How to Buy a Home and Pay Off Bad Debt
- 1). Pay down debt obligations. High balances on credit cards will lower credit scores and make it difficult to secure a mortgage. If you can't pay off debt obligations altogether, keep revolving credit (like credit cards) to 30 percent or less of the total available balance. On a balance of $5,000, this would be $1,500 or less.
- 2). Handle delinquent accounts. Securing a mortgage is very difficult with delinquencies on a credit report. Some lenders will settle an account for a cash payment. The settlement amount is significantly less than the original debt obligation. Once settled, the debt won't show as delinquent anymore, positioning you better for a mortgage.
- 3). Shop for mortgage rates. Even if you have credit challenges, it's still important to shop for rates. Tools, such as bankrate.com, allow the user to enter a credit rating to sort interest rates by credit history.
- 4). Apply for Federal Housing Administration (FHA) loans. FHA loan requirements are less strict than conventional loans. For example, a credit score can be as low as 620. Down-payment requirements are also lower, at 3.5 percent down. FHA programs will accept individuals with a history of bankruptcy and foreclosure.
- 5). Investigate private lenders. Small groups of investors pool money to provide mortgage loans. Some of these investors specialize in high-risk mortgages. Contact a loan broker to find these loans in your area.
