Question: I am a single mother who recently took a job with the federal government and moved to the Washington, DC area. I own a condominium in southern Virginia and I am renting it out with a positive cash flow. I took a short term rental here in Washington and I'm paying $1,300 per month in rent. When I began looking into buying a condo up here, I was informed by a loan officer that my credit score is too low. I was laid off twice due to company restructuring and I did indeed fall back on some bills over the last couple of years. However, I am now back on my feet and all bills are current and paid in full. My credit score is 589. My supervisor says I should consider an interest only program to keep my payments down. Should I keep trying to get approved for a mortgage or am I wasting my time? I hate the idea of throwing away $1,300 every month in rent.

Answer: I think it's certainly worth some extra effort if you want to buy a condominium. The mortgage is business goes deep and wide, meaning there's usually some kind of program for almost everyone.

With a credit score of 589, you definitely fall into the "sub-prime" category. This means that your credit history places you in a statistically higher risk category for lenders. But as I said, there's usually a mortgage available for almost anyone. In your case, be prepared to pay a higher rate.

Let's quickly talk about credit scores for the folks who are unfamiliar with the term. The FICO score, developed by Fair, Isaac & Co., is a mathematical model that is supposed to "grade" a consumer's credit. The higher the score, the less likely the mortgage applicant is to make late mortgage payments or default on the loan. The lower the score, the higher the likelihood that the loan will go bad.

If you're looking for the most competitive rates, your credit score should be above 680, but most competitive mortgage programs will accept applicants who have scores in the 630 range. This depends entirely upon the type of mortgage program and other aspects of the application such as down payment, income and savings pattern.

According to Fair, Isaac & Co., 13 percent of the US population carry a FICO score of 599 or lower. This means that you score in the bottom 13 percent of the country. Unfortunately, that's why you're a sub-prime mortgage candidate.

Enough said on that. Let me share some thoughts that might help you.

First, accept the fact that you'll likely have to pay a rate that's a bit higher than someone with perfect credit. Since interest rates in general are at historical low levels, a sub-prime rate probably will not be prohibitively high.

Sub-prime lenders will not just look at your credit score. They want to see evidence that you've "turned the corner." In other words, they will want some evidence that you are indeed back on solid financial ground. For example, a lender may accept an applicant with a 589 credit score but if your credit report indicates that you have been late on your rent more than two times in the last 12 months, they may not grant the loan. They would rather see your credit report show 10 late payments that occurred more than a year ago than two late payments within the year.

Most sub-prime lenders offer primarily adjustable rate mortgages (ARMs). But this isn't so bad because the rates will be considerably lower than fixed rates. An interest only option, as your supervisor points out, is a possible alternative because it allows for low mortgage payments. However, an interest only mortgage allows you to possibly borrow more money -- something that may not be advisable for folks trying to get out of a bad credit situation. Make sure you can truly afford the amount of money that you're borrowing.

The last thing to mention is down payment. Sub-prime lenders do indeed offer 100 percent mortgage programs for scores as low as 589. But they will want to see that you've "turned the corner," so make sure you haven't made multiple late payments on your rent over the last six months.

Depending upon your down payment and the specifics of your application, expect to pay an interest rate between seven and nine percent. This rate may be fixed for two years and adjust annually thereafter. Also, be prepared to pay at least one point. (One point is equal to one percent of the loan amount paid in cash at settlement.)

In my view, paying two or three percent over the most competitive programs is a small price to pay if your alternative is renting. To put things into perspective, the lowest adjustable rates available in the early 1980s may have dipped below ten or eleven percent -- so eight or nine percent isn't so bad.

Published: October 2, 2003

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.