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Preparing To Qualify For Mortgage With Bad Credit And Low Scores

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Preparing To Qualify For Mortgage With Bad Credit And Low Scores

This BLOG On Preparing To Qualify For Mortgage With Bad Credit And Low Scores Was UPDATED On May 7th, 2019

Preparing To Qualify For Mortgage Explained

One of the most common inquiries I get is when potential home buyers ask on advice in preparing to qualify for a mortgage.

  • Preparing to qualify for a mortgage takes time and patience
  • Everyone who has documented income can qualify for a mortgage
  • Having bad credit should not deter borrowers in preparing to qualify for a mortgage
  • Millions of hard-working folks were impacted by the Great Recession of 2008
  • They lost their businesses, they lost their jobs, they lost their pensions
  • They lost all of the equity they had in their homes
  • Many filed for bankruptcy
  • Millions of homeowners had to go through a foreclosure and/or short sale
  • The whole mortgage industry went through major changes
  • New laws and regulations were launched and implemented
  • Entire mortgage sectors were eliminated
  • All sub-prime lenders went out of business
  • The sub-prime market went extinct overnight
  • Mortgage loan originators had to go through new pre-licensing requirements
  • Both federal and state testing and intensive federal and state criminal background checks and credit checks were created and launched
  • This was done in order for them to be able to originate mortgage loans to the public
  • Days of no doc loans and stated income loans were long gone
  • Now, borrowers need documented income in order to qualify for a mortgage loan
  • It may take some time in preparing to qualify for a mortgage for individuals who are self-employed or those who have poor credit
  • Self-employed individuals need to have positive and qualifying income in order to qualify for a mortgage loan
  • Borrowers with poor credit need at least 12 months on-time payments on all of their monthly debt obligations
  • Just meeting the minimum credit score to qualify for FHA Loan is not sufficient
  • Just because borrowers meet the minimum credit scores does not guarantee they will get qualified for a mortgage loan
  • Lenders will look at overall payment history on credit report
  • It is okay not to pay off older collection accounts and charge off accounts
  • It is okay to have prior bad credit, collections, charge offs, judgments, bankruptcy, and foreclosure
  • However, lenders want to see re-established credit and no late payments for the past 12 months

When Should I Prepare To Qualify For A Home Loan

It is never too late to start preparing to qualify for a mortgage.

  • Even if consumers just went through a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale
  • Many folks who just had a bankruptcy and foreclosure don’t even want to think about re-establishing their credit
  • Most don’t even want to even think about credit
  • However, this is the wrong approach to take and will end up hurting consumers at the end
  • It takes time preparing to qualify for a mortgage if a consumer just had a bankruptcy or foreclosure
  • Or just went through periods of bad credit due to loss of business, loss of a job, divorce, or medical issues
  • However, don’t be discouraged if credit scores are poor or credit is very bad
  • Poor credit is like a hangover
  • It recovers on its own as time passes even if nothing is done
  • There are ways of expediting getting a good credit
  • However, it does take some time and patience
  • I have seen countless consumers who get their credit scores over 700 FICO after bankruptcy or foreclosure and periods of bad credit

Start Re-Establishing Credit To Qualify For Mortgage

Consumers who just went through a bankruptcy, foreclosure, deed in lieu of foreclosure, short sale, or went through a period of bad credit and have multiple collection accounts and charge offs, don’t get discouraged.

  • Do not attempt to pay off old outstanding collection accounts or charge off accounts
  • This is because borrowers do not need to pay off outstanding collection accounts and charge off accounts to qualify for a mortgage with a no FHA Lender Overlays like myself
  • HUD does not require borrowers to pay any outstanding collection accounts or charge off accounts to qualify for FHA Loans
  • Borrowers who are told they need to pay off an outstanding unpaid collection or charge off accounts contact us at Gustan Cho Associates at Loan Cabin Inc.
  • The Gustan Cho Team at Loan Cabin Inc. are direct lenders with no overlays on government and conventional loans

Do I Pay Off Outstanding Collections And Charged Off Accounts?

