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Creative financing: making the home-buying process easier

Buying a home, especially in an expensive housing market like San Diego's, ranks high on the list of stress-provoking situations.

The home-buying process is time-consuming and arduous, and as a result you may feel as if you are lost in a mountain of paperwork. It is important to understand the basics of home loans and repairing your credit so hidden fees, high interest rates and balloon payments do not come back to haunt you later.

Nearly all homebuyers feel confused - even if they've bought a house in the past - because it's easy to forget the steps you took to get into a home once the event is behind you. When buying a house, it is very important to make sure you do your homework. Information about loan programs, buying a home and how to repair your credit is readily available on the World Wide Web.

Always be careful when spending above your means - relying too heavily on loans, credits and other similar financial tools can be costly in the long-term.

Debt-Free America, a nationwide non-profit community service organization that offers confidential and professional credit counseling and debt management programs, works with people locally to help them figure out what options they have to make the process as easy and painless as possible.

Whether you are in the home-buying process currently or are years away from purchasing anything, it's never too early to learn more about home loan basics, your funding options and how to ensure your credit will secure you lower and more affordable rates.

Below are some of the things to consider in your path toward home ownership.

Credit reports

All adults in the United States and its territories are now able to request three free reports each year, one from each of the nation's three credit bureaus: Equifax, Experian and Transunion.

Seventy percent of all consumers who check their report find a mistake, so it is important to check your report on a regular basis to protect yourself from identity theft and ensure accuracy.

If there are mistakes, such as a late payment or open accounts you are not using, you could be receiving higher interest rates on your current credit cards and other debts, and will receive higher interest rates on home loans. So fixing the mistakes is to your advantage.

The bureaus are not required to give you your FICO score for free, however. It is recommended that you purchase your score from at least one of the bureaus when running your free report. The cost is approximately $12.

The following are common concerns when it comes to credit reports:

How to obtain a credit report: Log on to www.annualcreditreport.com in order to obtain your free report from each bureau. The process is easy.

Reading a credit report: Start by obtaining a report from one of the three bureaus, and purchasing your FICO score. Review it to ensure it is accurate and continue to obtain your free reports one at time to ensure you will always have free access. Your report lists what types of credit is used, length of credit history and whether bills have been paid on time.

What does the credit score mean? Credit scores are mathematical equations created out of the information in your report, like delinquent payments. Lenders most commonly use FICO scores, but each bureau has their own version using the same sort of equation. FICO scores are: 35 percent payment history, 30 percent amounts owed, 15 percent length of history, 10 percent new credit, 10 percent types of credit.

Fixing your credit: Raising your score is like losing weight: it takes time and effort. To improve your score bring your accounts current and stay current, do not apply for new credit until the score is more stable and try to pay off some of the accounts.

To maintain a good score keep balances on credit cards low, pay off debt rather than moving it around, don't open several new cards at once and don't apply for credit at random. Bankruptcies and collections unfortunately can stay on your report for up to 10 years, but the farther away they are the less they harm your score, as long as you've taken steps to rebuild since the bankruptcy reporting, like making consistent payments.

What if the basic information about me is wrong? If you find inaccurate reporting, contact the credit bureau directly in order to submit a dispute. Claims can be submitted online at www.experian.com, www.transunion.com and www.equifax.com.

The bureau will research the claim and send you a response. If the bureau tells you the creditor indicated the report is accurate, you will need to contact your creditor directly and dispute the reporting with them directly.

Understand what is beyond the borrower's control: Some things will take time to "drop" off the credit report like bankruptcies and collection accounts. The best option is to correct what will improve the credit score quickest: closing open accounts that are paid off, making on-time payments to creditors and paying off credit card balances.

Creative funding options

Even if you have perfect credit, figuring out the best home loan funding options can be a confusing ordeal. Someone with poor credit has an even harder time obtaining the money necessary to purchase a home.

Here are a few popular funding options, especially in a market where mortgage payments can be sky-high:

First-time homebuyer programs: There are a variety of loan programs and incentive programs for the first-time homebuyer, you just have to do your research.

No-income verification loans: Ideal for those with complicated financial histories or small business owners with a hard-to-prove salary, these loans mean you report a lot less about your financial background, but pay a little more.

Interest-only loans: These loans are ideal for commission or bonus income earners, someone who expects to earn a lot more within a few years, or someone who will invest the savings.

FHA streamline loans: These are loans insured by the FHA. They are generally easier to qualify for than conventional loans and may require less of a down payment. FHA loans are great for first time homebuyers and buyers with poor credit.

VA streamline loans: VA loans are available to assist eligible people on active military duty and retired status to buy primary residences.

Section 8 low-income assistance: Renters receiving Section 8 vouchers from the Department of Housing and Urban Development (HUD) for rent can apply those vouchers toward mortgage payments. Applicants must participate in home lending counseling and be first time homebuyers.

To learn more about creative ways to fund a home loan in San Diego, log on to www.debtfreeamerica.com.

Debt-Free America is a 501(c)3 nonprofit, community service organization offering confidential and professional credit counseling, debt management programs and financial education to consumers nationwide.

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