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Mortgages with bad credit
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April 5, 2000: 10:46 a.m. ET
People with spotty or no credit can still buy a home -- but get the right rate
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Most people are highly confident they'll be able to buy a home at some point, surveys show, even if they have a poor credit history. They're right.
"Almost anybody can get a loan, no matter how bad their credit is," said Bob O'Toole, senior vice president of government-agency relations for the Mortgage Bankers Association of America. "The problem is how much they're going to pay for it."
The good news is that having a bad, spotty or blank credit record doesn't block you out of the market. Here's how to go about getting a mortgage that's right for you.
Don't get eaten by the predators
Bear in mind that lenders who serve the "subprime" market, or less credit-worthy people, charge higher interest rates and often slap on higher transaction fees. Not all subprime lenders are "predatory," of course, but some are, with restrictions and hidden charges that make it tough for homeowners to ever get their heads above water.
 "The people who have the weakest credit histories are in great danger of falling into a predatory environment," said Karen Hill, chief executive of the American Homeowner Education & Counseling Institute, which trains people to counsel homebuyers.
There are simple steps you can take to avoid mortgage sharks. Watch for warning signs such as unsolicited mail advertising mortgage products and companies that require you to pay upfront fees before you get financing.
Get educated, for free
Hill recommends that all consumers get to know their mortgage market, at a local level. That should help put a lender in perspective and help you avoid rogues.
Buying a home is the most complex financial transaction many people conduct, she said. "It's the most significant investment someone is likely to make, but there's nothing formal in our social or educational network that prepares us," she said.
Hill suggested contacting nonprofit organizations that run homeowner-education programs. On a nationwide level, she recommends ACORN, or the Association of Community Organizations for Reform Now; Consumer Credit Counseling Services; the National Urban League; and the Neighborhood Reinvestment Corp.
They typically have housing counselors to help prospective buyers one-on-one. All of them organize workshops on home buying. The sessions are typically free, though some may have a registration charge of $5 or $10.
"They give out loads and loads of information, and give you an opportunity to hear many experts who teach these seminars, and many provide worksheets to put your ideas down on paper," Hill said.
For people who are nervous or novice, it's a nonthreatening environment, she added. The nonprofits will also put you in touch with the many local nonprofits that counsel prospective homeowners.
Make sure the bad credit is where credit is due
The next step is to check out the source of your problem -- your credit. Get a copy of your credit rating, and make sure there are no mistakes on the report. There are three main credit-reporting agencies -- Equifax in Atlanta, Experian in Orange, Calif., and Trans Union in Chicago. The national homeowner-education services can also help with this step.
If your credit is bad, consider staying out of the market while you repair your record, O'Toole suggested. Normally, a year of regular bill payments and prioritizing and paying off your debts is sufficient, he said, and will help lower your mortgage payments in the long run.
"Stay out of the market for a little while and it will be worth it," O'Toole said.
A year of clean credit with a few missed payments before that should qualify you for a "B loan," which has a down payment that's bigger and interest rates that are a point or two higher than the "A loan" perfect credit will get.
Even if you have had a serious credit problem like a bankruptcy or a foreclosure in the past, a year of clean credit should get you a "C loan" with some lenders, requiring a bigger down payment and a point or so higher interest than a "B loan."
If you are in serious credit trouble, or you don't feel you can manage your debts, contact a credit-counseling agency, O'Toole suggested. They will help you identify your bills, plan to pay them and work out a schedule with your creditors. They normally cooperate, happier to receive some of the money owed regularly than none at all.
O'Toole said avoid credit seminars that come into town for a one-time event, perhaps at a hotel, and charge hefty fees -- $300 or $400 for a "course" from a credit doctor, for instance.
No credit? No problem
If you have limited or no credit history, you're not alone. Recent immigrants often find it hard to establish a credit track record, as do people who come from social or ethnic groups that frown on using credit.
Get a letter from your landlord corroborating regular rent payments. Build proof of any regular payments you make, by tracking your utility bills, for instance. A credit or housing counselor can also help you build a history even if you have not normally used credit.
Next, decide what kind of home is best for you. If you're not really the do-it-yourself type, don't take on more remodeling than you're likely to do, for instance. Consider your family needs and talk with family members -- is a condo or co-op right, or a semidetached house?
Then come up with a plan. Work out your saving patterns and your income versus your expenses. The fact that you have bad credit shows that you may need third-party help getting a handle on your finances, O'Toole said, which shouldn't be seen as a defeat. The main point is to come up with an effective plan to pay for a home and a realistic, complete picture of your finances. "It's not complicated, but it's not easy either," he said.
Myvesta.org, a credit-counseling service formerly known as Debt Counselors of America, suggests that people can normally afford a home worth about three times their gross annual income. People with no or few long-term debts may be able to afford a home four or five times their annual income.
Besides waiting for better credit, Myvesta recommends homeowners consider moving to a more-affordable neighborhood or area, if making a large-enough down payment is holding you back. Some people may also be able to consider applying for a home with someone they will live with who has better credit, perhaps buying a two-unit building and applying for one mortgage with a friend.
If all else fails, look for alternative forms of credit, such as private financing from a wealthy friend. Some sellers may also "carry the note," with you paying the seller the down payment and mortgage, to avoid taxes, perhaps. Basically, the seller acts as your bank.
But more than likely, even people with bad credit can find a loan, albeit at a higher rate than people with perfect credit. As Myvesta puts it, remember that mortgage lenders make money by making loans, not by turning people down. 
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