Sunday, October 6, 2013

Bad credit need not apply...or should you? - By Rick Yost

I am asked everyday about mortgages and the ability to qualify, and there is a strong misconception that you now need 20 percent down and perfect credit to qualify for a mortgage. It is very true that it is not like 2006 when lenders were throwing mortgages at borrowers, but it is not all bad either. Lenders have tightened their standards and we have all heard crazy stories of mortgages applications being denied for what seemed to be little or no reason, but mortgages are available to even those without perfect credit.
 A mortgage company’s definition of bad credit may not be the same as yours. A quick review of FICO scores (you did read that column, didn’t you?) tells us that a credit score of 740 to 800 is excellent, 720 to 740 is great, 700 to 720 is good, 680 to 700 is mediocre and 620 to 680 is approvable even if less than perfect. Your credit score just starts the process. It helps determine what types of mortgage you qualify for (conventional, FHA, etc.), and what you will pay for an interest rate. Sorry to say, but the worse your credit score, the higher the interest rate/and or charges.

 After looking at your credit score, the lender will do a full credit review. This is the process where underwriters look at-- What happened? Why did it happen? Will it happen again? Some of the common issues that lenders look at and what they generally mean:

Late mortgage payments—one late payment in the past 12 months is permitted as long as explainable.
Late student loan payments—one late payment in the last 12 months may mean only conventional loans.
Record of late payments—is possible to work with, but expect higher down payment and interest rates.
Short sale—eligible for a conventional loan with at least 20 percent down or a VA loan in 24 months from the sale. Eligible for FHA using 3.5 percent down 36 months from the sale.

Foreclosure—FHA loan with 3.5 percent down is available 36 months from the date of foreclosure, VA loan with no money down is available after 48 months, but conventional loans are not available for seven years.
Bankruptcy (Chapter 7)—FHA loan with 3.5 percent down is available 24 months after the discharge, VA with no money down in 48 months from the discharge, and conventional loans in 48 months from discharge.

 You can get a free credit report once a year from to see your credit score and your credit history. This will be important to know when seeking a mortgage. Most lenders have something called investor overlays. These overlays are adjustments in lending guidelines that they get from their investors. Which really means that not all lenders can do the same loan. It is important to know that just because your first lender said no, it doesn’t mean all lenders will say no. In order to avoid spending too much money on mortgage application fees trying to find a lender that will say yes--get your credit history and credit score, be open and honest with potential lenders, and ask them about their programs. 

Remember always pre-qualify for a mortgage before house hunting. Happy house hunting.

Rick is a realtor, real estate author, and long- time Windham resident. You can reach Rick with any of your real estate questions or needs at

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