Re-Establishing Credit to Buy a Home
Getting Checking Account With Poor Credit
Improving your Credit Rating
Correcting Your Credit Report
I Need Help Reestablishing Credit
Three years ago, I filed for bankruptcy, lost my home and most everything in it. I got into "stretching my dollars" as a result, and I managed to pay off the bills that I had reaffirmed after my bankruptcy, cleared my debts with the tax folks, and I practice all of the frugal things I have learned as a result of my previous spendthrift days. I actually am debt free now. I have a reasonable paying job and have several savings accounts. I have followed all of the things I have learned to the letter. I am wanting to buy a condo in the future and I don't know how to clear my credit. I KNOW BETTER than to try some of those companies. They just take your money, but how do I got about reestablishing credit so I can eventually purchase a place to live. I know with the foreclosure and the bankruptcy it won't be easy, but I believe that all I have accomplished in the past three years, it is not completely out of my reach. Any reader ideas on how to get reestablished?
Start Reestablishing Credit with Secured Card
Secured credit cards are the best way to re-establish credit. Most need a minimal amount to sign up (usually $500). Use the card for small to mid-sized purchases for which you already have the cash for, and pay the bill in full. Before you know it, companies will be knocking down the door to get you. Department store cards are usually pretty free with who gets a card, but these have killer interest rates and should be avoided.
Our Bankruptcy Experience
I was also in pretty much the same situation having filed for a simple Chapter 7 bankruptcy. I wanted to buy a house and began looking for one about a year after filing for relief. I knew that I would need to repair my credit so what I did was apply for a secured credit card and slowly began the process of opening at least 3 lines of credit. Eventually, I was able to get unsecured credit cards (watch out for those high application fees and yearly dues). There are enough sources of credit made available to individuals with distressed credit histories.
By doing this, I was offsetting the negatives on my credit report with positives. I never paid late and I disputed any erroneous or outdated entries. Within two years, I was able to buy a house with my wife even though I was not able to get the prevailing mortgage rates. I am still able to get refinancing within a year since I now have my foot in the door (no pun intended).
The key to all of this is to have a little faith and perseverance. The idea of bankruptcy is "forgiveness of debts" and a chance to do it better a second time.
More Than One Step Required to Reestablish Credit
It may be difficult to repair your credit, but there are certainly steps to take to put you in better credit standing. If you are already debt free, that's the first step. The second thing to do is to obtain some type of credit. Department stores, jewelry stores, and secured MasterCard and Visa accounts are typically the one's that you would qualify for. You don't need to purchase anything big, just something you would normally purchase with cash. Unfortunately, you may be paying an escalated interest rate at first, but in time, you may be able to qualify for a lower interest rate card. To reestablish credit, you have to have credit. Split payments over a six month period. This is so that you can establish that you can handle installments.
To qualify for a mortgage loan, you should neither have too little credit, nor too much credit. You can also research reputable mortgage companies with regard to their second chance programs or programs for people with less than perfect credit. Some lenders will lower the interest rate over a five-year period for timely mortgage payments.
You should also obtain a copy of your credit record, if you haven't done so already. It is important to make sure that there is nothing on the report that shouldn't be. If you dispute anything, it may take valuable time to clear it up, but it is well worth the effort. It is also a good idea to offer a written explanation that the credit bureau can attach to the pertaining credit issue for unusual circumstances. Another thing is that some mortgage lenders will take into consideration unusual circumstances that pertain to your imperfect credit history. Believe me, if you have a good savings, there will be a lender out there willing to work with you.
Advice from a Mortgage Officer
I am a mortgage officer who works with people in your situation every day. Your plan begins with finding out what is on your credit report, make any corrections, then re-establish a credit history. Being debt free is not enough. These steps are outlined below. Please note that you probably can get a loan right now even with your background, but it will mean higher interest rates at first. In order to get the best rates, you really don't have far to wait. If your bankruptcy and foreclosure were due to medical reasons, you might be able to apply now (follow the below steps first). If they were due to other reasons, you only have to wait four years after the bankruptcy was discharged or the forclosure was complete, whichever was later. Again, follow the steps below first.
