Mortgages

How to Get a Mortgage With Bad Credit

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Today, there is still a general consensus that to buy a home you need to have 20% down and a good-to-excellent credit history. The good news is you actually don’t need a large down payment or great credit in order to purchase a home with competitive market terms.

Let’s look at the characteristics of what a mortgage lender deems to be bad credit when it comes time to qualify for a mortgage loan.

Credit Score Scale
740-800 Outstanding
720-740 Great
700-720 Good
680-700 Mediocre
*620-680 Less than perfect, but approvable

 

A mortgage company’s definition of bad credit might not be what a consumer considers to be bad credit. A credit score of 620 or higher is required to successfully obtain a mortgage. By the same token, a 620 credit score is considered by a lender to be less than perfect, but it’s still possible to get a mortgage with that score.

Your credit score determines two major things for a mortgage company:

  1. Loan program — whether it’s a conventional or FHA-type mortgage
  2. Pricing — this includes your interest rate and any additional charges indicative of the credit score (the lower the credit score, the higher the interest rate and/or potential charges)

Your credit history is the next factor in determining whether or not your loan will be approved. Is there a pattern of previous credit delinquencies? Are there balances on closed-out accounts? It’s common for a consumer to have a 620 credit score, and have a consistent historical pattern of derogatory credit. Interestingly, this person would have a more difficult time obtaining mortgage loan approval than someone with a 640 credit score with no history of delinquencies other than a foreclosure from a couple of years before.

In order of priority, lenders will look at the credit score to determine which home loan you’re eligible for. Next, the complete credit overview will be taken into consideration to determine what questions may or may not arise in the underwriting decision process. The underwriting process will be looking for “what happened,” “why it happened” and the future “likelihood of continuance or repeat non-repayment.”

Common Credit Red Flags for Lenders

Pattern of Delinquencies — A record of late payments is possible to work around, but more lender scrutiny will be given to the size of your down payment and your debt-to-income percentage.

Student Loan Late Payments — If you had a late payment on your student loans within the past 12 months, you may be more likely to be approved for conventional financing. Government financing — like FHA — does not take kindly to delinquent federal debt.

Mortgage Late Payments – One late payment in the past 12 months is permitted, so long as it can be explained and, if necessary, fully documented.

Foreclosure – 36 months from the date of the foreclosure you’ll become eligible for a 3.5% down FHA loan; for a VA loan, 48 months and no money down required; conventional loans require seven years no matter the down payment.

Short sale – It takes 36 months from the date of the short sale until you’re eligible using a 3.5% down payment FHA loan; 24 months with the VA loan; 24 months on a conventional loan with a minimum down payment of 20%.

Bankruptcy – With Chapter 7 (Chapter 13 is less common), you have 24 months from the date of discharge until you’re eligible using a 3.5% down FHA loan; 48 months on VA loans (still no money down required); and 48 months on conventional loans, no matter the down payment.

Why You Can Get a Mortgage With Bad Credit

There’s a thing called investor overlays, which are adjustments to guidelines and/or pricing created in favor of the lender. This is precisely why one lender can do a loan for someone with bad credit and minimal (or no) down payment, and another lender cannot do the loan in some instances.

Overlays further protect lenders against potential future losses from the home loans they originate, preserving profit margins and buyback risk (an event in which the originating lender is forced to buy back from the investor if the loan they made was not fully documented). Investor overlays tighten the screws on borrowers’ ability to borrow. Put another way, it shifts risk — which translates to cost — on to the consumer by means of limiting the ability to borrow via higher loan fees, reduced purchase price, or lower debt ratio, to name a few.

Note: Every mortgage lender has investor overlays, it’s the nature of how mortgage companies operate, the key is to work with a lender whose overlays are minimal.

Homebuyer Homework

  1. Know your credit score, first and foremost (you can monitor your score for free using a service like Credit.com’s Credit Report Card). Obtain a copy of your free annual credit report, this will aid you in selecting the appropriate lender.
  2. Get as much supporting documentation as possible surrounding your credit challenges so the story can be explained from A to Z.
  3. When speaking with a potential lender, be very specific. Do not be afraid to share every detail of your needs and concerns, giving the most complete description possible. Find out upfront if they have any additional conditions with regard to credit history, as doing so could save you considerable time and money.

