Got Bad Credit: Can You Still Get A Mortgage?
There could be many reasons why you have bad credit. You suffered
an illness, lost your job or took on too much credit card debt.
Either way, you missed making scheduled payments on your personal
debts. Does this mean you won’t be able to qualify for a
residential mortgage loan? The American dream after all is to
be the owner your home. Apply here for a home
Bad Credit Explained
When somebody is categorized with bad credit, they were in arrears
on debt payments whether it’s a loan for a house, cars or
credit cards. They could also have gone through a foreclosure
or a bankruptcy.
The FICO Score: Whenever you apply for a loan
be it a car loan or a mortgage, the borrower will look at your
credit score or otherwise known as the FICO score. FICO is derived
from the Fair Isaac Company who developed the system of rating
your credit information. It quantifies your probability of paying
your debts based on a three digit number. The higher the credit
score, the better your credit rating. FICO scores ranges from
300 (the lowest) to 850 (the highest).
Excellent: 750 and up
Good: 720 to 749
Fair: 660 to 719
Uncertain: 620 to 653
Poor: 619 or lower
Scores less than 620 suggest heightened risk of default. Scores
under 575 are considered sub-prime. To obtain the report on your
credit score, there are three major credit reporting agencies
that you can go to. They are Equifax, Experian and TransUnion.
Can I Still Get A Home Mortgage Loan?
Your credit report may be bad but you may still get a mortgage
loan for a home purchase, a refinance mortgage, or even a cash
out mortgage refinance on your current home. Regardless whether
you have charge-offs, collections or tax liens on your credit
report, as long as you can meet the exact guiding principle for
a loan approval by a multitude of mortgage lenders specializing
in the credit-damaged borrower market.
The home mortgage loan industry uses class categories to determine
the credit risk of any particular borrower. If the property checks
out and you have adequate income, impeccable credit and the required
down payment you are considered an 'A' borrower. An 'A' borrower
can walk into almost any residential loan lender and get a mortgage
loan. A mortgage borrower can fall short in one of these areas
and still be considered an 'A' borrower, as long as the other
areas can recompense for the weakness.
For example, a residential mortgage borrower that exceeds the required
monthly debt-to-income ratios (28% housing debt and 36% combined
debt) could provide a large down payment. Many mortgage companies
will also wave modest credit 'blemishes' if a reasonable clarification
is provided (i.e. job transition, medical problems). Being 30-60
days late on one credit card payment is a typical blemish that
could be accepted by a mortgage banker.
Bad Credit Categories
What about those that have more serious marks against their credit?
Depending on how imperfect your credit history has been, home
loan lenders will typically put borrowers into the following credit
categories, which are qualified by time frames:
A-minus credit (FICO Score 575 to 619)
Acceptable blemishes within the last two years: Charge-offs, or
collection accounts, of minor amounts (e.g. less than $500 in
all) are acceptable. Medical bills (e.g. hospitalization and clinic
visits) tend to be disregarded by the lender. As for payment habits,
the borrower can have no more than two 30 days late payments,
or one 60 days late payment on revolving or installment credit.
B credit (FICO Score 575 to 619)
Acceptable blemishes within the last 18 months: Up to four 30
days late or up to two 60 late days payments are permitted on
revolving and installment debt. If the credit ding is an isolated
incident, a 90 days late payment is allowed within the last 12
months. Charge-offs, or collection accounts, which are isolated,
insignificant, and under $1,000 in all, are acceptable. However,
outstanding collection accounts less than four years old must
be paid. Bankruptcy or mortgage foreclosure that had been discharged
or settled previous to the 18 months time frame is allowed.
B- to C credit (FICO Score 525 to 574)
Acceptable blemishes within the last 12 months: No more than six
30 days late payments, three 60 days late payments, or two 90
days late payments are permitted on revolving or installment credit.
Open collections accounts and charge-offs cannot go over $4,000
and must be paid in full. Bankruptcy or foreclosure of a mortgage
that had been discharged or settled prior to the last 12 months
C- to D credit (FICO Score less than 525)
A sporadic disregard for timely payment or credit standing categorizes
the borrower in this class. Open collections accounts, charge-offs,
and judgments must be paid through loan proceeds. The borrower
who had filed bankruptcy and had been discharged prior to the
last six months is acceptable, as much as the ex-homeowner who
had his previous home foreclosed and settled prior to the last
six months. However, mortgage payments cannot be longer than 90
days past due.
The above are general industry guidelines to make lending judgment
on the borrower's mortgage loan application. There are no strictly
defined rules of separating the borrower on the borderline between
one credit category and another. Also, there are variations between
one mortgage lender to the next depending on the degree of subjectivity
involved in underwriting and how much each mortgage banker wants
to commit their funds.