Improving Your Credit Scores To Qualify For Mortgage

In this blog, we will discuss and cover improving your credit scores to qualify for mortgage. One of the most frequently asked questions we get daily at Gustan Cho Associates is can I qualify for a mortgagee with bad credit and low credit scores?  You do not need to pay outstanding collection accounts and/or charged-off accounts to qualify for an owner-occupant home mortgage. You can have lower credit scores to qualify for a government and/or conventional loan. However, you do need to meet the minimum credit score requirement on government and conventional loans. Fannie Mae and Freddie Mac require a 620 minimum credit score requirement to qualify for a conventional loan.

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FHA Loans With 500 Credit Scores

FHA Loans With 500 Credit Scores

To qualify for a 3.5% down payment FHA loan, HUD (the parent of FHA), requires 580 credit scores. However, HUD allows borrowers with under a 580 credit score and down to a 500 FICO to qualify for an FHA loan as long as the borrower can get approve/eligible per the automated underwriting system.

Importance of Automated Approval from the Automated Underwriting System

The key to getting an approve/eligible per automated underwriting system (AUS) is for the borrower to have been timely in the past 12 months. All manual underwrites require timely payments in the past 24 months. Borrowers can get an approve/eligible per automated underwriting system with one or two late payments in the past 12 months. In this article, we will discuss and cover how to improve your credit and increase your credit scores so you can get approve/eligible per the automated underwriting system.

Qualifying For A Mortgage With Bad Credit

Borrowers can get qualified for a mortgage with prior bad credit and lower credit scores. If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. HUD is the parent of FHA. HUD realizes that there can be extenuating circumstances in people’s lives. HUD does not penalize potential homebuyers who have had prior credit issues and have re-established themselves. HUD, the parent of FHA, is not a lender and does not fund FHA loans.

The Role of the U.S. Department of Housing and Urban Development (HUD)

The role of the Federal Housing Administration is to promote homeownership by insuring loans originated by private lenders such as banks and mortgage companies in the event the borrower defaults on their FHA loans. This also holds true with Fannie Mae and Freddie Mac on conventional loans. You can qualify for a conventional loan with outstanding collections and/or charged-off accounts. In order for FHA to insure defaulted FHA Loans, the lender needs to be meet the following requirements. The bank and/or lender needs to: meet the following guidelines:

  1. Be FHA Approved
  2. The borrower needs to meet FHA Guidelines
  3. Lenders can have their own FHA Lender Overlays
  4. Overlays are higher standards than those of HUD GUIDELINES

Main Reasons Consumers Have Bad Credit

Here are the reasons why people have bad credit:

  • Unemployment
  • Medical issues
  • Divorce
  • Loss of business

Common Reasons For Bad Credit

There are other reasons why consumers’ credit took a turn for the worse besides the reasons above. Nobody has intent on not paying their bills. However, if there is a gap in the income stream coming in, the consumer cannot make the minimum required monthly payments, and due to that their credit suffers. Homebuyers can qualify for FHA loans after one year of timely payments

HUD Guidelines To Qualify For FHA Loans

Here are HUD’s Guidelines on the qualification requirements to qualify for FHA loans:

  • Minimum of 580 credit scores
  • Borrowers with under 580 credit scores and down to a 500 FICO can qualify for FHA loans
  • Any borrowers with under a 580 credit score need a 10% down payment
  • Borrowers do not have to pay off outstanding collection accounts
  • Charge off accounts do not have to be paid off
  • HUD requires on-time payments for the past 12 months
  • No mortgage late payments in the past 12 months
  • One 30-day late payment in the past 12 months is allowed

HUD Guidelines On Bankruptcy And Housing Events

HUD Guidelines On Bankruptcy And Housing Events

The 2-year waiting period after Chapter 7 Bankruptcy discharged date. Borrowers can qualify for FHA loans one year into the Chapter 13 Bankruptcy repayment plan. The three-year waiting period after foreclosure, deed in lieu of foreclosure, short sale to qualify. If the borrower had a mortgage part of Chapter 7 Bankruptcy, there is a three-year waiting period after the foreclosure, short sale, or deed in lieu was finalized after the Chapter 7 Bankruptcy.

