This Article On How Underwriters View Credit History And Recent Late Payments
Credit history and recent late payments are carefully reviewed by mortgage lenders during the mortgage application and mortgage approval process.
- A mortgage underwriter will look at the overall credit history of applicants
- Two things they will look for is whether the applicant has regards for is credit scores and periods of bad credit, especially payment history in the past 12 months
In this article, we will discuss and cover How Underwriters View Credit History And Recent Late Payments.
Case Scenario On How Underwriters Analyze Borrowers
Here is a case scenario on How Underwriters View Credit History And Recent Late Payments:
- the applicant has a five-year credit history
- first, two years has had a perfect payment credit history
- one year had a derogatory credit history
- the next two years had good credit again
- the mortgage underwriter will want to know the circumstances why the applicant had the one year of bad credit and late payment history
- If the applicant had lost their job, had medical issues, went through a divorce, that is totally understandable
- A detailed letter of explanation, LOX, will be required detailing the circumstances of the bad credit payment history
Prior bad credit will not disqualify the applicant from getting a mortgage loan approval:
- Total disregard of credit will be an issue
- Lenders look at the overall payment credit history and recent late payments
- This is because historical payment history is an indication of future payment history
Almost all mortgage lenders want to see timely payment history in the past 12 months.
Collection Accounts And Charge Offs
A mortgage applicant can qualify for a mortgage with unpaid collection accounts and charge offs.
- Lenders do not care about medical collections and charge offs
- Medical collections and charge offs are often ignored by lenders with no investor overlays
- There are lenders like banks, credit unions, and mortgage companies with investor lender overlays
- Lender Overlays are mortgage lending guidelines that are above and beyond agency guidelines
- Most lenders have overlays
- Lenders with overlays may require borrowers to pay off unpaid collection accounts
- Borrowers do not have unpaid collection accounts or charge offs
- If a lender requires you to pay off outstanding collections/charged offs, contact us at Gustan Cho Associates Mortgage Group
- Gustan Cho Associates has no investor overlays
HUD does not require to have unpaid collection accounts to be paid in order to qualify and close on FHA Loans.
Credit History And Recent Late Payments: Non-Medical Collection Accounts
There are rules and mortgage lending guidelines on non-medical collection accounts.
- Borrowers with an aggregate total of $2,000 or greater in unpaid collection accounts, do not have to pay it off
- However, HUD does require that the mortgage underwriter take 5% of the unpaid collection balance to calculate debt to income ratios on outstanding collections OVER $2,000
For example, the borrower has a total of $5,000 in unpaid non-medical collections:
- 5% of $5,000, or $250, will be used as part of the debt to income calculations
- If a borrower has large unpaid collection balance
- and the 5% of the unpaid collection balance will not qualify them due to high debt to income ratio qualification
- borrowers can enter into a written payment agreement with the collection agency
- written monthly payment agreement will be used to calculate for debt to income ratio qualification without any seasoning payment history requirements
- For example, if the borrower has a $5,000 unpaid collection account
- 5% of the $5,000, or $250 per month will not qualify them because of surpassing the debt to income ratio cap
- then the borrower can enter into a written payment agreement with the creditor and/or collection agency for less than that, such as $100
- the $100 will be used to calculate debt to income ratio in lieu of the 5% of outstanding collections
Credit History And Recent Late Payments: Recent Late Payments
Prior bad payment history is no problem. This is as long as applicants can explain the reason for the derogatory credit via a detailed letter of explanation that is signed and dated.
- However, late payments in the past 12 months can be an issue in getting an approve/eligible per Automated Underwriting System Approval
- Lenders do expect borrowers have paid their bills timely in the past 12 months
- Maybe one or two late payments due to extenuating circumstances may be possible
- But in the most part, multiple recent late payments will be a deal-breaker
- Borrowers with recent late payments may have to wait until the late payment history has seasoned at least six to twelve months
Gustan Cho Associates Mortgage Group are direct lenders with no overlays on government and conventional loans. We have zero overlays on agency loans. We just go off findings of the Automated Underwriting System. AUS will accept some borrowers with one or two late payments in past 12 months. However, multiple late payments will be a deal killer. Borrowers who need to qualify for government and/or conventional loans with a direct lender with no lender overlays, please contact Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
