by Laurel Michaels

Created on: June 15, 2008   Last Updated: June 22, 2008

Not so very long ago you could get a home loan with bad credit, no money down, no money in the bank, and no explanation to the lender required. Fast forward to today, pick up a newspaper and read about the increasing foreclosure rate sweeping the nation, and you can see why that is no longer the case. Oh, you can still get a home loan with lousy credit, but be prepared for some scrutiny.

CASH IS KING
Nowadays, most lenders will want what they call "compensating factors" if you have bad credit. They may make concessions and give you a loan despite your credit history, but they want something in return, namely, a higher down payment, or equity in the property, or several months of your house payment sitting in the bank.

You must understand that lenders use automated systems to underwrite their loans before a person even looks at the file. In addition to your credit, other information such as your income, down payment (or equity as in the case of a refinance), money in the bank, other properties or assets, time on your job, and other factors, is entered into an automated system and the risk of loaning money to you is assessed. If the system feels you are a good risk it will issue an approval and if not, you are declined. If you have lousy credit, these automated systems will be more favorable to you if you have a large down payment or lots of cash in the bank (or stocks or other liquid assets).

After the automated system approves you, the underwriter (an actual person) looks at your file to make sure the information entered into the system is correct. They will look at your bank statements, or investment account statements to make sure the cash you say you have is really there. They will also check your paystubs and W2s to make sure the income is correct, and verify any other information that led to the automated decision. Generally, as long as everything checks out, they will uphold the system's approval of your loan despite your credit. If the computer declines you, some lenders will allow the underwriter to override that decision. Again, you would have to have some compensating factors for them to be inclined to do this.

PROVE IT
Even if the computer issues an approval, be prepared to explain the reasons for your bad credit, and to prove those reasons. If you have a low credit score because you forget to pay your bills, that isn't going to fly. If, however, you were in a car accident and so were out of work for a couple months and got behind on your bills, you could

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