This BLOG On Qualifying For Home Loan With 580 Credit Scores And Bad Credit Was UPDATED And PUBLISHED On November 21st, 2020
Once home buyers have decided to purchase a home, the next step is qualifying for home loan.
- There are different types of mortgage loan programs
However, the two most common types of mortgage loan programs are:
- FHA Loans
- Conventional Loans
In this article, we will be discussing qualifying for home loan with FHA Loans and Conventional Loans:
- Other loan programs are VA Loans, USDA Loans, and Jumbo Mortgages which we will cover on the next series of articles
- Qualifying for home loan is not just qualifying with minimum credit scores and income requirements
- Just because consumers have high credit scores and sufficient income does not mean they will meet the minimum qualification requirements
- In this blog article, we will cover all aspects of qualifying for home loan so home buyers will be ready to purchase their dream home without any hiccups during the mortgage loan approval process
In this article, we will discuss and cover Qualifying For Home Loan With 580 Credit Scores And Bad Credit.
Qualifying For Home Loan With Bad Credit
Qualifying for home loan with bad credit is no issue. This holds true as long as they have re-established credit after period of bad credit and timely payments in the past 12 months:
- FHA Loan programs have the most lenient mortgage lending guidelines with regards to collection accounts and minimum credit score requirements
- Consumers do not have to pay off outstanding collection accounts with FHA Loans
- Medical collection accounts and charge offs are exempt with debt to income ratio calculations
- Non-medical collection accounts do not have to be paid off
However, if the total aggregate unpaid balance of non-medical collection accounts is $2,000 or greater, then 5% of the outstanding unpaid collection balance will be used to calculate the borrower’s debt to income ratios.
Case Scenario On Qualifying For A Mortgage With Outstanding Collections
For example, here is a case scenario:
- if the borrower has a total of $10,000 of unpaid outstanding collection balance
- that collection account is non-medical
- then 5% of the $10,000 or $500 will be used as a hypothetical monthly debt payment in calculating the debt to income ratios of borrowers
- this holds true even though the borrower does not have to pay anything
One important thing to keep in mind is borrowers can have prior bad credit and outstanding collection accounts in qualifying for home loan:
- However, all loan programs require borrowers have re-established their credit and have timely payment history for the past 12 months
Even if borrowers meet the minimum credit score requirements for the various mortgage loan programs but if they had late payments in the past 12 months, it will be difficult for anyone to qualify for a home loan. It does not matter whether it is an FHA Loan, Conventional Loan, VA Loan, USDA Loan, or Jumbo Mortgage.
Qualifying For Home Loan With 580 Credit Scores
Minimum credit scores to qualify for 3.5% down payment FHA Loans is 580 FICO.
- Borrowers with under 580 credit scores can qualify for FHA Loans
- However, 10% down payment is required and rates will be substantially higher and compensating factors are required
Compensating factors are additional positive factors that a borrower has such as the following:
- verification of rent with low payment shock
- longevity on the job
- income that the borrower has but is not used to qualify for a home loan
- the working spouse that is not on the mortgage note
- larger down payment
FHA Loans have a generous debt to income ratio caps:
- If borrowers have credit scores of at least 620 credit score, then the maximum front end debt to income ratio is capped at 46.9% and maximum back end debt to income ratio is capped at 56.9%
- If a borrower has credit scores below 620 credit scores, then the debt to income ratio cap is reduced to 43% DTI to get an approve/eligible per automated underwriting system
Minimum credit scores on conventional loans are 620 and maximum debt to income ratios are capped at 50% DTI.
Qualifying For Home Loan With Under 620 Credit Scores
Conventional Loans have a minimum credit score requirement of 620 credit scores.
- However, home buyers can qualify for home loan with under 620 Credit Scores with FHA Loans
- As mentioned earlier, minimum credit score guidelines state that a mortgage loan applicant with a minimum 580 credit score can qualify for a 3.5% down payment FHA Loan
- However, there are certain guidelines borrowers with under 620 credit scores need to meet
- Chances are that the Automated Underwriting System will require verification of rent for mortgage loan applicants with under 620 credit scores
- Verification Of Rent is only valid and can only be used if the renter has paid their rental payments with a check
- Needs to provide 12 months canceled checks or bank statements showing a wire transfer from their bank account to their landlord’s bank account
All rental payments for the past 12 months need to be timely and the landlord needs to sign a verification of rent form provided by lenders.
