Going Through Credit Repair To Qualify For Mortgage

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Going Through Credit Repair To Qualify For Mortgage

This BLOG On Going Through Credit Repair To Qualify For Mortgage Was UPDATED On July 2nd, 2018

Is going through credit repair to qualify for mortgage recommended?

  • Consumer’s credit scores is what determines whether or not they qualify for a particular mortgage loan program
  • There are minimum credit score requirements for all loan programs
  • For example, to qualify for a 3.5% down payment home purchase FHA Loan , the minimum credit score required is 580
  • Need a 620 credit score to qualify for a Conventional Loan
  • Lenders do not expect perfect credit
  • But they do expect minimum credit scores that is mandated by HUD, VA, USDA, Fannie Mae, or Freddie Mac in meeting the minimum guidelines with regards to credit scores
  • Credit Repair to qualify for mortgage often times is not needed for those home buyers or borrowers with no outstanding collection accounts
  • However, borrowers with many outstanding collection accounts, credit repair to qualify for mortgage is highly can work but do expect delays in qualifying for mortgage and there are risks associated with credit disputes

Qualifying For Mortgage With Bad Credit 

Bad credit happens to the best of us.

  • Most consumers make their payments on time and have regards to credit
  • However, there are times where consumers go through extenuating circumstances such as the following:
    • business loss
    • loss of job
    • gaps in employment
    • medical issues
    • other issues where their income stream is interrupted and they cannot make their schedule payment obligations to creditors

Borrowers can qualify for mortgage with bad credit. They do not have to pay outstanding collections and charged off accounts. Lenders with no overlays normally are concerned with timely payments in past 12 months. Credit Repair is often not necessary to qualify for mortgage with bad credit.

Is Credit Repair To Qualify For Mortgage Necessary?

Unfortunately, most creditors will report their payment history to the three credit reporting agencies and this will hurt the consumer’s credit scores.

  • Derogatory items will stay on consumer credit reports for a period of 7 years from the date of last activity
  • Bankruptcies are reported for a period of 10 years
  • One thing consumers need to understand is that prior bad credit will affect credit scores when it is first reported
  • But as the bad credit item ages, it will have less and less impact on the consumer’s credit report
  • Just because a person has filed bankruptcy or had a foreclosure two or three years ago, that person can have a 700 credit score if they have added positive credit and have re-established credit
  • Many times credit repair is a waste of money
  • Spending thousands of dollars to remove and delete older collection items or derogatory credit is not necessary to qualify for mortgage
  • Many times credit repair will really hurt borrowers whey they are applying for a mortgage or intend in going through the mortgage application and approval process
  • Home buyers who want to do credit repair to qualify for mortgage, do it way prior to applying to applying for a mortgage
  • Doing credit repair to qualify for mortgage during the mortgage process will halt the mortgage approval process
  • This because borrowers cannot have credit disputes during the mortgage process
  • All credit disputes needs to be retracted to qualify for mortgage during mortgage process
  • We will discuss these issues in the following paragraphs

Home Loan With Bad Credit: Is Credit Repair To Qualify For Mortgage Needed?

Borrowers can qualify for mortgage with prior bad credit, low credit scores, open collections, and prior bankruptcy and foreclosure.

  • Many home buyers, especially first time home buyers, freak out when they are ready to purchase a home because they have prior bad credit
  • Borrowers can qualify for a mortgage loan without having to pay off old collection accounts
  • Hiring a credit repair company to delete off old collection accounts and spending hundreds if not thousands of dollars is not necessary and can back fire
  • Please consult with a specialty mortgage lender like myself who specializes in home loans with bad credit

Good Credit, Bad Credit, No Credit: Review Your Credit Report

Whether you have stellar credit or bad credit, review your credit report at least once a year for errors.

  • Every consumer, by law, is allowed on free annual credit report from each of the three credit reporting agencies:
    • Transunion
    • Experian
    • Equifax
  • Consumers can request a free credit report by visiting Annual Credit Report www.annualcreditreport.com
  • Credit reporting agencies are not perfect and a percentage of consumer credit reports do contain errors
  • Review credit report carefully and make sure the credit bureaus are reporting everything correctly
  • Make sure they are not reporting anything late that you are not late on or have any derogatory that do not belong to you
  • If there are errors, need to contact the credit bureaus or send him a certified mail along with documentation that the creditor and/or credit bureaus made a mistake in reporting the credit item erroneously

Past Bad Credit: How Bad Is It?

If you have unpaid collection accounts, you can still qualify for a mortgage loan with unpaid collection accounts.

  • Mortgage lenders ignore medical collection accounts even with larger unpaid balances
  • Do not pay any old collection accounts, unless it is a pay for delete
  • This is because by paying off old unpaid collection accounts, it will re-activate the old dormant collection account
  • Credit scores can plummet because the credit scoring system will update it like it is a new fresh collection account

Consumers with unpaid non-collection accounts, as long as the total aggregate unpaid balance is $2,000 or less, than they have nothing to worry about.

  • However, if total unpaid credit balance is $2,000 or greater, then the mortgage underwriter will take 5% of the unpaid collection balance and use it towards calculating borrowers debt to income ratios
  • For example, here is a case scenario:
    • borrowers has an aggregate unpaid collection balance of $10,000
    • 5% of the $10,000, or $500 will be used as a monthly debt obligation in calculating monthly debt to income ratios
    • this is the case even though borrower do not have to pay for it
    • Borrowers do not have to pay off the $10,000 to get a mortgage approval
    • But the 5% used to qualify for income may be a problem for higher debt to income ratio borrowers
    • If borrowers make a written payment agreement with the creditor, the monthly payment agreement can be used in lieu of the 5% calculation
    • Borrowers a lot of unpaid collection accounts with high balances, a credit repair program may be an option but there are risks with credit repair

Risks Associated With Credit Repair To Qualify For Mortgage

Borrowers can have credit disputes on medical collections and non-medical collections with zero balance. All other credit disputes is not allowed. The risk with credit disputes is when consumers retract credit disputes, their credit scores can drop significantly.

  • Borrowers may not need to spend hundreds of dollars for credit repair to qualify for a mortgage
  • Before entering into a credit repair program, please consult with a mortgage loan originator who is an expert in home loans with bad credit
  • The only time I recommend credit repair for home buyers or homeowners seeking a refinance mortgage is when they have large unpaid collection accounts where it impacts their debt to income ratios
  • Also, borrowers with credit cards or revolving credit accounts, make sure that you do not have those credit cards maxed out
  • Keep them with a balance no greater than 10% of the credit limit
  • A maxed out credit card will affect credit scores

Reason Why Retracting Credit Disputes Drops Credit Scores

Whenever consumers dispute a negative credit tradeline, credit bureaus automatically remove the disputed tradeline from the credit scoring formula.

  • The derogatory item remains on the credit report, but the scoring formula takes that negative item from the credit scoring formula
  • Therefore, the credit bureaus treats the negative item like it does not exist
  • Doing so, increases consumer credit scores
  • When consumers retract the credit dispute, the credit bureaus will add the negative item back to the credit scoring formula and treats it like a new derogatory
  • This is the cause of consumer credit scores dropping when credit disputes are retracted
  • This often automatically disqualifies borrowers from mortgage because they may no longer meet the minimum credit score requirement

Borrowers with credit disputes and who need to qualify for a mortgage with a direct lender with no overlays on government and conventional loans please contact us at GCA Mortgage Group at 262-716-8151 or text us for faster response. We are experts in helping borrowers get mortgage approvals where other lenders cannot. We are available 7 days a week, evenings, weekends, and holidays.

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