Can I Qualify For Home Loan With Bad Credit?
Written By Gustan Cho
Many hard working responsible folks have gone through periods of financial hardship where they could not pay their bills where it affected their credit scores. Some had to file for bankruptcy while others lost their homes through foreclosures. Many folks had to file bankruptcy and also had to go through a foreclosure as well. Never since the Great Depression did we have historical unemployment, bankruptcies, and foreclosures due to the Great Recession and real estate meltdown of 2008. Whole industries got wiped out. Most neighborhood banks got bought out by giant banks, all the mortgage companies who were sub-prime lenders went out of business, mortgage brokerage shops almost became extinct, half the mortgage loan originators left the industry due to the rigorous new regulations ( SAFE ACT ) that were implemented for mortgage brokers where they needed to take pre-education courses, pass a uniform national exams and state exams, undergo federal and state criminal background checks, go through credit checks and provide detailed letters of explanations for derogatory credit. New construction and home sales came to an abrupt halt after the Great Recession of 2008. New mortgage rules and regulations were implemented. Both HUD, Fannie Mae, Freddie Mac, VA, USDA, and portfolio mortgage lenders all eliminated no doc and stated income mortgage loans. Millions of home prices plummetted and many homeowners were stuck in homes where their home values were lower than the amount of their mortgage balances. Many hard working folks, especially retirees saw their hard earned equity of their home diminish literally overnight. Bankruptcy, foreclosure, deed in lieu of foreclosure, and short sales were common household terms. It was a major financial crisis and the biggest real estate meltdown in history.
Home Loan With Bad Credit
HUD, FANNIE MAE, FREDDIE MAC, VA, USDA, and portfolio mortgage lenders realize the financial and mortgage meltdown as well as double digit unemployment statistics and historical bankruptcies and foreclosure rates left many hard working with bad credit. The government made many changes and set up new mortgage lending guidelines to spike the housing market and give folks who fell victim to the 2008 financial, credit, and real estate collapse. New guidelines were created for folks who filed bankruptcies. A 2 year mandatory waiting period after a bankruptcy discharge and re-established credit guideline was implemented so people who were forced into bankruptcy and got back on their feet had a second chance to purchase a new home again. Folks who had a foreclosure, deed in lieu of foreclosure, or short sale, the new mortgage lending guideline was that they had to wait a 3 year waiting period in order to qualify for a new home. They also implemented a new rule that home buyers needed to not be late after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale and had to have re-established credit after their economic event. The general public understood and accepted that bankruptcies, foreclosures, deed in lieu of foreclosures, and short sales happens to the best of us. Doctors, lawyers, pilots, mortgage professionals, professional athletes, prosecutors, judges, professors, corporate executives, small business owners, white collar professionals, contractors, blue collar workers, politicians, and professionals in dozens of other fields have contacted me with credit problems and had prior bankruptcies, foreclosures, deed in lieu of foreclosures, short sales, judgments, charge offs, open collections, tax liens, and other forms of prior bad credit. As long as they have income and can document their source of income, the question is not if they can get a mortgage but WHEN they can get qualified for a mortgage. On the flipside, you can have the best credit in the world but if you are self employed or get paid in cash with no income documentation to show for, then you will not qualify for a residential mortgage until you can prove documented income either by two years tax returns for self employed and 1099 wage earners or by W2s for hourly and salaried employ80 ees. Days of stated income and no doc mortgage loans are long gone.
So If I Have Income And Bad Credit, I Can Qualify For A Mortgage?
The answer to the above question is YES and NO. If you had a period of bad credit due to the economic and real estate collapse of 2008 and say, for example, you had a period of collections, charge offs, bankruptcy, foreclosure, deed in lieu of foreclosure, short sale, or poor payment history, then the answer is yes. If your bad credit was the cause of your business going under or due to unemployment or medical reasons, then you can qualify for a home loan with bad credit. However, if you had a ten year credit history and had the whole ten years worth of late payment history and bad credit, then you will have a problem in qualifying for a residential mortgage loan. Mortgage loan underwriters will review the overall credit history of a mortgage loan applicant and will not just go off their credit scores. Bad credit is considered when someone has credit scores below 640 FICO. A person can qualify for a 3.5% down payment FHA insured mortgage loan with a credit score as low as 580 FICO, however, the mortgage loan underwriter will not just evaluate a person’s credit score. The mortgage loan underwriter will review the mortgage applicant’s overall credit profile and credit history and a period of bad credit such as a three year span of bad credit is acceptable as long as the mortgage loan applicant has re-established their credit and have proven themselves that they have been timely on all of their monthly credit obligations for the past 12 months.
What If I Just Filed Bankruptcy Or Had Recent Foreclosure?
If you just had a bankruptcy discharged, you need to start working in re-establishing your credit. Many folks ask me how they can re-establish their credit when their credit scores have plummetted due to their bankruptcy. It is extremely difficult to get unsecured credit cards or other forms of unsecured credit after a bankruptcy discharge, however, those with a recent bankruptcy discharge can start re-establishing their credit by getting several secured credit cards. 3 to 5 secured credit cards with $500 credit limits will do a world of wonders. Many folks who have a bankruptcy and get their secured credit cards right away can easily get their credit scores upwards of the high 600’s or lower 700’s in as little time as 12 months. There is a two year waiting period after a bankruptcy discharge to qualify for a residential FHA mortgage loan.
Recorded Date Of Foreclosure Or Sheriff’s Sale Is Key Date
If you had a recent foreclosure and/or deed in lieu of foreclosure, make sure that the title is transferred out of your name and into the mortgage lender’s name. There is a mandatory 3 year waiting period after the date of the sheriff’s sale and/or the date your name was transferred out and into the name of the mortgage lender’s name and recorded in public records. Once you had a foreclosure and/or deed in lieu of foreclosure, you need to start re-establishing your credit by making sure that you always pay your monthly credit payments on time. If you do not have any credit or very little credit, then you need to start re-establishing new credit by getting several secured credit cards.
Recent Late Payments
If you have recent late payments showing up on your credit report, there can be a problem. Most mortgage lenders do not want to see any late payment history in the past 12 months. One late payment with a good letter of explanation may be doable, however, if you have had multiple late payments in the past 12 months, you may need to wait and show at least six months of on time payment history. You cannot have child support payments and/or student loans in collections or arrears. Also, judgments needs to either be paid off or you need to have a payment agreement with the judgment creditor and provide 3 to 6 months cancelled checks.