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.

Image: Jupiterimages

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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.

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