First Time Home Buyers With Bad Credit Mortgage Guidelines

This BLOG On First Time Home Buyers With Bad Credit Mortgage Guidelines Was UPDATED On January 29th, 2019

Many first time home buyers with bad credit are under the following impression:

Need high credit scores to qualify for mortgage:

  • Not true
  • FHA, VA, USDA requires 580 credit scores
  • Fannie Mae and Freddie Mac require 620 on Conventional Loans

Cannot have outstanding collection and charged-off accounts:

  • Outstanding collections and charged off accounts do not have to be paid to qualify for home loans
  • Need to have 20% down payment on a home purchase
  • FHA requires 3.5% down
  • VA and USDA loans do not require any down payment and offer 100% financing
  • Conventional Loans require 3% to 5% down payment

Need to have been with the same job for the past 2 years:

  • Can have gaps in employment and qualify for government and conventional loans

In this article, we will cover and discuss how first time home buyers can qualify for a mortgage with bad credit.

How To Start The Mortgage Application Process

First Time Home Buyers with bad credit, the first step should be to consult a mortgage lender. Not all lenders have the same mortgage requirements. Most lenders have overlays. First Time Home Buyers With Bad Credit should consult with a lender with no lender overlays. Gustan Cho Associates has zero overlays on government and conventional loans.

  • Home Buyers need feel comfortable with their loan officer
  • They should also consult with a real estate agent
  • Decide what area they want to purchase their home
  • Not all mortgage lenders have the same lending requirements
  • Most mortgage lenders have mortgage lender overlays 
  • Overlays are additional lending guidelines on top of FHA, VA, USDA, Fannie Mae, Freddie Mac
  • There are lenders with no mortgage overlays

Gustan Cho Associates has zero overlays on government and conventional loans.

Mortgage Pre-Qualification And Pre-Approval Process

Mortgage loan originator will go over the following:

  • Income
  • Credit
  • Credit report
  • Credit scores

Loan Officer with goes over monthly debts to determine what is the maximum amount borrower can afford.

  • Just because mortgage loan originator gives  a maximum monthly payment cap does not mean that borrowers can comfortably afford the housing expenses
  • That figure is a number that borrowers cannot surpass for qualification purposes
  • The mortgage loan originator will then analyze mortgage application and credit report to see if a borrower currently qualifies for a mortgage loan
  • Many mortgage loan originators will have the first time home buyers prep program

They will counsel and guide mortgage loan applicants with bad credit.

FHA Loans For First Time Home Buyers With Bad Credit

FHA Loans is the most popular home loan program in the U.S. HUD, the parent of FHA, sets Lending Guidelines on FHA Loans. FHA Loans have lenient credit and debt to income requirements than Conventional Loans.

  • Need current verifiable income which is likely to continue for the next three years
  • Minimum credit scores of 580 score to qualify for a 3.5% down payment FHA Loans
  • Credit scores between 500 and 579, borrowers need a 10% down payment
  • 43% is maximum debt to income ratios for scores under 620
  • Credit scores for 620 or higher, the debt to income ratios can be capped at 46.9% front end and 56.9% back end
  • Borrowers cannot under any late payments in the past six months
  • Majority of  lenders do not allow any late payments in the past 12 months

Mortgage applicants also cannot have any bank overdrafts in the past 12 months.

Timely Payments In The Past 12 Months Versus Prior Bad Credit

Home Buyers can have prior bad credit that is over a year old including the following:

  • Unpaid collections
  • Charge offs
  • Late payments
  • Bankruptcy
  • Foreclosure
  • Deed in lieu of foreclosure
  • Short sale

Mortgage Guidelines On Outstanding Judgments And Tax-Liens

Judgments and tax liens:

  • Borrowers do not have to pay outstanding judgments and tax liens 
  • Need written payment agreement with judgment credit and/or IRS on tax liens
  • Three months seasoning of making payments is required
  • Need to provide lender three months canceled checks
  • Or bank statements showing that proof of at least three months seasoning

Waiting Period To Qualify For VA and FHA Home Loans After Bankruptcy And Housing Event

The Veterans Administration and Housing and Urban Development has similar mortgage guidelines on waiting period to qualify after bankruptcy and/or housing event on VA and FHA Loans;

There are mandatory waiting periods after the following:

Bankruptcy:

  • Two year waiting period after Chapter 7 Bankruptcy discharged date to qualify for VA and FHA Loans
  • Borrowers can qualify one year into a Chapter 13 Bankruptcy Repayment Plan on VA Home Loans and FHA Loans
  • No waiting period after Chapter 13 Bankruptcy discharged date on VA Loans and FHA Loans

Foreclosure:

  • The three-year waiting period after the recorded date of foreclosure on FHA Loans
  • Two year waiting period after foreclosure on VA Loans

Short sale:

  • Three year waiting period after short sale date on FHA Loans
  • Two year waiting period after the short sale on VA Loans

Deed in lieu of foreclosure requirements:

  • The three-year waiting period after the recorded date of deed in lieu of foreclosure on FHA Loans
  • The two-year waiting period after a deed in lieu of foreclosure on VA Loans

First Time Home Buyers With Bad Credit must have judgments and/or tax liens paid off or have a payment agreement with at least three months of timely payments:

  • Provide three months of canceled checks

Two Important Factors For First Time Home Buyers With Bad Credit

Income and credit are the two most important factors that determine mortgage loan approval.

  • Home Buyers who have income but bad credit can qualify a mortgage approval but the key question is when
  • If credit is really bad and had multiple recent late payments, then the option may be to wait at least six months payment history
  • Or they might need to boost up credit scores by adding positive credit such as getting a few secured credit cards
  • However, those who have excellent credit but no reportable income, they will have a problem qualifying for any type of home loans
  • Mortgage lenders require qualified documented income
  • The reason is that they need to know that they are able to be able to make the minimum required mortgage payment
  • Cash income does not count and all income needs to be qualified income
  • Income needs to be verified by the Internal Revenue Service

Income But Bad Credit

Mortgage Borrowers with qualified income but terrible credit and recent late payments can enroll in our First Time Home Buyers With Bad Credit Prep Program with Gustan Cho Associates Mortgage Group. We help all of our First Time Home Buyers With Bad Credit qualify for one of our mortgage loan programs.

  • Any First Time Home Buyers With Bad Credit can take advantage of our free First Time Home Prep Program
  • The First Time Home Prep Program was created for those who have income with bad credit
  • We prepare First Time Home Buyers with bad credit qualify for a mortgage loan 

With our First Time Home Prep Program, the mortgage loan borrower will be advised on the following:

  • How to repair their credit
  • Improve their credit scores
  • Manage their finances to prep them in becoming a first time home buyer or home buyer 

For those who just had a bankruptcy discharge or had a recent foreclosure, deed in lieu of foreclosure, or short sale, the time is now to start re-establishing credit. Borrowers who need to qualify for a mortgage with bad credit with a direct lender with no overlays on government and conventional loans, please contact Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at [email protected]