By paying off outstanding collections or charge offs, consumers are going to lower their credit scores. This is because it will re-activate the old collection account as a newer collection account and will reset the statute of limitations.

  • The most important thing to do to kick start preparing to qualify for a mortgage after periods of bad credit is to re-establishing credit
  • The quickest and easiest way of re-establishing credit is by getting new credit by getting three to five secured credit cards
  • Secured credit cards are the best and fastest way of re-establishing your credit
  • The higher the credit limit secured credit card the stronger the credit profile
  • Do not waste time in getting a $200 to $300 secured credit card
  • Get at least a $500 secured credit card
  • Preferably a $1,000 credit limit secured credit card
  • Get yourself at least three secured credit card for maximum optimization
  • As secured credit card ages, credit scores will gradually improve and credit profile will get stronger
  • Always make the minimum payment due every month on secured credit card
  • This is because if consumers are ever 30 days or more late, the secured credit card company will definitely report late on the three major credit reporting agencies
Preparing To Qualify For Mortgage
Gustan Cho Associates

Credit Scores And Credit Payment History

Keep in mind that all mortgage loan programs have a minimum credit score requirement.

  • To qualify for a 3.5% down payment FHA insured mortgage loan, borrowers need a 580 FICO credit score
  • To qualify for conventional loans, Fannie Mae and Freddie Mac both require a 620 minimum credit scores
  • USDA requires 580 credit scores
  • VA does not have a minimum credit score requirements and it is up to lenders
  • To be safe, borrowers would most likely need a 580 credit score to qualify for a VA Loan
  • Most lenders do have overlays on VA Loans
  • Many will not accept any borrowers that have at least a 620 FICO

Borrowers Credit Payment History

Just meeting the minimum credit scores do not automatically guarantee a mortgage loan in the particular loan program:

  • Mortgage underwriters will also look at the borrower’s payment history
  • Applicants can meet the minimum credit scores with a lousy credit payment history
  • Most lenders do not want to see any late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale
  • Almost all lenders will want to see timely payments for at least the past 12 months on all of the borrower’s debt obligations

Credit trade lines are extremely important. A credit trade line is when a borrower has a creditor account with at least a 12-month payment history. Most lenders like to see at least 3 credit trade lines. Not having any credit trade lines is not a deal killer. But there are many lenders that do require at least three credit trade lines for at least 12 months. Some may go back as much as a 24 months seasoning requirement on credit trade lines.

How Is Verification Of Rent Validated

One of the most important compensating factors that a borrower can have is verification of rent.

  • Verification of rent is when a mortgage borrower can prove that he or she has been paying their rent payments with a bank check for the past 12 months
  • Unfortunately, many renters do not pay their monthly rental payments with a bank check
  • Many renters will pay cash and get a cash receipt by the landlord
  • Unfortunately, this will not work
  • Cannot be used as rental verification
  • Make sure to pay rental payments with a bank check or wire the funds from bank account to the landlord’s account
  • If renting from a registered property management company, renters can just get a letter from the property management company property manager stating they were timely for the past 12 months
  • The property manager has to sign a VOR, verification of rent form provided by the lender

When Is VOR Not Required By Mortgage Lenders

FHA borrowers with credit scores of higher than 620 FICO will not have to worry about verification of rent .

  • However,  the Automated Underwriting System will most likely request verification of rent for FHA borrowers who have credit scores of under 620 FICO
  • All manual underwriting FHA Loans do require verification of rent
  • Renters who plan on becoming homeowners in the near future, make sure to make rental payments with a check
  • Make sure not to be late on rent payments

If preparing to qualify for mortgage, contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. The Gustan Cho Team at Loan Cabin Inc. is available 7 days a week, evenings, weekends, and holidays to take phone calls and respond to email inquiries. We can help home buyers get qualified for a home loan and work with borrowers in getting qualified if they do not quite qualify yet.

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