Credit History and Recent Late Payments? Get Help Today

How Underwriters View Credit History and Recent Late Payments

When buying a home, your credit history and recent late payments play a big role in whether you’re approved for a mortgage. Mortgage lenders carefully review your credit history to understand how you’ve managed debt over time.

Late payments, especially within the past 12 months, can raise red flags for underwriters. However, getting a mortgage is still possible with the right guidance and solutions.

At Gustan Cho Associates, we specialize in helping borrowers overcome credit challenges, including recent late payments, to achieve their dream of homeownership. In this article, we’ll explain how underwriters view credit history, how recent late payments impact mortgage approval, and what steps you can take to improve your chances of getting approved.

Understanding Credit History and How It Impacts Mortgage Approval

Your credit history records how you’ve managed credit over time. It includes details about:

• Payment history (on-time or late payments).
• Types of credit accounts (credit cards, loans, etc.).
• Length of credit history.
• Total debt owed.
• Recent credit inquiries.

Why It Matters: When you apply for a mortgage, the underwriters look closely at your credit history. This information helps them determine how likely you are to repay the loan. If you have a good credit history, it shows that you’re responsible with your money and can handle debt well. On the other hand, recent late payments in your credit history might raise some concerns for lenders about your ability to pay back the mortgage.

Knowing your credit history is important because it impacts your chances of getting a home loan. Lenders want to see that you have used credit carefully in the past. If you have missed payments recently, it might suggest that you could have trouble keeping up with mortgage payments. Understanding your credit history can help you make better financial choices in the future.

How Underwriters Analyze Late Payments

Late payments are categorized based on their timing:

• 30 Days Late: Minor impact but still a red flag for recent payments.
• 60+ Days Late: More severe and can significantly lower your credit score.

Case Scenario: Imagine you’ve been managing your credit for five years. For the first two years, you had a perfect payment history. In the third year, you experienced financial hardship, leading to several late payments. Over the next two years, you recovered and made all payments on time.

Here’s what the underwriter will consider:

1. What caused the late payments? (e.g., job loss, medical issues, divorce)
2. Did you take steps to fix the problem? (e.g., catching up on payments, maintaining good credit since then)
3. How recent were the late payments?

Pro Tip: Write a detailed Letter of Explanation (LOX) to explain the circumstances behind your late payments. Be honest and specific about the issues and what you’ve done to prevent them from happening again.

How Recent Late Payments Impact Mortgage Approval

Mortgage lenders place extra weight on your payment history over the past 12 months. Here’s why:

• Recent Late Payments: These are seen as a sign of current financial instability and can make it harder to get approved.
• Historical Payment History: Underwriters view past behavior as a predictor of future behavior.

Exceptions to the Rule

• One-Time Late Payments: If you have a solid payment history but one recent late payment, underwriters may overlook it, especially if there is an extenuating circumstance.

Multiple Late Payments: More than one late payment within the past year can be a deal-breaker. However, some lenders, like Gustan Cho Associates, offer flexible solutions for borrowers in this situation.

Can You Get a Mortgage With Recent Late Payments?

Yes, it’s possible, but the path may not be straightforward. Here’s how you can improve your chances:

1. Work With Lenders That Have No Overlays

Many lenders impose stricter requirements than agency guidelines. These are called overlays. For example, some lenders may require a clean payment history for 24 months, even if agency guidelines allow for 12 months.

At Gustan Cho Associates, we do not have overlays on FHA, VA, or USDA loans. We follow only agency guidelines, which means more flexibility for borrowers.

2. Improve Your Credit Before Applying

• Catch Up on Payments: Make sure all your payments are current. This helps avoid late penalties and helps keeps your credit score in good shape. Staying organized with your bills will give you peace of mind and help you manage your budget better. Take a moment to check your accounts and ensure everything is up to date.
• Avoid New Late Payments: Focus on paying all bills on time for at least 6-12 months before applying.
• Reduce Debt: Pay down your credit card balances. This will improve your debt-to-income (DTI) ratio and raise your credit score. Taking this step can greatly benefit your financial health!

Collection Accounts and Charge-Offs

Medical Collections

Lenders typically ignore medical collections when evaluating your mortgage application. These debts are considered less reflective of your financial behavior.

Non-Medical Collections

If unpaid collections exceed $2,000, HUD guidelines require underwriters to calculate 5% of the balance as part of your DTI ratio. For example:

• Total unpaid collections: $5,000
• 5% of $5,000 = $250 added to monthly debt obligations.

Solution:

You don’t need to pay off collections to qualify for an FHA loan. Instead, you can:

1. Consider setting up a payment plan with the collection agency. This can help you manage your debt more effectively and reduce stress. It’s a useful option to keep in mind when dealing with financial challenges.
2. When calculating your Debt-to-Income (DTI) ratio, it’s important to use the agreed monthly payment amount—think $50 instead of the total of $250. This method gives you a better understanding of your financial situation, empowering you to make smart choices.

