Past credit affects present loan status; new leaf may lift blemishes

Q. I've had credit problems in the past. How does this impact my chances of getting a home loan?

A. Obtaining a home loan is possible even with extremely poor credit, but your past credit problems will label you a "risky borrower" in the eyes of a lender.

To compensate for this added risk, the lender will charge you a higher interest rate and usually expect you to make a larger down payment on your home purchase (typically 20-50 percent down).

The worse your credit is, the more you can expect to pay for an interest rate and a down payment.

Not all lenders choose to lend to risky borrowers, so you may have to contact several before finding one that will.

Once you get a loan and make your mortgage payments on time for 12 to 24 months, you will have re-established your credit and you could probably refinance your loan at a more attractive rate.

If you get a mortgage with a high interest rate with the intention of refinancing when your credit is better, be sure that there is no prepayment penalty clause written into your loan.

If there is such a clause, you will have to weigh the advantages of refinancing against the penalties that you might have to pay in order to determine which option makes the most financial sense.

Q. I've only been late a couple of times on my credit card bills. Does this mean I will have to pay an extremely high interest rate on my mortgage?

A. Not necessarily. If you have been late less than three times in the past year, and the payments were no more than 30 days late, you probably have a pretty good chance of getting a home loan at a competitive interest rate.

Although guidelines vary, most lenders will excuse a couple of minor "late-pays" as long as the borrower can provide a reasonable excuse for the tardiness (i.e., job transition, illness.)

If the late-pays were 60-plus days late and cannot be explained, you may have to settle for a higher interest rate.

As an alternative to paying a higher interest rate, you might want to delay your home purchase for a year or two and re-establish your good credit by paying every mortgage (or rent) payment, credit card, department store and utility bill on time during that period.

Lenders will look at your credit history, but they will be influenced by your efforts to clean up your credit blemishes and start down a new path.