Tips In Qualifying For Home Loan

Once you 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 and Conventional Loans so on 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 you have high credit scores and sufficient income does not mean that you will meet the minimum qualification requirements. On this blog article, we will cover all aspects of qualifying for home loan so you will be ready to purchase your dream home without any hiccups during the mortgage loan approval process .

Qualifying For Home Loan With Bad Credit

Qualifying for home loan with bad credit is no issue as long as you have re-established credit after period of bad credit . FHA Loan programs have the most lenient mortgage lending guidelines with regards to collection accounts and minimum credit score requirements. You do not have to pay off outstanding collection accounts with FHA Loans. Medical collection accounts and charge offs are exempt with FHA Loans. 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 . For example, if the borrower has a total of $10,000 of unpaid outstanding collection balance and that collection account is non-medical, then 5% of the $10,000 or $500 will be used as a monthly debt payment in calculating the debt to income ratios of the mortgage loan borrower even though the borrower does not have to pay anything. One important thing to keep in mind is that you can have prior bad credit and outstanding collection accounts in qualifying for home loan, however, all mortgage loan programs require that the mortgage loan borrower have re-established their credit and have timely payment history for the past 12 months. Even if you meet the minimum credit score requirements for the various mortgage loan programs but if you 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 a FHA Loan, Conventional Loan, VA Loan, USDA Loan, or Jumbo Mortgage.

Minimum credit scores to qualify for  3.5% down payment FHA Loans is 580 FICO. Mortgage loan borrowers with under 580 FICO credit scores can qualify for FHA Loans, however, 10% down payment is required and mortgage rates will be substantially higher and compensating factors  are required. Compensating factors are additional positive factors that a borrower has such as reserves, longevity on the job, income that the borrower has but is not used to qualify for home loan, and a working spouse that is not on the mortgage note.

FHA Loans have generous debt to income ratio caps. If the borrower has credit scores of at least 620 FICO 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 the FHA mortgage loan borrower has credit scores below 620 FICO credit scores, then the debt to income ratio cap is reduced to 43% DTI.

Minimum credit scores on conventional loans are 620 FICO and maximum debt to income ratios are capped at 45% DTI.

Qualifying For Home Loan With Under 620 Credit Scores

Conventional Loans have a minimum credit score requirement of 620 FICO credit scores. However, home buyers can qualify for home loan with under 620 Credit Scores with FHA Loans. As mentioned earlier, FHA minimum credit score guidelines state that a mortgage loan applicant with a minimum 580 FICO credit score can qualify for a 3.5% down payment FHA Loan. However, there are certain guidelines borrowers with under 620 FICO credit scores need to meet. Chances are that the Automated Underwriting System will require verification of rent for mortgage loan applicants with under 620 FICO credit scores. Verification Of Rent is only valid and can only be used if the renter has paid their rental payments with a check and 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 needs to be timely and the landlord needs to sign a verification of rent form provided by the mortgage lender.

Qualifying For Home Loan With Prior Bankruptcy And Foreclosure

Here are the qualification guidelines on Conventional Loans after a prior bankruptcy and foreclosure:

  1. There is a four year waiting period after a Chapter 7 Bankruptcy to qualify for a conventional loan.
  2. There is a two year waiting period after a Chapter 13 discharge to qualify for a conventional loan.
  3. There is a four year waiting period to qualify for conventional loan after a short sale.
  4. There is a four year waiting period to qualify for conventional loan after the recorded date of deed in lieu of foreclosure.
  5. There is a seven year waiting period to qualify for conventional loan after the recorded date of foreclosure.
  6. UPDATE: If you had a mortgage part of bankruptcy , you can qualify for conventional loan four years from the Chapter 7 Discharged Date even if the foreclosure did not record after the Chapter 7 Bankruptcy Discharged Date. This is a brand new conventional loan guidelines that was implemented and went into effect on August 2014.

Here are the qualification requirements on FHA Loans after prior bankruptcy and foreclosure:

  1. There is a two year waiting period after a Chapter 7 Bankruptcy to qualify for a FHA Loan.
  2. 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.
  3. There is no waiting period after a Chapter 13 Bankruptcy discharge. All Chapter 13 Bankruptcy mortgage loan applications are submitted via manual underwriting and verification of rent are required on all manual underwriting mortgage loan submissions.
  4. 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 and out of the borrower’s name and into the name of the lender. The date you turn in your keys to the mortgage lender is not the start date of the waiting period.
  5. There is a three year waiting period after 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.
  6. Mortgage Part Of Bankruptcy with FHA Loans: If you had a mortgage as part of your bankruptcy, there is a three year waiting period after the recorded date of the foreclosure and 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 and the borrower will not qualify for a FHA Loan until January 1, 2016.

Qualifying For Home Loan With Credit Disputes

Many consumers go through credit repair and the way credit repair is done is by disputing derogatory credit items. You cannot have credit disputes during the mortgage loan process. Medical credit disputes or credit disputes with zero balances are exempt, however, you cannot have credit disputes on non-medical collection accounts  with outstanding balances.  You cannot have credit disputes on charge off accounts either. Mortgage borrowers can qualify for home loan with charge off accounts but you cannot qualify with charge off accounts that have credit disputes. Before you can proceed with the mortgage loan process, the credit disputes needs to be retracted.  The issue with retracting credit disputes is that your credit scores can drop when credit disputes are retracted. Make sure that you do not have any credit disputes prior to applying for a home loan.

Qualifying For Home Loan With Bank Overdrafts

Mortgage lenders will require two months of bank statements from all mortgage loan applicants. Mortgage lenders will not qualify a borrower with overdrafts in their bank statements. If you have overdrafts in your bank statements in the past two months, you cannot use those bank statements and either have to use another bank statement if you have one or you need to let your bank statements season for at least two months. If you have a spouse or family member where you can add your 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.

Why Can I Qualify With One Lender And Not Another Lender?

Just because you meet the minimum federal lending guidelines does not mean that you will qualify with all mortgage lenders. Most mortgage lenders have mortgage lender overlays which are their own mortgage lending standards which surpass the federal minimum mortgage lending guidelines. For example, if you were to walk in to a bank and apply for a FHA Loan with a 580 FICO credit score, the chances are that the bank will tell you that you do not qualify for a FHA Loan with them because their minimum credit score requirement is 640 FICO even though FHA’s minimum credit score requirements are 580 FICO. This is called a mortgage lender overlay the bank has. FHA does not require that you pay off outstanding collection accounts to qualify for a FHA Loan. However, most banks and mortgage lenders will require that you have no outstanding collection accounts as part of their own internal mortgage lender overlays requirements. If you have been told that you do not qualify for a home loan by one lender, that does not mean you do not qualify with another lender. If you are looking for a mortgage lender with no mortgage lender overlay, please contact Gustan Cho Associates at 262-716-8151 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

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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