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  • Luke

    One key to improving your credit is being constant on newly acquired debts. A home not only is a wise investment for your future, it can also help a credit score that hasn’t always been the best. It may be more difficult to obtain a mortgage for some people and that’s why there are brokers that specialize in repairing credit.

    Luke | http://www.ralainvestments.com/bad_credit_mortgage.html

  • John

    Trying to get a home in Michigan and just keep hitting people that want me to go to credit repair service. Everything I see about that is scams. Just need a home.

    • ScottSheldonLoans

      John, I would try credit.com’s new scoring model to run scenarios on what it would take to raise score from where it is now. Then its a function of what your score could be and whether new score could qualify you for a mortgage.

  • Marie

    My fiancee and I are wanting to buy a home. My income is very low being I am mainly a stay at home mom, about$1,200/month. But my credit is 748, I am the co-signer with him on my auto loan, have 3 major credit cards that I use basically every day. And pay off monthly. My fiancee makes appx 54k but has horrible credit @ 520. He can’t even be on a mortgage loan with me. I applied for a loan and was surprisingly almost accepted but was turned down because I have been the one making the payments on the auto loan for the last year. I’ve told him time and time again he needs to get his debts paid off, and I do honestly think he is going to this month. We found our perfect home for 60k. We are determined we are going to find a way to get it. We will have only about $5000 to put toward the buying of the house. Is there anyway possible that we are going to be able to get his credit fixed and able to obtain a loan in the next few months? I have researched about authorized users on CC and am wondering if we were to get married and me have him be an authorized user to boost his credit score on top of paying his debts, which honestly are only about $2000, if a mortgage lender would see his credit score evened out and acceptable with me in the mix? As I read they only see the authorized user credit acceptable if married. I am desperate for ANY kind of input into how to obtain a mortgage somehow! Coming up with a %20 down payment is almost out of the question, just figured I’d throw that in there since that would be an option for me to apply without them checking my income.

    • ScottSheldonLoans

      Marie,

      Based on what you’re
      saying, it appears as though you have a few choices. Either put the project on
      hold, and have him start making the payment on the car loan directly to the
      creditor -usually lenders need at least 12 months to be able to omit the
      cosigned debt from your ratios which affects your ability to qualify for the
      mortgage. Whether or not you get married, is your decision however if you guys
      are married and you are looking at a government loan such as the loan down payment
      loan you mentioned because you don’t have 20% down both debts of each spouse
      are examined for qualifying even if one spouse is not on the mortgage. That
      rule does not apply if you are not married. As for getting his credit score up
      it’s possible, just depends on what factors are reporting generating a lower
      score. That might take months could take longer depending on the severity of
      his credit history. Another possibility perhaps is to payoff the car and then
      use your income solely to qualify.

  • http://www.Credit.com/ Gerri Detweiler

    I am so glad to hear things are on the upswing for the two of you. It’s hard to say what exactly has to happen before you can qualify without knowing what exactly is holding your credit scores down. Do you have your free credit score from Credit.com? Which of the five factors have low grades?

  • http://www.Credit.com/ Gerri Detweiler

    Brenda,

    His debt ratio sounds pretty good (depending on how much the housing payment would be) but it sounds like he’s going to need to do some work on his credit. A great place for the two of you to start would be to talk with a HUD approved housing counselor. Many of them offer free or low-cost counseling and/or workshops for would be home buyers. You can find one here:HUD- approved housing counselors

  • Kevin

    I have 20% to put down and a 640 score with 46% debt ratio. Can I get a conventional loan?

    • http://www.credit.com/ Credit.com Credit Experts

      Kevin —
      That debt ratio is on the high side . . . but give those numbers to a mortgage broker and ask if any of the lenders he or she works with would be likely to approve it. (And work on bringing that credit score up.)

    • ScottSheldonLoans

      46% is soooo close to 45%– I bet you could change the insurance quote, loan size or down payment or pay off a debt to make the ratio doable at 45%. Talk to your loan officer and run these scenarios by them.

  • ddesperattomove

    I have credit average 670. Have a bankruptcy that was dismissed in 2011. It was not discharged but dismissed. Have tried to apply mortgage loan & was declined. What steps do I need to take to get a loan approved?

