Mortgage Loan With Bad Credit And Outstanding Collections

This BLOG On Qualifying For Mortgage Loan With Bad Credit Was UPDATED On May 14, 2017

Millions of Americans have been victims of the subprime and financial crisis of 2008.

  • The real estate and credit crisis of 2008 have affected almost every American family. 
  • People have lost their jobs, they lost their businesses, and they have lost their homes.
  • Bankruptcy filings and foreclosures hit historical highs.
  • Some folks did not have enough money to file bankruptcy and dragged on with their lives dealing with bill collectors and countless of collections, charge offs, charge offs on their credit report
  • Folks that I talk to today who have been financially crushed are still recovering and rebuilding from their loses
  • Many have recovered with new jobs in different fields but still have bad credit
  • The 2008 Great Recession was the longest recession in U.S. history

Good news is many have recovered and so did the housing market. Home buyers can qualify for mortgage loan with bad credit without having to pay off or settle outstanding unpaid collections and charge off accounts with FHA Loans.

Bad Credit Is Like A Hangover: Heals With Time

There is hope for people who got hurt financially due to the financial collapse of 2008 and have lost their homes to bankruptcy or foreclosure. Credit scores fluctuate and just because someone has low credit scores today does not mean that they will have low credit scores a year from now.

Here Are Some Facts On Credit Scores:

  • Credit Scores will improve over time even if consumers do nothing about it.
  • Credit Scores will increase as the bad credit on the credit report ages.
  • A bad credit record stays on consumer credit reports for a 7 years, except for a bankruptcy, which stays on credit report for 10 years. 
  • I have seen consumers who had credit scores under 500 but now their credit scores are in the mid 600s just a year later where they can qualify for FHA Loans.

Home Buyers With Prior Bankruptcy

Home Buyers can qualify for mortgage loan with bad credit and prior bankruptcy.

Here are mortgage guidelines in qualifying for mortgage after bankruptcy:

  • 2 year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA Loans, VA Loans, USDA Loans
  • Home buyers can qualify for FHA, VA, USDA Loans one year into a Chapter 13 Bankruptcy Repayment Plan with Trustee Approval
  • There is no waiting period to qualify for a FHA, VA, USDA Loans after a Chapter 13 Bankruptcy discharged date or Chapter 13 Bankruptcy Dismissal Date
  • There is a four year waiting period to qualify for Conventional Loans after Chapter 7 Bankruptcy discharged date 
  • There is a two year waiting period to qualify for Conventional Loans after Chapter 13 Bankruptcy discharged date
  • There is a four year waiting period to qualify for a Conventional Loans after a Chapter 13 Bankruptcy Dismissal Date
  • NON-QM Loans and Alternating Financing Programs do not have any waiting period after bankruptcy

Minimum Credit Score Requirement

There are various different types of mortgage loan programs and they all have minimum credit score requirements. The best loan program for mortgage loan with bad credit are FHA Loans.

Here are the FHA Guidelines On Credit Scores

  • FHA Requires a 580 credit score for 3.5% down payment home purchase loans
  • Borrowers can qualify for FHA Loans with credit scores under 580 FICO but need 10% down payment
  • There are mortgage lenders that require minimum credit scores of 620 to 640
  • Lenders who require higher credit score requirements than the 580 FICO required by FHA are lenders who have lender overlays
  • Overlays are additional mortgage guidelines that is above and beyond those of HUD that is set by individual lenders
  • FHA is the best loan program for home buyers needing mortgage with bad credit

Collections And Charge Off Accounts

There are countless of borrowers who contact me and tell me that they were denied for a loan by a lender due to having outstanding collections and charge offs. Collection and charge off accounts do not have to be paid off to qualify for FHA Loans.

Here Are Bullet Points On HUD Guidelines On Collections And Charge Off Accounts

  • Outstanding collections and charge offs do not have to be paid off to qualify for FHA Loans
  • Non-Medical Collections with outstanding balances of $2,000 or greater, underwriter needs to take 5% of the outstanding unpaid collection account balance and use it to debt to income ratio calculations
  • Medical collections and charge off accounts are exempt from the 5% DTI calculations
  • Borrowers can set up a written payment agreement with creditors and that agreed upon payment will be used in lieu of the 5%

Preparing For Mortgage Loan With Bad Credit

Borrowers who need mortgage loan with bad credit need to consult with a lender who has little to no overlays.

  • Borrowers who do not quite qualify for mortgage due to bad credit or recent late payments, can start working on their credit. We will help you.
  • The Gustan Cho Team helps borrowers to increase scores and work on getting them qualified as soon as possible for a mortgage. 
  • It is never too early to seek the advise of a mortgage consultant to prepare for mortgage. 
  • It might take 3 months to 6 months or more before getting qualified for mortgage for borrowers with bad credit. 
  • Lenders want to see timely payments for past 12 months. 
  • Remember that one late payment can decrease scores by 50 points or more. 
  • Monitor checking account and do not have any overdrafts.
  • Mortgage lenders do not want to see a bounced check for a year prior to a borrower applying for a mortgage application. 
  • Get three secured credit cards and pay monthly secured credit card payments on time. 
  • Each secured credit cards can boost credit scores by 20 points or more.
  • Cannot have an active credit dispute during mortgage process. 

The Gustan Cho Team are experts in helping borrowers qualify for mortgage loan with bad credit and outstanding collection and charge off accounts. We are available 7 days a week, evenings, weekends, and holidays. Contact us at 800-900-8569 or text Gustan at 262-716-8151 for faster response or 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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