How Do Underwriters Analyze 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 the mortgage loan applicant. Two things they will look for is whether the mortgage loan applicant has regards for credit and periods of bad credit. If a mortgage loan applicant has a five year credit history and the first two years has had perfect payment credit history and one year had derogatory credit history and the most two years had good credit again, the mortgage underwriter will want to know the circumstances why the mortgage loan applicant had the one year of bad credit and late payment history. If the mortgage loan 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 a mortgage loan applicant from getting a mortgage loan approval. Total disregard of credit will be an issue. Mortgage lenders look at the overall payment credit history and recent late payments because historical payment history is an indication of future payment history. Almost all mortgage lenders want to see a timely payment history in the past 12 months.
Collection Accounts And Charge Offs
A mortgage loan applicant can qualify for a mortgage with unpaid collection accounts and charge offs. Mortgage lenders do not care about medical collections and charge offs. Medical collections and charge offs are often ignored by mortgage lenders with no investor overlays. There are mortgage lenders like banks, credit unions, and mortgage companies with investor lender overlays that may require you to pay off unpaid collection accounts and if you do have unpaid collection accounts or charge offs and the mortgage lender requires you to pay them, go to a different lender, like myself, where there are no investor overlays. HUD does not require to have unpaid collection accounts to be paid in order to qualify and close on a residential mortgage loan.
Qualifying For Home Loan With Non-Medical Collection Accounts
There are rules and mortgage lending guidelines on non-medical collection accounts. If you have a total of $1,000 or greater in unpaid collection accounts, you do not have to pay it off, however, HUD does require that the mortgage underwriter take 5% of the unpaid collection balance to calculate your debt to income ratios. For example, if you have a total of $5,000 in unpaid non-medical collections, 5% of $5,000, or $250, will be used as part of your debt to income calculations. If you have a large unpaid collection balance and the 5% of the unpaid collection balance will not qualify you due to high debt to income ratio qualification, you can enter into a written payment agreement with the collection agency and the written monthly payment agreement will be used to calculate for your debt to income ratio qualification without any seasoning payment history requirements. For example, if you have a $5,000 unpaid collection account and the 5% of the $5,000, or $250 per month will not qualify you because you surpass the debt to income ratio cap, then you can enter into a written payment agreement with the creditor and/or collection agency for less than that, such as $100, and the $100 will be used to calculate your debt to income ratio.
Recent Late Payments
Prior bad payment history is no problem as long as you can explain the reason for the derogatory credit via a detailed letter of explanation that is signed and dated by you. However, if you have been late on your payments in the past 12 months, that can be an issue. Mortgage lenders do expect that you have paid your 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. If you have had recent late payments, you may have to wait until the late payment history has seasoned at least six to twelve months.