were late. Be honest – most lenders will understand, as long as the late payments are rare occurrences.
• If you have left a trail of late or unpaid bills, start by paying off some, if not all, of your debts and then make a habit of paying your bills on time. After about a year, your credit report will start shaping up and lenders will see that you have been dependable.
  
  
• If you have previously foreclosed on a loan or if you have filed for bankruptcy, wait another two or three years before you apply for a mortgage. Meanwhile, get your financial situation in order. Start by paying your bills on time.

A tarnished credit history will probably keep you from qualifying for an “A” loan.  “A”  loans require as little as 5 percent down and have the best interests rates.  While everyone wants an “A” loan, if you don't qualify, you may qualify for lower grade loans.

“A” Loans – These are the loans given to the best credit risks.  Long-term employment, few, if any, late payments and a solid history of paying back loans earn you the best rates and lowest down payment requirements.

“B” loans – Just a step below the “A” category.  Most lenders ask that your history in the last 12 months be clean and late payments marring your history be at least one year old. No payments should have been more than 60 days overdue.  “B” loans usually require 20 to 25 percent down. Interest rates are generally one to two percentages higher than “A” loans.

" C” Loans – These loans require your credit history has been clean in the last year, but unlike “B” loans, you won't be disqualified for a “C” loan if you have been foreclosed on or declared bankruptcy in the past few years.  Also, lenders often let a few late mortgage payments in your past slide, as well as loan and credit card payments longer than 60 days. "C" loans require 20 percent to 35 percent down and interest rates are generally three to four percent higher than “A” loans and may require additional “points” to be paid at closing.

“D” Loans  – For those with disastrous credit histories. That is, people who have been  foreclosed on or went bankrupt in the past couple of years or people who just can't seem to pay any of their bills on time. "D" loans require 35 percent to 60 percent down and their interest rates mimic those of credit card companies. If you only qualify for a "D" loan, you may want to reevaluate how important buying a home is right now. It might be smarter to wait, clean up your credit record and then try to buy a home in a few years.