Preparing Credit For Mortgage Loans With Bad Credit

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Preparing Credit For Mortgage Loans With Bad Credit

This Article On Preparing Credit For Mortgage Loans With Bad Credit Was UPDATED On November 2nd, 2018

Preparing Credit For Mortgage is one of the first things any home buyer needs to do prior to shopping for a home.

  • Home buyers planning in buying a home in the near future should consult with a lender and see if they qualify
  • If they do not qualify, they need to find out why
  • See what needs to be done in order to qualify
  • Preparing Credit For Mortgage may take some time
  • How long?
  • It may take 30 days or six months
  • Each individual case is different
  • Best way to find out is to consult with a loan officer

How Can Loan Officer Help Buyers In Preparing Credit For Mortgage

Here is what will get accomplished by consulting with your loan officer:

  • Loan officer will run a tri-merger credit report
  • Find out what credit scores are
  • Review credit history
  • Just because borrowers meet the minimum credit scores and debt to income ratio requirements does not mean they will qualify for mortgage

Recent Late Payments In Past 12 Months

Late payments after bankruptcy and foreclosure are deal killers:

  • Lenders do not want to see any late payments after bankruptcy and/or foreclosure
  • This holds true no matter how small the monthly payment is
  • Late payment in the past 12 months are viewed very unfavorably
  • Mortgage late payments in past 12 months are normally deal killers
  • Cannot have any credit disputes on non-medical collection accounts and charge off accounts
  • Judgments and tax liens either needs to be paid off
  • Or needs a written payment agreement with the judgment creditor and/or Internal Revenue Service:
    • three timely payments need to have been made
    • cannot pre-pay the three months of payments upfront

Barriers Where It Can Affect Mortgage Approval

There are barriers that will delay mortgage approval:

  • Preparing credit ready for mortgage is recommended by waiting the waiting period after bankruptcy and/or foreclosure
  • Preparing credit for mortgage should get started as soon as possible after periods of derogatory credit, bankruptcy, or foreclosure
  • Should start re-establishing your credit and credit score

Here are barriers where it will affect mortgage approval:

Qualifying For FHA Mortgage After Bankruptcy:

  • To qualify for government and/or Fannie Mae/Freddie Mac mortgages, there are mandatory waiting periods
  • For FHA Loans, there is a two year waiting period after a Chapter 7 Bankruptcy discharged date
  • Borrowers who filed Chapter 13 Bankruptcy can qualify for a FHA Loan one year into a Chapter 13 Bankruptcy repayment plan
  • Need approval of the Chapter 13 Bankruptcy Trustee
  • There is no waiting period to qualify for a FHA Loan after a Chapter 13 Bankruptcy discharged date
  • However, it will be a manual underwrite if the borrower did not pass a two year waiting period after the Chapter 13 Bankruptcy discharged date

Qualifying For Conventional Mortgage After Bankruptcy:

  • There is a two year waiting period to qualify for a Conventional Loan after a Chapter 13 discharged date
  • There is a four year waiting period to qualify for a Conventional Loan after a Chapter 13 dismissal date
  • Four year after Chapter 7 discharge
  • There is a four year waiting period after a Chapter 7 Bankruptcy discharged date if you have a mortgage included in Chapter 7 Bankruptcy discharge
  • The deed can be recorded at a later date after the bankruptcy discharged date:
    • Has no bearing on the four year waiting period after the discharged date of the Chapter 7 Bankruptcy
    • However, the deed does have to be out of the borrowers name
  • A Chapter 7 Bankruptcy Discharge will stay on credit report for a period of 10 years
  • Not only is Chapter 7 Bankruptcy on credit report but also all of the discharged debts will remain on credit report as well for 7 years
  • After a bankruptcy, consumers should be getting credit ready for mortgage by re-establishing credit by getting several secured credit cards

Qualifying For Mortgage After Foreclosure And Short Sale:

Short sales and Foreclosures both have mandatory waiting period after short sales, deed in lieu of foreclosure, and foreclosure to qualify for government loans and Fannie Mae/Freddie Mac Mortgages.

