Qualifying For Home Mortgage With Bad Credit

Qualifying For Home Mortgage With Bad Credit

Many first time home buyers believe that you can only get a home loan with good credit.  This is not the case. There are many national mortgage lenders like myself that specialize in helping first time home buyers seeking a home mortgage with bad credit.  You can get a home loan with a prior bankruptcy, a prior foreclosure, a prior deed in lieu of foreclosure, and a prior short sale.  You can also get a home mortgage with bad credit such as open collections, charge offs, late payments, judgments, tax liens, repossessions, and high debt to income ratios.

Advice In Getting Approved For Home Mortgage With Bad Credit

Home buyers can qualify for a home mortgage with bad credit.  What is bad credit?

  • Bad credit with regards to qualifying for home mortgage with bad credit is when a person has had a time of financial problems and their credit and credit scores have suffered due to the fact that they could not meet their minimum monthly debt payment obligations. 
  • Mortgage lenders do realize that financial crisis do happen to the best of us. 
  • Some of the reasons why people go through periods of bad credit is when they are unemployed, when they lose their business, when they go through a divorce, when they have a death in the family, and/or when they have medical issues. 
  • Most folks eventually recover from their financial setbacks and get back on their feet. 
  • Unfortunately, their credit scores have taken a plunge and their credit report reflect the period of bad credit. 
  • The bad credit on a person’s credit report stays on their credit report for a period of 7 years from the date of last activity. 
  • Chapter 7 bankruptcies remain on a person’s credit report for a period of 10 years from the date of the bankruptcy discharge date. 
  • After these periods, the three credit reporting agencies need to remove them off the consumer’s credit report by federal law.

Is Bad Credit An Isolated Incident Or Financial Irresponsibility?

Lenders understand that people can go through periods of hardship. One reason why lenders scrutinize a consumer’s credit is because a person’s previous habit is a good indicator of their future habit patterns. If a person had a great payment history in paying their bills, the likelihood of them paying their bills timely in the future is likely. Getting a home loan with bad credit is possible and many mortgage lenders specialize in approving home loans with bad credit.  However, this is different than those folks who have total disregard for credit.

If you had periods of bad credit due to the following:

  • Periods of unemployment
  • Divorce
  • Business loss
  • Unemployment
  • Death in the family
  • Medical issues

It is understandable to have periods of bad credit due to extenuating circumstances like the reasons listed above. However, most people recover and that is what lenders want to see. They understand that a borrower can have had periods of bad credit but want to see that they have re-established their credit. Showing that you have been timely for the past 12 months after periods of bad credit is fully understandable and shows that you are financially responsible. However, if you had bad credit all of your life, whether in good times or bad times, and are recently late on your payments while you are still employed, you will have a hard time convincing a mortgage underwriter that you will be timely with your new mortgage payments.  Mortgage lenders will want to see why you have had bad credit and will require a detailed letter of explanation on the extenuating circumstances of why you went through the period of bad credit.

Payment History After Bankruptcy And/Or Foreclosure

Million of Americans were victims of the Financial Collapse of 2008 where they lost their jobs and businesses and were forced into bankruptcy or foreclosure.  Mortgage lenders understand this fact and have implemented new mortgage rules and guidelines to help folks get a home loan with bad credit.  Mortgage lenders want to see that the mortgage applicant has since recovered from their financial crisis and period of bad credit by having them re-establish their credit.  It is normally very tough to re-establish your credit if you have bad credit and the best way to re-establish your credit is by adding positive credit to your bad credit history.

Re-Establishing Credit After Bankruptcy And Foreclosure

The best way to do this is by getting 3 to 5 secured credit cards with $500 credit balance.  Each secured credit should boost the person’s credit score by at least 20 or more points.  The person’s credit score should also improve as their payment history ages.  I have seen many folks have credit scores of 700 FICO plus after one year after a bankruptcy and/or foreclosure.  Mortgage lenders do not want to see any late payments after a person has filed bankruptcy or had a prior foreclosure.  Having one or two late payments after a bankruptcy or foreclosure is not a deal breaker but most mortgage lenders will frown upon the fact that the mortgage applicant had late payments after a bankruptcy or foreclosure.  Almost all mortgage lenders will require that a mortgage loan applicant have a timely payment history for the past 12 months.  Again, one late payment in the past 12 months is not a deal breaker but a good detailed letter of explanation will be required.

