Your credit scores and payment history carry more weight in
getting approved for a mortgage than ever. If you've had
some rough times in your credit past but feel like the storm has
cleared and you are ready to own a home again, you need to know
how to present the case for why you are ready to get a
1. The whole truth and nothing but the truth
If you have had major problems with your credit history in the
last couple of years, my best advice is to wait to buy a house.
Despite programs that advertise reduced timelines for allowing
you to apply for a mortgage after a foreclosure, short sale, or
bankruptcy, it is still difficult to get approved for them unless
your credit score is at least 660 or higher.
If you really feel strongly about your case for another
mortgage, then write out an explanation letter with details about
what caused the major problems in your credit history and how
those things have improved to the point that you think you are
ready to take on a new mortgage now. Add in as much documentation
as possible to support your explanation
One common reason for credit setbacks is a sudden illness that
causes an extended period of unemployment. Providing an
explanation and some doctor's notes about how you're on the mend
and back to work will allow you to bridge the gap in employment
and show that your circumstances have stabilized to the point
where you will be able to pay a new mortgage.
2. The big credit bumps
Anything in your credit history involving the loss of a home due
to inability to pay a mortgage will present the biggest challenge
in the mortgage application process. Foreclosures, short sales,
and late mortgages payments in the last two years will make it
very difficult for you to get approved, even if you have a large
down payment and lots of income. This may seem unfair, but
lenders view anything related to default on a prior mortgage as a
risk going forward. The more time that has passed since one of
these major mortgage setbacks, the better.
If you currently renting, be sure to keep canceled checks to
show how consistently you pay on time. This will help show a
mortgage lender how well you are managing your housing expenses
3. Financial mismanagement or extenuating
In order to be approved for a new mortgage after a big negative
credit event like a foreclosure or bankruptcy, you will have to
prove to the underwriter that the credit problem was not due to
your own financial mismanagement and that there were extenuating
circumstances that caused the credit trouble.
The death of a household wage-earner and major medical issues
are examples of extenuating circumstances that will enable a
lender to consider approving a mortgage in a shorter time period,
even after a bankruptcy or foreclosure. Extra documentation
always has to be provided in these cases, as well as a detailed
letter of explanation.
An example of financial mismanagement includes cases where a
homeowner walks away from a mortgage because the house was so
severely upside-down that there wasn't much hope of ever breaking
even on a resale.
4. Collection corrections
There is a myth circulating in the mortgage industry that
correlates paying off collections with dropping credit scores.
According to credit.com, mortgage professionals often advise
against paying off a collection, believing this will lower the
debtor's credit score. The premise is that once the status of the
collection changes from unpaid to paid, it will actually show up
as a new collection. That is simply not true. The credit scoring
system doesn't grant any fewer points for an unpaid collection
than it does for a recently paid collection.
Sometimes the approval of a mortgage will not require
collections of under $500 to be paid off, but in the long run,
it's always best to have these paid in full or settled before you
apply for a mortgage, because over time, your scores will improve
with the collection shown to be paid..
5. Resolve those disputes
There is a credit "trick" whereby putting accounts into a dispute
status actually prevents them from being fully scored on a credit
report. That means a credit report with multiple collections that
are in "dispute" status may show a higher score than a credit
report with collections that are not in this status. However,
while this trick may lead an automated underwriting program (like
the ones used to prequalify buyers for loans) to grant an initial
approval, it's a false positive. The disputes need to be resolved
or taken off before you apply for a mortgage loan to eliminate
any chance that the approval will be overturned because not all
of the credit was being taken into account by the computer to
Final Foolish points
Despite all of the regulatory reforms in mortgage and credit
lending, there will always be companies that come along and
promise quick fixes and creative ways to game the underwriting
system to get past credit issues or make it appear that you have
less credit than you actually do.
Credit repair companies, in my opinion, are not worth the
money when so many nonprofit credit-counseling alternatives
exist. Most customers don't realize that they can repair their
credit directly with each bureau. Calling Experian, Equifax, and
Transunion yourself to fix errors or make your score reflect
paid-off collection accounts sooner will produce quicker results
than paying a third-party company.
I can't emphasize enough how important it is to tell your
story and provide as much detail about what happened and how
things have changed for the better. If you don't get approved at
first, ask your mortgage professional for an idea of what you'll
need to do to get approved in the future. Often the only thing
standing between you and an approved mortgage is a little more
time since the credit challenges occurred.
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