  • Government Loans are FHA, VA, and USDA Loans
  • Government Loans are guaranteed and insured by the government
  • For example here are the agencies that insure government loans:
    • FHA Loans are guaranteed by the Federal Housing Administration
    • VA Loans is guaranteed by the United States Department of Veteran Affairs
    • USDA Loans are guaranteed by the United States Department of Agriculture Rural Development
  • There is a three year waiting period after a foreclosure, deed in lieu of foreclosure, and short sale to qualify for FHA Loans
  • There is a four year waiting period to qualify for a Conventional Loan after a deed in lieu of foreclosure and short sale
  • There is a seven year waiting period to qualify for a Conventional Loan after a regular foreclosure
  • There is a two year waiting period to qualify for a VA Loan after a short sale, foreclosure, and deed in lieu of foreclosure
  • There is a three year waiting period to qualify for a USDA Loan after a foreclosure, deed in lieu of foreclosure, short sale

Monitoring Consumer Credit Report

Preparing credit for mortgage should be started as soon as buyers are re-established financially where they can religiously meet the minimum monthly debt payments no matter what.

  • Do not take on more debt than you can handle
  • Preparing credit for mortgage does take time and it is a process

Thoroughly review your credit report and look special lookout to the following:

  • Unpaid Judgments On Credit Report:
    • cannot get a mortgage approval with judgments on your credit report
  • Preparing credit for mortgage with judgment does take time
  • Make sure to plan well ahead in trying to fix judgment prior to applying for mortgage
  • A judgment can sometimes be deleted off credit report
  • However, the fact of the matter is lenders will find out about the judgment
  • This is because all lenders do a third party credit search through Data Verify and/or Lexis Nexis
  • All lenders will do a third party national public records search on all borrowers during the mortgage process
  • All outstanding judgments needs a written payment plan or needs to be paid off

Qualifying For Mortgage With Outstanding Collections And Charged Offs

Outstanding Collections and Charge Offs- Credit Repair Does Work.

However, credit repair does take time.

  • If home buyers are at least one year out in preparing credit for mortgage, then I highly recommend credit repair
  • See if you can get the outstanding collections and charge offs deleted off credit report
  • However, if buyers are going to be applying for a mortgage in the near short term, do not go through credit repair

Credit Disputes:

  • Cannot have credit disputes on outstanding collections that are non-medical collection accounts that have aggregate outstanding balance of over $1,000
  • Credit disputes will halt the mortgage process
  • Will need to be retracted before the mortgage process can proceed

Credit Card Balances:

  • About two months before applying for mortgage application, preparing credit for mortgage needs to be really in fast track
  • Make sure that all of credit card balances are below 10% of credit limit
  • Maxed out credit cards are one of the biggest reasons for low credit scores
  • Once maxed out credit cards are paid down, credit scores will go right back up
  • The higher the utilization rate with revolving credit card debt will plummet credit scores

Contact Credit Card Companies To Increase Credit Card Limit:

Consumers who had their credit cards for over a year and have a perfect payment record with no late payments, contact credit card company. Ask them for an increase of credit limit. This extra available credit will boost credit scores.

Pay All Of Your Monthly Debt Payments On Time:

One late payment will plummet your credit scores over 80 FICO points

  • Remember that most lenders will not approve a borrower with any late payments after bankruptcy or foreclosure
  • Late payments in the past 12 months is a definite no go on a mortgage approval

Finding A Creative Lender

Gustan Cho Associates at Loan Cabin Inc. has a national reputation and is known by many for its 21 day closing on most of their home loans. The Gustan Cho Team at Loan Cabin Inc. is also known by many due to its no lender overlays on government and Conventional Loan Programs.

If you had late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale, or late payments in the past 12 months and were told by lenders that you do not qualify, please do not give up. Contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your call or inquiry. Looking forward to speaking to you and working with you.

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    1. Gustan Cho, NMLS 873293 says

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