Re-Establishing Credit To Qualify For Mortgage With Secured Credit Cards

Re-Establishing Credit To Qualify For Mortgage

This BLOG On Re-Establishing Credit To Qualify For Mortgage Was Updated On April 12, 2017

Qualifying for a home loan is not as difficult as many people think. Most home buyers think that they need a large down payment and good credit in order to qualify for a mortgage loan. Lenders do realize that many folks may have gone through periods of hardship due to the following:

  • Loss of business
  • Loss of employment
  • Gap or gaps of employment
  • Divorce
  • Medical Issues
  • Were victims of the Great Recession of 2008
  • Other extenuating circumstances

The best loan programs for home buyers who had prior credit issues are FHA and VA Loans. Unfortunately, not everyone can qualify for VA Loans. VA Home Loans are restricted to veterans of the U.S. Military with a valid Certificate Of Eligibility. You do not have to pay outstanding collections and charge off accounts to qualify for FHA Loans. However, lenders do want to see re-established credit to qualify for mortgage by borrowers.

Ways Of Re-Establishing Credit To Qualify For Mortgage

In order to establish good credit so you can get good mortage rates and terms as well as great interest rates on your credit cards, automobile loan, and other installment loans, you need a good credit history. If you have no credit history at all, it is easy to reestablish your credit.

Opening a bank account is the simplest and safest way to manage your finances. By opening a savings account or a checking account, you can build good credit by saving money and earning interest, easily paying bills and tracking expenses. Responsible use of a checking account or an Automatic Teller Machine (ATM) card will reflect favorably in your credit report.  If you had prior bad credit, opening a bank account would be a great way of reestablishing your credit.

If you have services in your name (telephone, gas, and electric), make sure you pay them in full and on time. Pay any loans and credit accounts on time each month. At least pay the minimum, if there is one. This will be another way of reestablishing your credit.

Tips On Re-Establishing Credit To Qualify For Mortgage After Bankruptcy & Foreclosure

Re-establishing credit to qualify for mortgage after bankruptcy and/or a foreclosure can be done.  The best way of re-establishing credit after bankruptcy or foreclosure is by getting 3 secured credit cards with $500 credit limits. Each secured credit card can boost credit scores by 30 points so 3 credit cards with $10 balances can substantially increase one’s credit scores.

Applying for credit cards and using it responsibly can help build good credit history. Borrowers who have been denied credit cards in the past may want to investigate getting secured credit cards where they deposit a pre-determined amount of money in with the credit card provider. The secured card can be used the same way as regular unsecured credit card with the same convenience and payment flexibility. Gasoline companies and retail stores also offer their own credit cards.

FHA Loans With Bad Credit

Borrowers can qualify for FHA Loans with bad credit. However, lenders want to see that borrowers have re-established their credit. Borrowers do not have to pay off outstanding collections and charge offs to qualify for FHA Loans. Here are the basic FHA Loan Requirements:

  • Minimum 580 Credit Scores
  • Outstanding Collections and Charged Off Accounts do not have to be paid to qualify for FHA Loans
  • 3.5% down payment
  • Borrowers can qualify for FHA Loans two years after Chapter 7 Bankruptcy discharged date
  • Borrowers can qualify for FHA Loans three years after deed in lieu of foreclosure, short sale, and/or foreclosure
  • Lenders want to see re-established credit after bankruptcy and/or foreclosure 

Credit Disputes During Mortgage Application Process

A loan officer should not issue a pre-approval letter to borrowers if they have credit disputes during the mortgage application process.

Here are FHA Guidelines On Credit Disputes

  • FHA does not allow credit disputes on any non-medical collection accounts with aggregate outstanding balances of $1,000 or more 
  • Credit disputes on non-medical collection accounts less than $1,000 on one’s credit report and zero balance disputes are allowed
  • Credit disputes on medical collection accounts with outstanding balances are exempt and can be disputed
  • Credit disputes on charge off accounts are not allowed and must be retracted to for the mortgage process to proceed under HUD Guidelines

Does Collections And Charge Off Accounts Need To Be Paid Off

FHA does not require outstanding and collection accounts with outstanding balances to be paid off. Many lenders require collections and charge off accounts to be paid off in order for borrowers to qualify for FHA Loans. This is not a HUD Guidelines but a lender overlay on the individual lender. If a lender requires borrowers to have collections and/or charge offs to be paid, contact The Gustan Cho Team at Nationwide Mortgage & Realty LLC. We do not have any FHA Lender Overlays and will just go off HUD Guidelines On Collections and Charge Off Accounts . There is one rule with non-medical collections.

  • If borrowers have non-medical collections with over $2,000 aggregate outstanding balance, FHA requires the underwriter to take 5% of the outstanding balance of all collections and use it in the calculations of the borrower’s debt to income ratio. Borrowers do not have to pay this amount but is rather just used for qualifying income and used as a monthly debt.
  • If the 5% of the outstanding non-medical collection account will go over the maximum debt to income ratio requirements to qualify for a FHA Loan, borrowers can enter into a written payment agreement with the creditor and whatever the monthly payment is agreed upon, that number will be used in lieu of the 5%.

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