This Article Is About How Mortgage Underwriters View Negative Credit History
Mortgage Borrowers can qualify for mortgage loans with prior bad credit and negative credit history. Outstanding collection accounts and charge-off accounts do not have to be paid to qualify for home loans. Lenders understand that loss of income and unable to meet debt obligations happen to the best of us. However, what is important to lenders is the financial irresponsibility of borrowers.
The Ability To Repay Mortgage (Qualified Mortgage) is one thing. Paying mortgage payments and other bills timely when borrowers have the ability to repay the mortgage is another. That is why most lenders will not approve anyone who had late payments after bankruptcy and foreclosure. Having prior bad credit is fine. The keyword is PRIOR. Lenders understand hard working financially responsible folks can go through periods of a hard time. This can be due to unemployment, a slowdown in business, divorce, illness, or the death of a family member. This is why the total financial credit history is looked at. Most financially responsible folks will have years of timely payments and a short period of bad credit. The period of bad credit will be targeted by the mortgage underwriter and see what significant change happened with the mortgage applicant.
Outstanding collections and charged-off accounts do not have to be paid to qualify for a mortgage. More importantly, what lenders like to see is re-established credit after periods of bad credit. Lenders are looking for timely payments, reestablished credit, and new credit after bankruptcy and foreclosure as well as periods of delinquent payment history. Late payments after bankruptcy and/or a housing event are extremely frowned upon by lenders. Mortgage applicants with late payments after bankruptcy and/or foreclosure are classified as second offenders and will have a difficult time obtaining a mortgage. Gustan Cho Associates can help borrowers with late payments after bankruptcy and/or foreclosure qualify for a mortgage.
Credit Scores Versus Credit Report
The credit report will contain past credit history and payment behavior of mortgage borrowers:
- A creditor will pull a credit report when consumers request for credit or apply for a loan
- The credit report will have a credit history
It consists of past and current credit accounts:
- Payment history
- Amount of credit limit
Public records such as the following:
- Bankruptcy
- Foreclosure
- Deed in lieu of foreclosure
- Short sale
- Tax liens
- Judgments
- Other personal information about the consumer which includes the date of birth, social security number, past and current addresses
- Credit history is somewhat of total background information
Credit history will show:
- Spending habits
- Payment patterns
- Periods of bad credit
- Closed and open credit accounts
Credit history is a large part of how the three credit reporting agencies derive to credit scores.
Impacts Of Negative Credit History
Having a negative credit history can have a big negative impact and can cost consumers not only higher interest rates but career opportunities. Consumers with bad credit and lower credit scores will be paying higher interest rates on the following:
- Revolving accounts
- Installment loans
- Mortgages
- Auto Loans
- Insurance premiums
Bad credit and lower credit scores can affect career opportunities as well. Many employers run credit on prospective employees as part of their hiring process. Employers also run credit checks as part of their promotional process when promoting employees. Government and private employers both run credit as part of their recruitment and hiring process. To become a licensed loan officer, state and federal SRO (Self-regulatory organizations) run credit checks as part of their licensing process.
Case Scenario Of Consumer With Negative Credit History But Re-Established Credit
Many creditors and employers view those having negative credit history as being financially irresponsible:
- Therefore high-risk borrowers as debtors and irresponsible potential employees for employers
- Both creditors and employers understand folks going through bad periods of bad credit due to unemployment, divorce, or medical issues
For example, let’s take a case scenario:
A person has a 10-year credit history:
But on year 5 had a divorce and job loss so the following happened:
- Started to have late payments
- Collections
- Charge offs
- Judgments
- Tax lien
On year 6 had a bankruptcy and foreclosure:
- But on years 7 through 10 had multiple secured credit cards with low credit balances, a car loan, and several department store loans
- This person is a financially responsible person who had a period of tough times and has recovered
- This person will have no problem in qualifying for a mortgage loan
Second Case Scenario
However, if another person has a 10-year credit history:
- From year one to year 10 has had histories of the following:
- Late payments
- Charge offs
- Collections
- Medical collections
- Judgments
- But no bankruptcy or foreclosure
- This person has always had a negative history and would be considered an extremely high-risk borrower by creditors and lenders
- Lenders and creditors will view this person as financially irresponsible and will have a difficult time qualifying for a home loan
- One or two late payments will not severely affect credit history
- But late payments will hurt credit scores temporarily
One or late payments will drop credit scores but credit scores will recoup back to the original level in six or more months.
Fixing Negative Credit History
Consumers with negative credit history can correct it and start re-establishing credit with new positive credit.
- However, consumers need to discipline themselves and realize the importance of having good credit
- Fixing credit does not happen overnight and it takes time
- The great news is that having a negative credit history and bad credit is not permanent
- Consumers can actually have great credit as soon as a year by adding positive credit and not being late
- Derogatory credit items will only stay on credit report for seven years and it will fall off the credit report
- As time passes, derogatory credit items have little to no impact on credit scores
Establishing Credit With Secured Credit Cards
The best way of re-establishing credit is to add positive credit to a credit report with secured credit cards. Each secure credit card can boost credit scores by 20 to 30 points:
- Start with getting 3 to 5 secured credit cards with $500 credit limits
- Use them regularly and make sure to religiously pay the minimum payments on time
- Start adding one to three new credit items every year
- After 3 to 5 secured credit cards have aged at least a year, consumers can probably qualify for unsecured credit cards
- Add one or two unsecured credit cards every year
- Add auto loan and department store credit card
- A short term payday loan can also boost credit scores but will be paying the price of the enormous interest rates
- So make sure to pay the payday loan off in less than a year
- By getting credit to use it as a credit score booster will strengthen credit profile
- Following these steps, consumers will be on the road to good credit
- As the years pass, derogatory credit items will fall off credit report
Negative credit history will turn into a positive credit history.
Qualifying For Mortgage With Direct Lender With No Overlays
Home Buyers with less than perfect credit needing to qualify for a mortgage with a direct lender with no overlays on government and conventional loans can contact Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com.