Qualifying For Home Mortgage After Bankruptcy And Foreclosure

There are mandatory waiting period requirements after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale in order to qualify for a residential mortgage loan.

  • There is a two year mandatory waiting period after the discharge date of the bankruptcy to qualify for a FHA insured home loan. 
  • There is no waiting period to qualify for a FHA Loan after a Chapter 13 Bankruptcy discharged date.
  • A person can qualify for a FHA Loan one year into a Chapter 7 Bankruptcy.
  • There is a four year waiting period to qualify for a Conventional Loan after the discharged date of a Chapter 7 Bankruptcy.
  • There is a three year mandatory waiting period after the recorded date of a foreclosure and/or a deed in lieu of foreclosure for those with a prior foreclosure and/or deed in lieu of a foreclosure to qualify for a FHA insured mortgage loan. 
  • There is a three year waiting period after the short sale date reflected on the HUD settlement statement for those who had a prior short sale sale. 
  • Fannie Mae and Freddie Mac requires a four year waiting period to qualify for a Conventional Loan after a short sale or deed in lieu of foreclosure. 
  • The waiting period is seven years after a regular foreclosure to qualify for a Conventional Loan per Fannie Mae and Freddie Mac Guidelines.
  • Again, all mortgage lenders will want to see that the mortgage loan applicants with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale to have re-established credit as well as no late payments after the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

FHA BACK TO WORK EXTENUATING CIRCUMSTANCES DUE TO AN ECONOMIC EVENT

Back in August 15, 2013,  HUD, The United States Department of Housing and Urban Development, has launched the FHA BACK TO WORK EXTENUATING CIRCUMSTANCES DUE TO AN ECONOMIC EVENT mortgage loan program.  The Back to Work mortgage loan program waives the standard 2 to 3 year waiting period after a bankruptcy and foreclosure and provides an opportunity to home buyers to qualify for a residential mortgage loan only after a one year waiting period after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.  However, there are strict qualification requirements to qualify for FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program.  In order to qualify for the Back to Work mortgage program, the candidate needs to have been unemployed or underemployed for at least six months and had at least a 20% reduction in their household income  prior to the initiation of the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

Credit Requirements

The Back to Work mortgage applicant needs to have had good credit and credit payment history until the loss of their job.  Credit will drop and bad credit history is acceptable during the period of unemployment, however, no late payments, re-established credit, and job stability will be required after the Back to Work mortgage loan applicant gets back to work.  The Back to Work mortgage loan applicant needs to complete a one hour HUD approved housing course and get a housing course completion certificate signed by the housing counselor.  The Back to Work mortgage loan applicant cannot officially apply for a residential mortgage loan until 30 days after the date of completion dated on the housing certificate.  If you feel you qualify for FHA Back to Work Extenuating Circumstances due to an economic event, please contact me at gcho@gustancho.com or call me at 262-716-8151.

2017 UPDATE On Qualifying For Home Mortgage With Bad Credit

This BLOG was updated on March 7, 2017. The FHA Back To Work Mortgage Program turned out to be a total disaster and most loan officers do not want to touch it and many lenders have discontinued with this loan program. The Gustan Cho Team at CrossCountry Mortgage offers the following:

  • FHA Loans with credit scores down to 580 and no overlays on FHA Loans
  • VA Loans with credit scores down to 580 FICO and no overlays on VA Loans
  • No overlays on Conventional Loans
  • 21 day closings
  • Accelerated Buyer Mortgage Program where it is a full mortgage loan approval without a subject property
  • We are available 7 days a week, evenings, weekends, and holidays

Call us at 262-878-1965 or text Gustan Cho at 262-716-8151. You can email us at gcho@gustancho.com.

 

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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