Fannie Mae and Freddie Mac Bankruptcy and Foreclosure Guidelines on Conventional Loans

With conventional loans, the waiting period is 4 years from the discharge date of Chapter 7 Bankruptcy. The recorded date of the foreclosure, deed in lieu, or short sale date does not matter. However, the deed in lieu, foreclosure, short sale needs to be finalized. Max debt to income ratio on conventional loans is capped at 50% DTI.

Debt to Income Ratio Guidelines on FHA, VA, USDA, and Conventional Loans

HUD’s maximum debt to income ratio guidelines can not exceed 46.9% front-end and 56.9% back-end debt to income ratio for borrowers to get AUS approval on FHA loans. Timely payments in the past twelve months are generally required to get approve/eligible per automated underwriting system (AUS). You can have prior bad credit such as outstanding collections, late payments, charged-off accounts but lenders want to see timely payments in the past 12 months. There are no minimum credit score requirements or maximum debt to income ratio caps on VA loans. USDA loans require debt to income ratio no greater than 31% front-end and 43% back-end DTI. Conventional loans require a maximum debt to income ratio of 50% DTI. There is no front-end debt to income ratio requirements on conventional loans.

FHA and VA Manual Underwriting Guidelines

The maximum debt to income ratio on FHA manual underwriting is dependent on the number of compensating factors. Borrowers with zero compensating factors can have a maximum front-end of 31% and a maximum of 43% back-end debt to income ratio. Debt to income ratio can increase to 37% front-end and 47% back-end with one compensating factor. With two compensating factors, borrowers can increase the front-end to 40% front-end and 56.9% back-end debt to income ratio. VA loans and FHA loans have the exact manual underwriting guidelines as VA loans.

Improving Your Credit Scores To Qualify For Mortgage Due To High DTI

Borrowers with bad credit can reduce monthly payment debt if they have a higher debt to income ratio. Car payments and student loan payments are the biggest barriers for borrowers with high DTI. Borrowers with high debt to income ratios can sell their car or trade it in for another car that has a lower monthly auto payment. The car can be more expensive which does not matter but the matter of the monthly payment does matter when calculating debt to income ratios.

Make Payments On Time Is Best Guarantee In Improving Your Credit Scores To Qualify For Mortgage

Borrowers can qualify for FHA Loans with prior bad credit, outstanding collections, past late payments, and charge-offs. However, most lenders want to see timely payments in the past 12 months. Late payments after bankruptcy and foreclosure can be the kiss of death. But not always a deal killer at Gustan Cho Associates. As long as we can get approve/eligible per Automated Underwriting System, we can approve and close the loan. Homebuyers need to be religious in making their monthly payments on time because scrutiny is based on the last 12 months’ payment history.

Never Close Out Revolving Credit Account

Improving Your Credit Scores to Qualify For Mortgage can be done by adding revolving accounts. Many consumers will never get a credit card or use credit after bankruptcy and foreclosure. This is not recommended and no credit or active revolving accounts is one of the main reasons for low credit scores.

When Should You Rebuild Your Credit After Bankruptcy?

When Should You Rebuild Your Credit After Bankruptcy?

The minute consumers have a bankruptcy discharge, they should get three to five secured credit cards. Credit cards are the easiest and fastest way of re-establishing credit after bankruptcy and/or foreclosure. Remember never to be late on any monthly debt payment after bankruptcy and/or foreclosure. There are lenders that WILL NOT extend credit to anyone who has filed bankruptcy and/or had a foreclosure. Many people are proud that they do not have any credit cards and whatever they purchase, they buy it cash. This is not a good policy and hurts the individual because they will not get higher credit scores and established credit tradelines.

Credit Cards In Improving Your Credit Scores To Qualify For Mortgage

Credit cards are the best tool to use to boost one’s credit scores and establish credit. For maximum credit score optimization, three to five secured credit cards with at least $500 credit limits are necessary. The sooner borrowers get their secured credit cards, the sooner they are on their way to great credit. There are many instances where consumers have 700 credit scores one year a bankruptcy and/or foreclosure. If consumers have older credit cards such as a JC PENNY, KOHLS, BEST BUY, GAS CARD and is still active, never close out the aged credit cards.

