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

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

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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What is credit?

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What is credit?

Credit is money a creditor or lender makes available for you to borrow with a deferred repayment. In exchange for the credit, the lender gets back the money, usually paid on a monthly basis, plus interest. The debtor gets the use of the money to pay for and take possession of goods and services immediately. Modern society is dependent upon credit to generate sales; it enables people to have the things they want and need, but can’t afford to pay for right away.

Interest is the compensation that the creditor demands for the use of his/her money. Money has a “time value” to it. Over time the value of money decreases (due to inflation): what a dollar will buy today is much less than what a dollar could purchase 20 years ago. Since a creditor pays out money today in exchange for a repayment of it in the future, the creditor loses the time value of that money. In order to make credit available, creditors are allowed to charge interest, often referred to as a finance charge. For example, if a lender gives you $10 worth of credit, s/he might expect to be repaid $11 within the next two months; the extra dollar is the interest charged for the loan.

Interest on credit can be either simple or compound.

Simple interest is interest charged only on the principal amount borrowed. Simple interest does not add the interest charge back to the outstanding loan during the length of the loan. Compound interest is interest charged not only on the principal, but on the interest accrued during the length of the loan. Thus, simple interest charges are less than compound interest charges.

Credit is extended pursuant to a written contract. The written contract sets forth the respective rights and responsibilities of the creditor and the debtor. Credit can be used by both businesses and individuals. When an individual uses credit, it is referred to as “consumer credit.”

(Reviewed 11.3.08)

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What is credit insurance?

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What is credit insurance?

Credit insurance comes in several different forms:

Credit life insurance – the outstanding balance is paid in the event of your death.

Credit accident and health insurance – monthly credit payments are made for you during periods when you are unable to work due to accident or illness.

Credit unemployment insurance – monthly credit payments are made for you during periods when you are unemployed.

Credit insurance is a form of insurance where you are the purchaser and the lender is the beneficiary. The payments will be made directly to the lender. Though lenders sometimes offer or forward offers of credit insurance, your acceptance or rejection of credit insurance normally is not used as a factor in deciding whether to extend credit to you.

If the lender required credit insurance, the premium charged for the insurance must be included in the disclosure of the APR. In deciding whether to purchase credit insurance, consider other available forms of insurance (such as term life insurance or disability insurance) and the cost of such insurance. The credit insurance offered through your lender may not be the best deal.

(Reviewed 11.3.08)

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What is a secured credit card?

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What is a secured credit card?

Some people have a poor credit record because they have not paid outstanding debts in the past or because they have recently filed for bankruptcy. People with poor credit records are generally unable to get any credit at all, or if credit is extended, the finance charge is the high and comes with an “application fee” to obtain the credit.

Some lenders have begun to offer secured credit cards to those who have bad marks on their credit record. Under a secured credit arrangement, the debtor places funds on deposit with the bank or other financial institution. The lender then allows the debtor to make credit card purchases from 90% to 150% of the amount placed on deposit – depending upon the individual circumstances. This arrangement enables people with poor credit records to have the convenience of having a credit card, while assuring the lender that there is a source of money from which the obligation will be paid.

Unfortunately, some of the secured credit card offers are scams. Visit the Federal Trade Commission’s website for more information. If you are using a secured credit card in order to create a good credit history, you need to make sure that credit card company reports to a credit reporting bureau. Not all of them do, and if yours does not, you will waste your effort.

(Reviewed 11.3.08)

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What can I do if a credit report has incorrect information about me?

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What can I do if a credit report has incorrect information about me?

If you believe information being reported about you is inaccurate, incomplete or outdated, challenge it by notifying the credit reporting bureau. Once placed on notice that you dispute the report, the credit reporting bureau must verify the facts within a reasonable period of time or delete that information from the report. If the dispute is not resolved to your satisfaction, you are allowed to have a statement (up to one hundred words) included in your file and in any future reports.

Read a Federal Trade Commission report (September, 2008) on How to Dispute Credit Errors.

(Reviewed 10.31.2008)

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What is the Equal Credit Opportunity Act?

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What is the Equal Credit Opportunity Act?

The Equal Credit Opportunity Act (ECOA) is federal law that prohibits creditors from certain forms of discrimination. Age (as long as you are old enough to enter into a legally binding contract), race, color, national origin, gender, marital status, religion, or receipt of public aid may not be used to:

Discourage or prevent you from applying for credit,
Refuse you credit which you otherwise qualify for,
Give you less credit, or credit on terms different from those who have similar credit risks (permissible risk factors include ability to pay, credit record, stability and assets owned)
Deny you credit because you exercised your rights under federal laws such as the Consumer Credit Protection Act, the Fair Credit Billing Act, or the Fair Credit Reporting Act.

A lender is allowed to use a statistically sound scoring system that is derived from empirical data as long as being 62 years or older is not assigned a negative value in the scoring system.

Under ECOA, a creditor is required to notify you within 30 days after you have completed your credit application whether your application has been approved or denied. If credit is denied, the reasons for the declination must be provided or you must be told how to obtain such information.

Violation of ECOA may be redressed by filing a federal lawsuit for the actual damages you have suffered plus punitive damages of up to $10,000.

(Reviewed 10.31.2008)

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What is the Truth in Lending Act?

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What is the Truth in Lending Act?

The Truth in Lending Act is federal law that regulates the credit market and sets minimum standards for the information that a creditor must provide in an installment credit contract. These include the sum being financed, the amount of the required minimum monthly payment, the total number of monthly payments, and the APR. The Act also specifies how the disclosures have to be made in written materials, such as separated in bold print or set off in a box.

The Act has several other provisions. It prohibits credit card companies from issuing cards to people who haven’t applied for them, though the companies can send unsolicited credit application. It limits the amount the cardholder can be charged for unauthorized use of a credit card, and it regulates the advertising of credit by requiring disclosure of specified information. These disclosure requirements enable you to make accurate comparisons of credit offers.

(Reviewed 10.31.2008)

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Will the Uniform Transfers to Minors Act help me provide for my children?

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Will the Uniform Transfers to Minors Act help me provide for my children?

Money held in trust for someone else is not property of the estate. Let’s say you setup a Uniform Transfers to Minors Act (UTMA) “custodianship” in the form a bank account. Because you cannot revoke the custodianship, any money you deposit to the UTMA account is not your property. Your payments might nonetheless be found to be fraudulent transfers if they were made with an intention to hinder, delay or defraud your creditors or at a time when you were insolvent.

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What about family gifts?

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What about family gifts?

Small customary gifts to family members are not voidable preferences. “Small” means less than $200 in aggregate during the past year.

Example: you give your daughter an Aston Martin for her birthday. If it’s a real one worth $250,000, it’s avoidable as a fraudulent transfer. If it’s a Corgi toy costing $25, it’s not.

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My ex-spouse was ordered to pay some debts in our divorce. Can he avoid paying by declaring bankruptcy?

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My ex-spouse was ordered to pay some debts in our divorce. Can he avoid paying by declaring bankruptcy?

In some cases he can. It depends on whether the payment of the debt is characterized as support. Many divorce decrees specifically include payments of marital debts as support obligations to make it easier for the receiving spouse to prevent the paying spouse from discharging the debt. Even if yours does not, the bankruptcy judge can review the judgment to determine whether that is what was intended.

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