Once burned, twice shy doesn’t seem to apply to those who were burned by the housing downturn. Even those who lost their homes to bankruptcy or foreclosure in the past few years are often eager to take advantage of lower housing prices and ultra-low interest rates available now. The question they often ask us is, “When can I qualify for a mortgage again?” (If you’re not sure what your credit profile looks like, you can check your credit score using a free tool like Credit.com’s Credit Report Card, which gives you your score plus a breakdown of the major components of your credit score – payment history, credit usage, length of credit history, mix of credit and new credit – to see what areas you need to work on. You can then do a deeper dive by checking your three major credit reports, which you can get for free every year.)
To answer that question, I interviewed with Joe Kelly, founder of a national mortgage firm, ArcLoan.com, on my radio show Talk Credit Radio. (ArcLoan.com is a sponsor of that show). Following is an edited excerpt from that interview.
Gerri: A few years ago, if you could breathe, you got a loan. Now it’s changed. So can you still get a mortgage if your credit isn’t perfect?
Joe: It really depends. The majority of lenders across the country are all operating under the same Fannie Mae or Freddie Mac underwriting guidelines. (The application is) going into a computer and it’s spitting out an answer; we will approve your loan or we won’t approve your loan.
There are also what are called “portfolio lenders.” They are small community banks (who) look at a wider variety of scenarios. Maybe your credit is not as good but you have other compensating factors such as liquid assets.
When you go to get a mortgage, what is generally considered a bad credit, good credit, great credit? What’s going to give you some issues and what’s going to get you in the door with no problems?
As of today (and it does change) bad credit in the mortgage world is considered below a credit score of about 620 — 640. Good credit is generally 640 — 740. Great credit from a mortgage standpoint in today’s world is a FICO score of 740 or above.
We’re talking FICO scores here. And we’re talking FICO scores on a mortgage credit report, not where you pull an individual credit report and get one score.
How does it work if you have great credit or not-so-great credit and your spouse is in the opposite position? What is the lender looking at when you have two borrowers with different credit scores?
The important thing to look at is whether they qualify for the mortgage just on the person who has the better credit. That’s because the lender is going to look at the lowest middle score of both of the people on the loan.
Let’s say that I’ve got a credit score of 640 and my wife’s got much better credit, she’s got a 780. It turns out that I’m the one working at the better job and making more money, but she’s got the higher score. If we need both of our incomes to qualify, they’re going to go off my score because it’s the lower score. But if it’s the opposite scenario, many times you can make the loan work and just remove the borrower who’s got the lower score (from the application).
Are there certain types of loans that are better if your credit isn’t perfect? For example, FHA is traditionally seen as the type of loan that’s available to a wider range of credit scores. Is that still the case?
Yes, it is still the case. FHA loans and VA loans have more flexible guidelines especially in the area of credit. I’ll give you an example — the minimum credit scores that we’re talking about for an FHA or a VA loan, typically in today’s market is 620. (Compare that to) a traditional conventional loan where the minimum score that you really are looking at is 680; otherwise, you get really hit with extra costs and penalties. So FHA and VA loans have more flexibility depending on what state you’re in. Sometimes there are state programs that you should inquire about that also have more flexibility.
If you have a judgment against you from a debt-buyer or a creditor, is a mortgage even a possibility?
A mortgage is still absolutely a possibility. In almost every case, a judgment will have to be paid and satisfied prior to approving and closing on that loan. It doesn’t have to hold you back from going in and getting the process started and talking to a lender. But in almost every single case we see you are going to be required to satisfy that judgment if you want a mortgage.
What if you’ve been through bankruptcy? We have approximately a million Americans filing for bankruptcy every year. When you add up the 7 to 10 years that it can remain on your credit report that’s potentially some 10 million consumers that have one listed on their credit reports. What are their options for getting a mortgage?
Many people think when they go through a bankruptcy that, “Hey that’s it, I’m not going to be able to buy a house again,” and that’s not true. It’s a matter of waiting a certain amount of time. Currently, if it’s an FHA or a VA loan, the government is more flexible. The waiting period from the time the bankruptcy is discharged — not when you started it, but when it’s completed — is two years. For a conventional loan, it’s four years. If someone’s going to get an FHA loan, with some some lenders in certain circumstances you can get a mortgage or refinance even sooner than two years.
What kinds of credit references do lenders want to see? Because what happens sometimes is people go through bankruptcy and they stop using credit altogether. They don’t really have any current credit references. Do you run into that problem?
We do. From the mortgage perspective, we’re looking for something called “re-establishing of credit” and folks can go and re-establish credit with a secured card. That gives them a trade line that helps them get that credit score back up. It shows that they are on the road to recovery.
Take someone who has been through a foreclosure or a short sale. They lost their home or sold their home, and now they’re saying rates are low and prices are low, I want to get back into a home. What are their shots of doing that?
So many people in the country have been through that. We see that so often and really, when it comes to getting another mortgage or refinancing a (current loan), it’s just a matter of waiting the appropriate amount of time.
Obviously, credit scores still come into play, but if that was the only impact on their credit, that credit score is going to continue to rise as time passes. The waiting period is currently two years for an FHA or VA loan and four years for conventional loans. (Those are subject to change, though, so please check with your lender.)
We get many applications where that scenario comes up and that two-year mark is (just a few months away). Literally it just means, “Start that application process now. You just cannot get approved or closed on that loan until that time period has passed.”
Is there anything else you want to let folks know know about getting a mortgage if you’ve been through credit problems, and how to prepare for that?
Yes, Gerri, it’s the same thing I think I say all the time: be proactive. Don’t feel that it’s a definite closed door. Find somebody that is trustworthy and reputable and get a mortgage credit report pulled. See what that’s looking like. See whether if there’s incorrect information. See if you can do things to improve that score.
Don’t miss this chance at low rates. It’s worth putting in some hours of time and it does take work. It’s a lot of work to reestablish your credit or raise your credit score. But it’s worth it, especially if you look at it over a 5, 10, 15, 20-year period of time.
Even if you pay a little bit higher rate, you’re still probably getting a very low rate because rates are so low.
I think that’s an excellent final point. You may hear rates are 3%. If you’ve got credit issues, you might not get that lowest, lowest rate. The point is, if you can lower the rates that you’re paying now for a reasonable cost or for no cost — that’s an important improvement.
Image: The Shopping Sherpa, via Flickr