Secured Credit Cards Makes Credit Profile Stronger As The Card Ages

The older the credit card is, the stronger the borrower’s credit profile is. There are many lenders with Overlays on minimum credit tradelines required. Some require that the credit tradelines have been opened for more than 24 months while others may require 36 months. Consumers do not have to use their credit cards. Just have them and pay their annual fees. Those aged credit tradelines are worth their weight in gold.

Credit Cards For Improving Your Credit Scores To Qualify For Mortgage

Having low credit card balances is the best and fastest way of Improving Your Credit Scores To Qualify For Mortgage. Consumers should not have greater than 10% of the outstanding balance on their credit limit. Consumers with maxed-out credit scores will have their credit scores plummet. Paying down credit card balances to 10% or lower balance to the credit limit is the best way of Improving Your Credit Scores To Qualify For Mortgage.

High Credit Scores Mean Lower Mortgage Rates

High credit scores mean lower mortgage interest rates and better terms. Lenders feel more secure with borrowers with higher credit scores. Users can sign up on FreeCreditClick.com for a free 7-day trial to get their overall credit scores from all 3 credit bureaus! They gain unlimited access to their credit scores, daily credit monitoring, and alerts as well as their scores delivered to them in minutes!

Easiest and Fastest Way to Improving Your Credit Scores To Qualify For Mortgage Loans

In the following paragraphs,  we will cover and discuss improving your credit scores to qualify for mortgage loans. The higher the credit scores, the lower the rates. In the following paragraphs, we will be covering the following points:

  • What determines mortgage rates
  • Credit scores versus pricing on rates
  • The minimum credit score requirements on loan programs

Not every borrower has quoted the same rate. Mortgage rates are determined by lenders based on the borrower’s and property’s layered risk levels.

Prequalify for a mortgage in just five minutes. 

Pricing Mortgage Rates Based on Layered Risk

Pricing Mortgage Rates Based on Layered Risk

Mortgage borrowers’ credit scores are the top deciding factor on whether or not they qualify for a certain mortgage loan program. Credit scores is also the determining factor with mortgage rates.

Mortgage Rates are priced as follows.

  1. Credit scores
  2. Loan level pricing adjustments are based on the risk level of the borrowers and/or the subject property

We will be covering and discussing re-establishing and maximizing credit to qualify for a mortgage.

Improving Your Credit Scores To Qualify For Mortgage Loans And How Credit Scores Versus Mortgage Rates

The higher the borrower’s credit scores, the lower the mortgage rates. Especially with conventional loans. With conventional loans, borrowers need a credit score of 740 or higher to get the best possible mortgage rates in the market. Mortgage rates will be higher with every 20 point drop in credit scores. This is especially on conforming loans.

Credit Score Breakdown Versus Pricing Adjustments on Mortgage Rates

The breakdown of credit scores for conventional loans are as follows below:

  • 760
  • 740
  • 720
  • 700
  • 680
  • 660
  • 640
  • and 620

Those in the 620 to 640 credit scores bracket will be paying the highest mortgage rates and possibly points on conforming loans. The bare minimum credit score to qualify for a conventional loan is 620. A 620 credit score is considered a really bad credit score for conventional loans. But homebuyers can qualify for a conventional loan with a 620 score.

Improving Your Credit Scores To Qualify For Mortgage Loans To Meet Credit Score Requirements on Mortgage Programs

Credit Score Requirements on Mortgage Programs

There are certain minimum credit score requirements to qualify for the various residential mortgage loan programs. For FHA loans, the minimum credit score required to qualify for a 3.5% down payment FHA loan is 580. If credit scores are between 580 and 620 the maximum debt to income is capped at 43% debt to income ratios. If credit scores are at 620 or higher, the debt to income ratio boosts up to 46.9% front end and 56.9% back end DTI to get an approve/eligible per Automated Underwriting System Approval.

Improving Your Credit Scores To Qualify For Mortgage Loans Prior To Starting The Mortgage Process

Sometimes it is worthwhile to try to improve credit scores prior to applying for a mortgage loan in order to get the favorable debt to income ratio caps increased. Borrowers can qualify for an FHA loan with credit scores between 500 and 579. This holds true as long as they can put a 10% down payment on a home purchase. If borrowers can only put a 3.5% down payment on home purchase via FHA loan, they need to improve credit scores to at least 580.

