Qualifying For Home Loan With Bad Credit

Many home buyers, especially first time home buyers, do not realize that they qualify for home loan with bad credit. Many potential home buyers are not aware of the major mortgage industry overhaul and new mortgage regulations after the 2008 Real Estate and Mortgage Meltdown that the government has created and implemented where home buyers can now qualify for home loan with bad credit. Although many banks and mortgage lenders have minimum credit score requirements of 640 FICO credit scores due to their mortgage lender overlays to qualify for mortgage, other mortgage lenders, like myself, can qualify mortgage loan borrowers with credit scores under 620 FICO credit scores. We have no mortgage lender overlays and the minimum credit score required for a 3.5% down payment FHA home loan is 580 FICO credit score. Home buyers with under 580 FICO credit scores can also qualify for a FHA home loan, however, anyone with a credit score of under 580 FICO needs a 10% down payment.

Home Loan With Under 620 FICO Credit Scores

There are various types of mortgage loan programs. FHA Loans, VA Loans, USDA Loans, Conventional Loans, and Jumbo Loans. For mortgage loan borrowers with credit scores under 620 FICO, they only have limited options. The only solid mortgage loan program that they can qualify with credit scores under 620 FICO  are FHA Loans. The Federal Housing Administration allows credit scores as low as 580 FICO for a 3.5% down payment home purchase FHA Loan. Prior bad credit is acceptable and older collections do not have to be paid off in order to qualify for a FHA Loan. Charge offs and medical collections do not count. Mortgage rates for mortgage loan borrowers with credit scores under 620 FICO are slightly higher and the debt to income ratio for mortgage loan borrowers with credit scores under 620 FICO is capped at 43% whereas the debt to income ratio for borrowers with credit scores of higher than 620 FICO is 56.9%. Verification of Rent may be required for mortgage loan borrowers with credit scores of under 620 FICO if the Automated Underwriting System requires it.

With conventional loan programs, the minimum credit score requirement is 620 FICO. USDA Loans normally require a 640 FICO credit score and VA Loans depends on what the Automated Underwriting System states. Normally, with VA Loans, most VA mortgage lenders want a 620 FICO credit score or higher.

How Mortgage Lenders View Lower Credit Scores

Generally, credit and credit scores will affect mortgage rates. The lower a mortgage loan borrower’s credit scores are, the higher the risk mortgage lenders view the borrower. The higher the risk, the higher the mortgage rates. The higher the risk, the mortgage lender will scrutinize the mortgage loan applicant even more to make sure that the mortgage loan applicant has the ability to repay the mortgage loan and not default on their credit obligations and not be late on their mortgage loan payments. Job stability is looked at. Compensating factors such as longevity on the job, reserves, debt to income ratios, verification of rent, and payment shock are factors that the mortgage lender will examine carefully.

What Does Home Loan With Bad Credit Mean?

Home Loan With Bad Credit means that the mortgage loan borrower has had prior bad credit and has lower credit scores in the recent past due to extenuating circumstances, however, the mortgage loan borrower has re-established their credit and had no late payments in the past 12 months. The mortgage loan underwriter will not just look at the mortgage loan borrower’s credit scores but will also carefully review the overall credit history and payment history. The mortgage loan underwriter will want to know the reason why the mortgage loan borrower had period of bad credit and may want a detailed letter of explanation as to the circumstances. Some legitimate reasons and extenuating circumstances may be due to loss of job, loss of business, divorce, medical reasons, or illness. If the mortgage loan borrower had total disregard for credit such as not paying their bills even when they could have afford it and had employment and has been constantly late in their monthly debt obligations in the past 12 months, there is no way they will qualify for a mortgage loan. Mortgage lenders do understand that people do go through financial hardship and due to the extenuating circumstances such as loss of job, their income stops and that is why they cannot pay their bills. However, the want them to recoup and re-establish their credit and start making good on their payments. How a person has paid their monthly debt obligations is a great indicator on how they will pay their future bills, especially their new mortgage payments.

 

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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