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Can I Qualify with poor credit?

You can recover from credit disasters

Bad things happen - unemployment, divorce, medical problems. In your financial life, these bad things can result in more bills than you can pay and in extreme situations bankruptcy or foreclosure. While these events can devastate your credit score, it is possible to recover from a financial crisis and qualify for a mortgage.

To qualify, it's important to reestablish credit. You typically need two to four active credit accounts with a history of at least 12 months. But what kind of credit can you get after a financial crisis? One option is a secured credit card. For this type of account, the creditor typically requires that you deposit money that acts as security if you fail to pay. If you have a relationship with a bank or credit union, inquire about a small personal loan. Another possibility is an auto loan. Some creditors specialize in making auto loans to folks with damaged credit. Your interest rate will be higher, but an auto loan is a great way to establish a new, positive payment history.

It's also important to keep in mind the purpose of these new accounts is more than just for the credit. Creditors are likely to offer you very low credit limits. You're also doing this to improve your credit profile by creating a record of paying the accounts on time. After a period of on-time payments, your credit score will improve. In fact, I've worked with customers who, after experiencing a bankruptcy, raised their credit score above 700 in two years by purposefully reestablishing credit.

Some folks seek credit counseling in response to a financial crisis. The appearance of credit counseling on your credit report won't affect your ability to qualify for a mortgage and doesn't affect your credit score. Instead, creditors may report that you're not paying your accounts as originally agreed, and that will depress your score. It's also true that many folks don't seek credit counseling until they've already hurt their score by getting behind on their payments.

After a financial crisis, some folks swear off credit. While this may seem financially responsible, it may make it difficult to qualify for a mortgage. Negative items stay on your credit report for seven to ten years. If you never add positive accounts to your credit profile, the credit bureaus only have the negative items to score, and your score will never recover. While we sometimes can qualify folks who have never used credit (no credit score), we never can qualify folks with low scores who've stopped using credit.