What Are Credit Scores Required on FHA 203k Loans?

FHA 203K loans are acquisition and construction loans all in one. FHA 203K loans require a minimum of 580 credit scores to qualify. Many FHA 203k Rehab Mortgage Lenders have overlays on credit scores with FHA 203k Loans. Most of them require a 640 credit score. Gustan Cho Associates is a lender licensed in multiple states with no lender overlays on government and conventional loans. We have no lender overlays on FHA 203k Loans. Gustan Cho Associates only requires a 580 credit score on FHA 203k rehab loans.

Improving Your Credit Scores To Qualify For Mortgage Loans: VA Home Loans

The Veterans Administration (VA) does not have a minimum credit score requirement on VA loans. However, most VA Lenders Has Overlays on credit scores on VA loans. Most VA lenders will require a 620 to 640 credit score by borrowers although VA does not have a minimum credit score requirement. Gustan Cho Associates Mortgage Group has zero overlays on VA loans. Compensating factors may be required. To get the best VA loan programs available where there are no overlays or rental verification required, one should have higher credit scores. Gustan Cho Associates can give borrowers tips on Improving Your Credit Scores To Qualify For Mortgage Loans.

USDA Mortgage Home Loans

USDA loans are a great loan program for first-time homebuyers in rural America. The maximum debt to income ratio for USDA loans is 29% front end and 41% back end DTI. Only designated areas by USDA Rural Development are eligible. There are maximum household income caps to be eligible for USDA loans. USDA loans are an excellent mortgage loan program that offers 100% financing and requires no down payment on behalf of the home buyer. There is a 2% funding fee of the loan amount which can be rolled into the balance of the loan.

Improving Your Credit Scores To Qualify For Mortgage Loans To Qualify For Condotel Financing

Condotel mortgage loans are portfolio mortgage loans and the minimum credit score required to qualify for condotel mortgage loans is 680. If borrowers have lower scores, we can help improve your credit scores to qualify for mortgage loans on condotels.

Improving Your Credit Scores To Qualify For Mortgage Loans On Jumbo Mortgages

To qualify for Jumbo Loans, Jumbo mortgage lenders would like to see high credit scores from Jumbo mortgage loan borrowers. Traditional jumbo loans require a 700 credit score. However, with lower credit scores borrowers can still qualify. To qualify for 95% loan to value jumbo loans, you need a minimum of 720 credit scores. Gustan Cho Associates has NON-QM Jumbo Mortgages with 90% LTV with 680 credit scores. There are quick fixes in boosting credit scores prior to the start of the mortgage process.

Improving Your Credit Scores To Qualify For Mortgage Loans For Commercial Loans

Non-QM and Bank Statement Mortgage Loans for Self Employed Borrowers

Most commercial mortgage lenders want to see their mortgage loan applicants have a minimum of 640 credit scores. There are two types of commercial loans: Recourse and non-recourse commercial loans. Non-recourse commercial loans is when the property is underwritten and the borrower has no liability. Recourse loans is when teh borrower personally guarantees the commercial loan.

Non-QM and Bank Statement Mortgage Loans for Self Employed Borrowers

NON-QM Loans require a minimum of 640 credit scores for 20% down payment home purchase loans. 660 credit scores require a 15% down payment. Borrowers with a 680 FICO require a 10% down payment. Bank Statement Mortgage Loans For Self Employed Borrowers with a 20% down payment requires a 620 FICO. 10% down payment bank statement mortgage loans for self-employed borrowers require a 720 credit score. Gusan Cho Associates offers 10% down payment traditional jumbo loans for borrowers with at least a 660 credit score and no higher than a 50% debt to income ratio.

Qualifying for a Mortgage with a Lender with no Overlays

Home Buyers who need to qualify for a mortgage with a mortgage company licensed in multiple states with no lender overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151. Or text us for a faster response. Borrowers can also email us at [email protected] Gustan Cho Associates Mortgage Group has no overlays on FHA, VA, USDA, and Conventional Loans. We are available 7 days a week, evenings, weekends, and holidays.

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