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Bad Credit Home Loans and Fair Lending Practices

By Gabriel Traverso
Mortgage Credit Problems Columnist


Many consumers with bad credit often worry how lenders will treat them when applying for a mortgage.

The Fair Housing Act

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Title VIII of the Civil Rights Act of 1968 is referred to as the Fair Housing Act. As currently amended it prohibits discrimination in the sale and financing of homes--including rentals. This means it prohibits discrimination of any kind, whether based on "race, color, national origin, religion, sex, familial status, or handicap (disability)." Does this apply to your bad credit? Does your low credit make you a second-class citizen when you apply for a mortgage?

Does Looking at Your Bad Credit Score Constitute Discrimination?

Last year MSNBC's Red Tape Chronicles, which is dedicated to unmasking scams and corruptions, ran a piece on how some insurance companies are using consumers' low credit scores to charge higher rates. In defense of the insurance industry Marcellus Andrews of The Insurance Information Institute argued that, "there is, in fact, a tight statistical correlation between credit scores and future auto mishaps." Bob Sullivan, who wrote the article, referred to the practice as "terribly unfair" as it applies to the insurance industry. However, the fact is that when you apply for a home loan your bad credit will have an impact--and this isn't discrimination.

How Bad Credit Affects Getting a Mortgage

Almost all creditors will use your credit score in order to determine how they will charge you, including fees and rates. According to the Federal Trade Commission, "Potential lenders use your credit score to help predict whether you are a good risk to repay a loan and make payments on time." When getting a home loan your bad credit will likely cause you to pay a higher rate than someone with good or perfect credit. You might pay more, but you won't be treated any differently! It's also important to understand that making your mortgage payments on time will go a long way to improve your credit score.

Sources
U.S. Dept. of Housing and Urban Development
MSNBC's Red Tape Chronicles
Federal Trade Commission

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