Poor Credit Need Not Deter Home Buyers

For those of us who have perfect credit, the world may indeed be like an oyster. Want to buy a new car, go for an expensive dinner, take a cruise to a tropical beach? No problem! All you need to do is whip out that credit card and say the magic words, "charge it."

Even buying a home may seem no more than extension of this credit card living. Simply give your wage or employment information to your loan agent and wait a short period of time for the approval. It can sometimes be as easy as using plastic. If your credit rating is not as good as those beautiful people who advertise on television for American Express, then the world is a very different place. Not only can buying the simplest things can be troublesome, but the whole world seems to be looking for ways to take further advantage of your troubles.

Advertisements that emphasize that a product is available for folks with bad credit are often preludes to some scheme on behalf of that business to charge very high prices or exorbitant finance charges.
- How do you protect yourself from these schemes if you have credit difficulties?
- How do you know just how bad or good your credit is?
These are the essential questions you have to answer if you are going to move on to buying or refinancing a home with less than spotless credit.

Your Credit Rating
The trend in evaluating credit is to give borrowers grades of credit just like in high school or college. In this way, lending institutions and other companies that evaluate credit for lending purposes like to categorize potential borrowers from "A" to "D" credit. It is important when you shop for credit or a loan to understand each of these designations.

Straight A's
"A" credit is pretty much what it implies. If you have "A" credit, you pay your bills on time, i.e., within 30 days. Perhaps you have missed a credit card payment or a payment on your student loan. Yet you did not miss except on rare occasions and with good reasons.
Furthermore, you definitely nave no 30-day late payments on your mortgage loans. You also have no unpaid bills that have gone to collection. The IRS workout specialist, the rep man, and the collection agency do not know your name.
If your credit is this clean, you have a right to be proud in this achievement. Again, the world is your oyster. Your main concern should be that you do not overextend yourself. If you do, you might one day find yourself moving into the next category.
Bs, Cs, and Ds

"B" credit already brings us into the realm of "credit problems." This is unfortunate because those with "B" credit are also very conscientious about paying their bills.
The designation, however, implies that there is a pattern over the last few years of skipping payments, maybe even for 60 days at times.
The "B" credit borrower usually has also been over 30 days late on a mortgage payment or two over the last few years. Collection agencies and those student loan people are probably occasional telephone callers. Yet overall, it you fit into this category, you are not behind in your bills. You may still belong to the world where spending on credit is as easy as can be. If you slide into the next category, however, that could change.

The "C" credit category is really where things start to get onerous. Imagine this scenario. You go to buy that new car, negotiate in all those little booths at the dealership for hours, and then you finally get to meet the "finance" guy. He smiles at you and says he has you approved for a loan at 18 percent due to your credit. You swallow hard and look in your pocket for the antacid.
"C" credit is, in fact, the part of the credit scale in which borrowing becomes very difficult or just plain expensive. Yes, you may be able to buy diamonds, used cars, furniture or a home, but you may be paying for it long and hard. Here's why: "C" credit is a record of slow payments, missed payments, tax problems, collections paid and unpaid, and other evidence that your bills and you are not the most compatible mix.

Bankruptcies within the last two years also tell the lender a similar story. IRS liens or State Franchise Tax liens that are unpaid also fit here. So many elements can fit together to make your credit look like "C" credit that no formula can really be given. Suffice it to say, however, that you have recently had substantial difficulty in paying your bills and have let some go entirely.

Now you can probably guess where "D" credit stands. "D" credit is somebody who has fallen on hard times with bills of all types - mortgages, credit cards, loans, taxes, etc. Again, while there is no formula that says exactly what defines "D" credit, there is an overall impression that the bills are not getting paid.

Shop Around
While "A" credit people can basically walk into a bank or mortgage broker and command the best home loans, what can people with other credit grades find in the loan market? Can they borrow as much money as "A" credit folks, and what rates should they expect?
"B" credit borrows do have a lot of choices when it comes to loans. Even with "B" credit, many lenders are willing to offer very similar terms as those with perfect credit. There are exceptions. Does your "B" credit designation seem like a short-lived experience or has it been going on for more than two years? Your explanations are important.
I have personally seen many people with "B" credit dress up their situation with a few good explanation letters. Many of my clients with "B" credit have been able to borrow at terms usually reserved for "A" credit.

Don't forget, the people who make decisions are human and they understand short-term situations that can happen to anyone in our society. These situations include medical problems, divorce, temporary unemployment, and past business problems for the self-employed.

Few people are able to go through life with some financial difficulties. Try to document your situation with explanation letters that address each one of your credit blemishes individually. If your credit has improved since your difficulties have passed, then you will have the greatest chance of improving your credit standard.

Of course, if "B" credit is a lifestyle choice for you, then it will be hard to explain your credit derogation's. You will find the doors of the major "A" lenders shut to you, but you will probably be able to borrow for a home loan from one of a very long list of lenders who specialize in loans for your credit type.

There is an extremely important point to be made! Even a person with "B" credit must shop for the best rates or find a mortgage broker who will do it for them. The disparity among "B" lending institutions is much greater than for any kind of loan. In every way, lenders differ in what they offer and what the loan will cost when it comes to "B" credit. Can you obtain an 80 or 90 percent loan? You must shop! Will the points be few or many? Will there be prepayment penalties? Again, shop around or find a loan agent who knows the ropes.

Furthermore, if you have "B" credit, make sure the lender is trying to give you their best rate for your credit category. Many lenders try to sell "B" credit borrowers into "C" or even "D" credit rates. That's not right, but it's not illegal and it's surely profitable for them. You may have to fight with good explanations, but the difference between various credit categories can mean hundreds of dollars each month in your house payment. Just because your credit is not perfect should not mean you need to be talked into an inferior loan.

The same applies for those with "C" or "D" credit. You also may have a good reason for your credit difficulties. While there is no possibility that you will be given "A" credit rates, you may find that for some lenders with a sympathetic ear you are closer to "B" territory than you may expect. Then the rates and programs are more reasonable.

Clean up Your Credit
The irony of life is that for those who are distressed, the world becomes less hospitable. Credit problems often lead people into borrowing at excessive rates and fees, which makes it more difficult to pay bills. Ironically, their credit problems are then attenuated. My recommendation continues to be to strive for the best credit record you can. If you have problems, try to put an end to them yourself or with a professional.
Work with your credit agencies to try to clear up any misunderstandings about past late payments. Settle and pay off all outstanding debt that has left you in this situation. If things are way out of control, our laws provide for legal relief, and a lawyer should be called. The sooner you show a good clean slate of credit activity, the faster you will be moving up in your credit grade. You want the highest grade because those with the best credit get the best deals.

If, however, you must borrow to buy or refinance your home, it will pay to shop for the best deal. You may also call a a mortgage broker who is committed to working with you to get the best credit rating and therefore the best loan. Home ownership or a good refinance may be more available than you think.
Richard Fishman is president of RAF Mortgage in Berkeley. This article was originally published in the Berkeley paper.

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