Strategies for Overcoming Recent Late Payments

1. Explain Your Situation

A strong Letter of Explanation (LOX) can make a difference. Here’s what to include:

• The reason for the late payment (e.g., unexpected medical expenses).
• How you resolved the issue.
• Steps you’re taking to avoid future late payments.

2. Consider Non-QM Loans

If traditional loans aren’t quite right for you, consider non-QM (non-qualified mortgage) loans! These options are tailored for borrowers who have distinct financial scenarios, such as:

• Recent late payments.
• High DTI ratios.
• Self-employed income.

Non-QM loans have flexible credit requirements but may come with higher interest rates.

3. Wait It Out

If your recent late payments disqualify you, waiting 6-12 months while maintaining on-time payments can help. Use this time to:

• Rebuild your credit score.
• Save for a larger down payment.

Tips for Improving Your Credit After Late Payments

1. Check Your Credit Report: Review your credit report for errors. If you spot inaccuracies, dispute them with the credit bureaus.
2. Set Up Automatic Payments: Want to dodge those pesky late fees? Setting up autopay for your bills is a smart move! It helps ensure that payments are made on time, giving you peace of mind.
3. Pay Down High Balances: Lowering your credit card balances can significantly boost your credit utilization ratio. Enhancing this aspect can raise your credit rating, which will simplify the process of obtaining loans and credit down the line. Start by focusing on high-interest cards first; doing so can lead to substantial savings and benefit your credit in the long run!
4. Use Secured Credit Cards: If you’ve observed a notable decline in your credit score, there’s no need to panic! A secured credit card is a fantastic option to kickstart rebuilding your credit.

Why Choose Gustan Cho Associates?

Gustan Cho Associates is dedicated to helping you reach your dream of homeownership, even if you face credit challenges. So, what makes us different?

• No Overlays: We only follow agency guidelines, providing more approval opportunities.
• Expert Guidance: Our team specializes in helping borrowers with credit history issues and recent late payments.
• Flexible Loan Options: We provide extensive loan options just for you! This includes FHA, VA, USDA, and non-QM loans. Whatever your financial situation, there’s likely a program that fits.

Take the First Step Today

If your credit history and recent late payments have you worried about getting a mortgage, don’t lose hope. At Gustan Cho Associates, we have the expertise and programs to help you achieve your dream of homeownership.

Call us today at 800-900-8569 or text us for a faster response. You can also email us at gcho@gustancho.com to get started. Let’s work together to turn your dream into a reality.

Frequently Asked Questions About Credit History and Recent Late Payments:

Q: What is Credit History, and Why is it Important for a Mortgage?

A: Credit history shows how you’ve managed credit over time, including on-time or late payments, the type of accounts you have, and your total debt. Lenders review it to see if you will likely repay the loan.

Q: Can I Get a Mortgage if I have Recent Late Payments?

A: Yes, you can still get a mortgage, but recent late payments can make it more challenging. Lenders like Gustan Cho Associates may still approve you if you meet certain requirements or explain the late payments.

Q: How do Underwriters View Recent Late Payments?

A: Underwriters pay close attention to late payments from the past 12 months. A one-time late payment might be excused with a valid explanation, but multiple late payments could delay your mortgage approval.

Q: What Should I Include in a Letter of Explanation for Late Payments?

A: A good Letter of Explanation should include the reason for the late payment (e.g., job loss or medical expenses), how you resolved the issue, and what steps you’ve taken to prevent future late payments.

Q: What is the Difference Between Medical and Non-Medical Collections?

A: Lenders usually ignore medical collections, but non-medical collections over $2,000 may affect your debt-to-income (DTI) ratio. FHA guidelines require 5% of the unpaid balance to be factored into your DTI unless you have a payment plan.

Q: What Steps Can I Take to Improve my Credit After Recent Late Payments?

A: Paying your bills on time is important to improve your credit score. It’s also important to lower your credit card balances. You might want to set up automatic payments to make this easier. Using secured credit cards can help you rebuild your credit score. Following these steps will help you achieve financial health and security!

Q: Are There Loan Options for Borrowers with Recent Late Payments?

A: Yes, non-QM loans are an option for borrowers with recent late payments, high DTI ratios, or unique financial situations. These loans have flexible requirements but may have higher interest rates.

Q: Do I Need to Pay Off Collection Accounts to Qualify for a Mortgage?

A: Not necessarily. FHA loans don’t require you to pay off collections. If you don’t set up a payment plan with the collection agency, the monthly payment amount will be used in DTI calculations instead of 5% of the balance.

Q: What is a Lender Overlay, and How Does it Affect my Mortgage Approval?

A: Lender overlays are extra requirements some lenders impose, like stricter credit history rules. Gustan Cho Associates has no overlays, meaning they follow only agency guidelines, which provides more flexibility.

Q: How can Gustan Cho Associates Help Me if I have Credit Challenges?

A: Gustan Cho Associates offers no-overlay loans, expert guidance, and flexible options like FHA, VA, USDA, and non-QM loans. They specialize in helping borrowers with credit history issues and recent late payments.

This blog about “Credit History and Recent Late Payments? Get Help Today” was updated on January 10th, 2025.