Qualifying For Home Loan With Prior Bankruptcy And Foreclosure
Here are the qualification guidelines on Conventional Loans after a prior bankruptcy and foreclosure:
- There is a four year waiting period after a Chapter 7 Bankruptcy to qualify for a conventional loan
- There is a two year waiting period after a Chapter 13 Bankruptcy discharge to qualify for a conventional loan
- There is a four year waiting period after Chapter 13 Bankruptcy dismissal date
- There is a four-year waiting period to qualify for a conventional loan after a short sale
- There is a four-year waiting period to qualify for a conventional loan after the recorded date of deed in lieu of foreclosure
- There is a seven-year waiting period to qualify for a conventional loan after the recorded date of foreclosure
- UPDATE: If borrowers had a mortgage part of bankruptcy, they can qualify for a conventional loan four years from Chapter 7 Discharged Date
- The mortgage cannot be reaffirmed after the bankruptcy
- This holds true even if the foreclosure did not record after the Chapter 7 Bankruptcy Discharged Date
This is a brand new conventional loan guideline that was implemented and went into effect on August 2014.
HUD Guidelines On FHA Home Loans With No Overlays
Here are the qualification requirements on FHA Loans after prior bankruptcy and foreclosure:
- There is a two year waiting period after a Chapter 7 Bankruptcy to qualify for an FHA Loan
- There is a one year waiting period into a Chapter 13 Bankruptcy with the approval of the Chapter 13 Bankruptcy Trustee
- Chapter 13 Bankruptcy FHA Loans are all manual underwriting
- There is no waiting period after a Chapter 13 Bankruptcy discharge
- All Chapter 13 Bankruptcy mortgage loan applications are submitted via manual underwriting
- Verification of rent is required on all manual underwriting loan submissions
- There is a three year waiting period after the recorded date of foreclosure and deed in lieu of foreclosure
- The waiting period start date needs to be the date of the sheriff’s sale and/or the date the deed to the property actually changed hands
- Needs to be out of the borrower’s name and into the name of the lender
- The date homeowners turn in their keys to the lender is not the start date of the waiting period
- There is a three year waiting period after a short sale to qualify for FHA Loan
The short sale waiting period of three years starts from the date of the short sale which is reflected on the HUD-1 settlement statement.
Waiting Period After Bankruptcy And/Or Foreclosure On FHA Loans If You Had A Mortgage Included In Bankruptcy
Mortgage Part Of Bankruptcy with FHA Loans:
- If the consumer had a mortgage as part of bankruptcy, there is a three year waiting period after the recorded date of the foreclosure
- Not the date the mortgage was included in the bankruptcy
- For example, if the mortgage part of bankruptcy was discharged on January 1, 2015, and the foreclosure was not recorded until January 1, 2013, the three-year waiting period clock did not start until January 1, 2013
The borrower will not qualify for an FHA Loan until January 1, 2016.
Qualifying For Home Loan With Credit Disputes
Many consumers go through credit repair prior to the mortgage process:
- The way credit repair is done is by disputing derogatory credit items
- Cannot have credit disputes during the mortgage process
- Medical credit disputes or credit disputes with zero balances are exempt
- However, consumers cannot have credit disputes on non-medical collection accounts with outstanding balances
- Cannot have credit disputes on charge off accounts either
- Borrowers can qualify for a home loan with a charge off accounts
- Cannot qualify with a charge off accounts that have credit disputes
- Before proceeding with the mortgage process, the credit disputes needs to be retracted
The issue with retracting credit disputes is credit scores will often drop when credit disputes are retracted. Make sure not to have any credit disputes prior to applying for a home loan.
Qualifying For Home Loan With Bank Overdrafts
Lenders will require two months of bank statements from all mortgage loan applicants.
- Lenders will not qualify a borrower with overdrafts in their bank statements
- Borrowers with overdrafts in bank statements in the past two months cannot use those bank statements
- Either has to use another bank statement or need to let bank statements season for at least two months
- If a bank account holder has spouse or family member where they can add their name on their bank statements as a joint account holder and get a transaction history print out for the past two months that is signed, stamped, and dated by the bank teller, that can be one option
- Bank printouts do not show YEAR-TO-DATE overdraft fees
Why Can I Qualify With One Lender And Not Another Lender?
Just because borrowers meet the minimum federal lending guidelines does not mean that they will qualify with all lenders.
- Most lenders have mortgage lender overlays
- Overlays are a particular own mortgage lending standards which surpass the federal minimum mortgage lending guidelines
For example, here is a case scenario:
- if the home buyer were to walk into a bank and apply for an FHA Loan with a 580 FICO credit score
- the chances are that the bank will tell the buyer they do not qualify for an FHA Loan with them
- this is because their minimum credit score requirement is 640 FICO at most banks
- this holds true even though FHA’s minimum credit score requirements are 580 FICO
- This is called a mortgage lender overlay the bank has
- HUD Guidelines does not require borrowers to pay off outstanding collection accounts to qualify for an FHA Loan
- However, most banks and lenders will require borrowers have no outstanding collection accounts as part of their own internal lender overlays requirements
Home buyers told they do not qualify for a home loan by one lender, that does not mean they do not qualify with another lender. Home buyers looking for a national mortgage company licensed in multiple states with no overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at email@example.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.