This blog will cover qualifying for a home mortgage with bad credit. One of the frequently asked questions by our clients at Gustan Cho Associates is, what is bad credit in mortgage terms? What does it mean to have bad credit? Bad credit, in general, can have a lot of meanings. Bad credit mortgage loans are home loan programs where the borrower had prior bad credit such as late payments, outstanding collections, charged-off accounts, prior bankruptcy, prior foreclosure or short sale, and other derogatory credit tradelines. The following paragraphs cover how to qualify and get approved for a home mortgage with bad credit.
How To Get Approved For a Home Mortgage With Bad Credit?
The key to qualifying for a home mortgage with bad credit is the word PRIOR. Lenders will offer a home mortgage with bad credit. However, borrowers must have had timely payments for the past twelve months. You do not have to pay old collection and charge-off accounts; having a bad credit history is not a problem. However, lenders want to see the mortgage loan applicant reestablish themselves and have been timely on all payments in the past twelve months. We will take a step further and cover qualifying for a home mortgage with bad credit.
How To Qualify For a 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 Gustan Cho Associates that specialize in helping first time home buyers seeking a home mortgage with bad credit. Home Buyers can get a home loan with a prior bankruptcy, a prior foreclosure, a prior deed in lieu of foreclosure, and a prior short sale. Home Buyers 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. In this article, we will discuss and cover Home Mortgage With Bad Credit Lending Guidelines.
Advice In Getting Approved For Home Mortgage With Bad Credit
Homebuyers 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. 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 the financial crisis does happen to the best of us. Some of the reasons why people go through periods of bad credit are when they had the following types of extenuating circumstances:
- lost of business
- death in the family
- medical issues
Recovery Of Bad Credit And Re-Establishing Credit To Qualify For Mortgage
Most folks eventually recover from their financial setbacks and get back on their feet. Unfortunately, their credit scores have taken a plunge. 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
- Business loss
- Death in the family
- Medical issues
What Mortgage Underwriters Look For on Credit Reports After Bad Credit
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
If you had bad credit all of life, whether in good times or bad times, and are recently late on 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. 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 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 underwriters 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 credit if you have bad credit and the best way to re-establish 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 plus after one year after a bankruptcy and/or foreclosure. 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
Most lenders will frown upon the fact that the mortgage applicant had late payments after a bankruptcy or foreclosure. .Almost all 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. 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. Every loan program has its own waiting period requirements after bankruptcy and foreclosure. Non-QM loans one day after bankruptcy and foreclosure does not have a waiting period requirements.
HUD Guidelines After Bankruptcy on FHA Loans
There is a two year mandatory waiting period after the discharge date of the bankruptcy to qualify for an FHA insured home loan. There is no waiting period to qualify for an FHA loan after a Chapter 13 Bankruptcy discharged date. A person can qualify for an 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.
HUD Guidelines After Foreclosure on FHA Loans
There is a three year mandatory waiting period after a housing event to qualify for FHA loans: A housing event is a foreclosure, a deed in lieu of foreclosure, or a short sale. The waiting period start date is not when the homeowner surrendered the house but the recorded date of the foreclosure. The waiting period after a deed in lieu of foreclosure start date is the recorded date of the foreclosure which is the date the name of the deed has changed ownership. 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.
Fannie Mae Guidelines After Foreclosure and Short Sale
Fannie Mae and Freddie Mac require 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. If you had a mortgage included in bankruptcy, the waiting period is four years from the discharge date of the bankruptcy. The date of the foreclosure date does not matter. However, the mortgage cannot be reaffirmed.
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.
2022 UPDATE on Qualifying For Home Mortgage With Bad Credit
This BLOG was updated on December 21st, 2022. Due to non-QM loans one day out of bankruptcy or foreclosure, homebuyers who do not qualify for government and conventional loans due to not meeting the waiting period requirements, can now qualify. 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. Gustan Cho Associates offers the following:
- FHA loans with credit scores down to 500 FICO
- No overlays on FHA loans
- VA loans with credit scores down to 500 FICO
- 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
- Non-QM and alternative mortgage loan options such as bank statement loans, no-doc mortgage loans, stated-income mortgages, DSCR mortgage loans, ITIN and Foreign National Mortgages, and hundreds of other mortgage loan options for owner-occupant homes, second homes, and investment properties.
The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. Contact us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Borrowers can email us at email@example.com.
December 21, 2022 - 7 min read