What can I do if I have bad credit but I want to obtain a home loan?

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If you have bad credit, it generally cannot be avoided on your credit report and can affect whether or not you're approved for a home loan. However, you can help to correct credit errors or misunderstandings by writing a letter to the creditor or by writing letters to be included within your credit reports. Sometimes, a letter explaining a sudden loss of a job, a lay off, or a long-term illness will change the view of the lender in reviewing your credit report. Additionally, you should provide any documentation proving your reason for failing to pay on your debts. By law credit reporting agencies are required to include letters of explanation along with any documentation proving such explanation with the credit report. As a general rule, a bad credit report usually stays on your record for a period of 7 years (10 for bankruptcies).

Lenders have extended loans to home buyers with bad credit, charging them sometimes significantly higher rates of interest. These loans are called subprime loans. Responsible, in part, for the financial crisis of 2008, subprime loans have become harder to get due to stricter federal regulations. Borrowers, unable to pay their mortgages in a depressed economy with rising interest rates, now face foreclosure.

Your best bet may be to wait a few years to buy and focus on rebuilding and improving your credit in the meantime.

(Reviewed 11.4.08)

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