- Obtain or purchase copies of your credit report from the big three credit bureaus (Experian, Transunion, and Equifax). Review them and note what information needs to be updated. For example, the credit report may report you have a collection for $5,000 when in fact it was included in your bankruptcy. Or, you may have paid off a collection but the creditor didn't update the credit bureaus. This investment is worth its weight in gold. I've seen sites on the internet which will give you all three reports for $40.
- Call Experian and Transunion to "dispute" the incorrect information. Equifax will require your dispute to be written. They have 30 days to resolve the information and they will mail you the updated reports.
- If you have re-established credit (auto loan, credit card, department store), make sure you USE it. Charge something at least every few weeks, and then pay the entire balance at the end of the month. Being debt free is not enough to buy a home. You must demonstrate your ability to charge items and then pay at least the minimum balance by the due date. Without exception.
- If you don't have any credit, start by obtaining a secured credit card. Put $200 to $500 into an account with the financial institution. Don't touch the money. In return, you are issued a credit card with a modest credit limit. This is good for the financial institution because if you default, they can tap the savings you set aside. This is good for you because you can begin improving your credit standing.
- When you are ready to apply for a mortgage, don't allow several banks to pull your credit report. The more people inquiring into your credit history, the lower your credit score will be. A seasoned mortgage officer will be able to pre-screen you, using your copies of your credit reports. Be firm on this issue. Only when you find THE person with whom you can place your trust will you give your consent.
Finally, once the credit bureaus have updated your information, sit with an experienced loan officer to discuss your options. I would recommend meeting with a Mortgage Broker instead of a major bank. Mortgage Brokers work with a wide variety of lenders who have many loan programs. In other words, with one visit, you are being screened for hundreds of programs available (instead of the two or three a single bank will offer).
The result of your meeting should be one of two things. Either you will learn you are ready to apply in the near future, or you will define what steps to take to reach your goal.
You can buy your condo without reestablishing credit. I have been a real estate investor for 30 years and I have bought many homes and not had my credit checked. Here is how you do it.
Ask your real estate agent to get a listing from the MLS of people that have free and clear condos or have a small loan. Also get a listing from the MLS of people that have indicated they will "carry back" a mortgage. Also get a listing from the MLS of condos that have an old VA or FHA loan.
Old VA and FHA loans can be assumed by anyone without credit check. They do not have a due on sale clause.
For the condos that are for sale with no or a small mortgage, ask the sellers to "carry back" a mortgage. You will use the condo as security for the mortgage. This is especially attractive for older people who are selling their condo. They get a 30-year income stream with a much higher interest rate than they can get from other savings accounts.
Write and Ask for Record Changes
In many cases you can write the credit companies with whom you have had problems and ask them to remove the rating from your credit record, but be sure to do this in writing as verbal agreements like this will not ensure that it is removed.This service is free,all you need is a stamp.In Canada(if this pertains to you)after seven years all is automaticly erased and you start fresh.
Take the Next Step
- Make sure you're not overpaying on your mortgage. If you haven't looked for a lower mortgage rate in the past year, use our simple tool that compares different lenders to see what your monthly mortgage payment could be. It's private, only takes a minute and could show you how to save thousands!
Debt from my past is preventing me from saving for my future! Tell us: Yes, debt is hindering my ability to save and I could use help dealing with it! or No, debt is not a problem but I am trying to get ahead financially!
More Money Tips & Tools
- How to get a faster tax refund
- Personal finance calculators everyone should use
- Why you should know your credit card payment cutoff time
- Saving-money secrets of the rich and frugal
- 5 low-risk ways to earn higher interest now
- How to save money fast
- 7 IRA withdrawals that don't trigger a penalty
- This week's Readers' Tips