Q)I want to buy a house or condominium as soon as possible. However, a few years ago I had some financial problems and have a poor credit rating. What can I do to get it removed from my record? Will any lending institution take my application for a mortgage loan with this kind of background?
A)Unfortunately, once a person has a bad credit rating, it follows him or her for a long time. Credit bureaus, which keep track of our financial histories, do not expunge these bad ratings for many years. When someone applies for a mortgage loan (or any loan, for that matter) the lender often checks with the credit bureau. In your case, the lender would get a negative report.
Many mortgage lenders probably would be willing to work with you, despite your bad credit record. If there are valid reasons for the rating -- for example, you were without a job for a couple of months or you were sick -- and you submit a statement explaining that to the lender, many of them will look at your present situation and ignore the past.
As a practical matter, your bad rating may not hurt your ability to get a loan if your credit record has been good for a year and you can explain your earlier poor rating. On the other hand, if you are chronically negligent in paying your bills, then I doubt that you will be able to qualify.
You also should make every effort to restore your credit rating as soon as possible. It makes sense to borrow a couple of hundred dollars from a bank or credit union, and then pay it back within 60 days. Do this several times, so that you can establish your ability to repay loans promptly. Then the bank or the credit union will be able to report that you are a good customer.
It is unfortunate today that the more you owe, the better your credit rating may be. All too often, people who do not have credit cards and do not borrow very much have no credit history whatsoever, and often find themselves unable to obtain a mortgage loan. However, once your credit record becomes blemished, the burden is on you to clear it up as soon as possible.
It may be that you have to bring in a coborrower who will stand on his or her credit record without you. But even under those circumstances, I have seen lenders who continue to look at the person's past history independently, and if it is bad the lender may turn down the application.
I would also recommend that you immediately contact the credit bureau and obtain a copy of your report. You are entitled to this information, although the credit bureau may charge you a nominal fee for it. If you dispute your rating, you have the right to send a statement of explanation to the credit bureau, which must keep it on file along with your credit history.
Perhaps now is the time to assess your entire financial situation. Are you loaded down with credit cards? Keep in mind that the credit card industry is charging you anywhere from 13 to 21 percent a year to lend you money, so it may be cheaper to use your savings to reduce those obligations. After all, banks are only paying 5 percent to 6 percent interest on savings, and you can save money by paying off your credit card debts. Remember, too, that Congress, when it passed the Tax Reform Act of 1986, decided to gradually reduce the amount of credit card interest payments that a taxpayer can deduct.
Since you want to buy your house or condominium now, I would strongly recommend that you touch base with a couple of mortgage lenders and discuss your situation with them. Be as candid as possible. After all, they are in the business of making loans, so they may be interested in you. It is possible that by putting more money down -- for example, 20 percent instead of 10 percent -- you may improve your chances of getting a loan.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.