The economic crash four years ago placed a high percentage of potential borrowers in the “bad credit” category. People who used to have strong credit, but suffered financial setbacks from job loss now struggle to obtain mortgage loan approval. Coupled with chokehold lending standards, borrowers have found that doing Quantum physics to be easier than being approved for a mortgage.
However, the mortgage industry has recognized that a large number of people are labeled “bad credit” borrowers due to circumstances beyond their control.
Several years ago, a credit score of 550 to 600 was considered to be passable, whereas today is mortgage loan poison.
Whether you are a first time homebuyer with no credit history (which unfortunately puts you in the “bad credit” category) or your credit has been tarnished due to economic circumstances, you still have options.
What is Considered to be Bad Credit?
Bad or an unacceptable credit history for lending purposes is a credit score anywhere under 620. Credit scores are comprised of your financial activity, which includes paying bills, obtaining employment, investing and spending money.
How you spend and save directly impacts your score. Those who pay bills on time, have steady employment and use credit wisely are typically awarded a higher score. On the flip side, if you are delinquent in your payments (especially a mortgage payment) or don’t make payments at all, your score will nose dive.
Certain types of credit impact your score than others. For example, defaulting on a student loan will have a major impact on your score. Also, foreclosure, tax liens and bankruptcy put a black mark on your record.
What Can You Do About A Bad Credit Score?
Before you pursue a mortgage loan, check your credit report to ensure it accurately reflects your financial activity. Even credit reporting bureaus make mistakes so it’s important review the report to ensure it accurately reflects your financial activity.
If you find an inaccuracy, report it immediately in writing to the bureau. You may also want to follow up with a phone call or email to possibly expedite the change.
Once you have a credit report that accurately reflects your financial activity you can pursue a mortgage loan.
Still Have Bad Credit? Can You Get a Mortgage?
If updating your credit report doesn’t help your credit score, it’s time to pursue mortgage loan options. While conventional mortgage loans may be currently out of reach, the Federal Housing Administration (FHA) can help.
FHA 203(b) lending isn’t an actual mortgage loan, but instead is insurance that helps you secure a loan with a mortgage broker.
The direct benefits of going through the FHA include low down payments and low closing costs. Also, being able to qualify for a mortgage loan with less than stellar credit is one of the biggest benefits.
Before pursing FHA lending, the borrower must meet standard FHA qualifications which includes:
- Proof of at least two years of steady employment
- Similar income the past two years
- Less than two 30 day periods of late payments on credit report
- If you declared bankruptcy, it must be at least two years ago
- Foreclosures must be at least three years or older
- Mortgage payments are 30% of your gross income
FHA 203 (b) mortgage insurance also has eligibility requirements. In addition to meeting the FHA credit qualifications, the borrower can only apply the 203 (b) program to properties that are one to four unit structures.
Additionally the borrower is eligible for up to 96.5% financing and must be able to finance the upfront mortgage insurance premium into the mortgage.
Each state also has its own set of FHA 203 (b) mortgage limitations, which should be explored with a chosen mortgage broker.
As with any mortgage loan, use mortgage calculators to determine which loan program is best for you and shop mortgage brokers. Obtain quotes from up to four FHA approved mortgage brokers before pursuing a loan.
Mortgage Refinance For Those with Bad Credit
Drooling over low rates and want to refinance but are worried about your credit score? Like with a first mortgage, those with bad credit can still pursue mortgage refinance or modification through government programs such as Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP).
HAMP is a mortgage loan modification program that allows mortgage brokers to restructure mortgage loans on homes that are worth less than what is owed. With property values in the doldrums, HAMP has been an extremely valuable program for many.
HARP is an actual mortgage loan refinance program for those who are unable to refinance through traditional means. Eligible homeowners must have a mortgage owned or guaranteed by Freddie Mac or Fannie Mae, are current on mortgage loan payments, owe more than the home is worth without the mortgage exceeding 125% LTV and have the ability to make new payments.