    • ScottSheldonLoans

      You should be good to go now 2 years on FHA post BK chapter 7 or 1 yr from a ch.13. For conventional–4 years out so you should be ok here too. I would say work with another mortgage company.

  • Stephanie

    My husband has credit scores from 656-677 but has a car repossession from 6 years ago that still has a balance of $5600. He and I both lost our jobs with the same company within a month so we defaulted on the car payments and thought the best thing would be to voluntarily surrender it. We were wrong and did not realize how badly it would effect our credit and lives at 19 years old. Fast forward to now, he has been making all of his payments for his car loan, credit cards, and student loans. He’s been in the Marines (active duty) for the past 4 years and his debit ratio is 11%. The only negative accounts are the car repo and we owe money to an apartment complex (from the same time as the car repo). He applied for a VA loan but was told he had to payoff the car repo first. With it being so close to the 7 year statue of limitations we really don’t want to pay it. Should we consider paying it? What should be our next step in trying to get a home loan? Should we try to qualify for a conventional or FHA loan instead? We have about $10,000 we can put down if needed.

    Thank you!!

    • http://www.credit.com/ Credit.com Credit Experts

      Stephanie —
      You may be confusing dates for debt reporting with dates for debt collections. A debt can be reported for 7.5 years after it first goes late (assuming no further activity on the account). Talk with a mortgage broker or loan officer about your loan options. (He or she will likely then have more information about total income, debt, obligations, etc. All of those, plus your own comfort level with the various options play into a decision.) Here’s information on debts and important dates:
      Does Your Old Debt Have an Expiration Date?

    • ScottSheldonLoans

      Try asking to settle the debt if its still on the credit as debt. Lender per VA requirement would just want the debt zeroed out. Whatever you guys chose to pay them, ie offering a lower amount to make the debt go away is what the lender would probably want in his scenario. Otherwise, wait for it to come off the credit and then look for a house.

  • rae

    because have a 625 score my wife has 700 score we both just got done working with a credit repair person. We payed off all the bad stuff on her credit and score jumped up alot. I still have a few thing on mine that need to be paid off. We both started off with 17 negative things down to 4 each on our reports.we are looking in to a FHA loan and have 5000 to but down. Not sure if this will be enough for us to get a loan.

  • Mandy

    My husband and I are trying to get approved for around 180-200k.
    Husband: Credit score 609 :( Fell down from 663 in January because we didn’t contact Navient (Sallie Mae) in enough time after his loan came out of forbearance.
    Only about $2,000 in credit card debt on 1 card (with no late payments), $1,000 on the student loan and $14,000 car loan (with no late payments).
    Income: $62k
    Me: Credit score 630.
    $20k in credit cards
    $111k in student loans
    no late payments. 35% credit card ratio
    $63k
    Mortgage lender told me yesterday that there is no way husband can get approved with the late pay to Navient. Navient told me they will report favorably at the end of this month. I’ve seen my score go up 60 points in a month. Is it possible his could too just from a favorable report?
    The lender is trying to see if I can qualify on my own. She says I have good income. Keeping fingers crossed. Any recommendations are appreciated and yes, we know we are idiots for not taking care of the Navient loan right when we were trying to get a house. :(

    • ScottSheldonLoans

      In order to answer this question post the minimum monthly payments on each obligation/loan payment/credit card. Not what you pay, but what is actually the minimum amount per month owed. Post this information and then I can give you more information about your scenario.

  • al

    is it possible to qualify for FHA loan but not a VA loan

  • Clem Holy Eagle

    Ian seriously thinking on relocating to Conestoga pa,yes I do have bad credit but nothing major where do I start

    • http://www.Credit.com/ Gerri Detweiler

      It doesn’t hurt to rent when you relocate so you can figure out where you really want to be. In the meantime, you can ask a loan officer to review your credit and financial situation and give you a game plan to get in a position to buy.

      • Clem Holy Eagle

        That’s the issue where can I start where can I find a loan officer to get a mortgage my relocation is in Conestoga pa,

        • http://www.Credit.com/ Gerri Detweiler

          Have you thought about opening an account with a credit union when you get there? They may be able to help.

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