To this day, there is still the general belief that in order to purchase a home, you need to have 20% down, and have good – stellar credit history. The good news is you don’t need a large down payment, your credit can be actually marginal, even “less-than-perfect” and you can still buy with competitive financing terms.
What a mortgage company determines as bad credit might not be what a consumer considers to be bad credit. A credit score of 620 or higher is required to successfully obtain a mortgage. By the same token, a 620 credit score is considered to be less-than-perfect credit for a lender, but is still achievable.
Credit score determines two major things for a for a deciding lender:
- Loan program i.e. Conventional, FHA loan type etc.
- Pricing includes interest rate and any additional charges indicative of the credit score (lower the credit score higher interest rate and/or potential charges)
Credit history is the next hurdle to overcome. Is there a pattern of previous credit delinquencies? Are there old balances on closed accounts? It’s quite common for a consumer to have a 620ish credit score, revealed by a consistent historical pattern of not paying bills on time or paying off balances. Ironically, this person would have a more difficult time attaining a loan than someone with a 640 credit score with no history of delinquencies other than a recent foreclosure. Crazy huh? But, completely true. In order of priority, lenders will look at the credit score to determine home loan eligibility. Next, a complete credit overview will be taken into consideration leading to what questions may or may not arise in the underwriting decision process. Underwriting will be looking for “what happened”, “why it happened”, and the future “likelihood of continuance or repeat non-repayment.”
Credit History Lending Red Flags & Requirements
Pattern of Delinquencies-can it be explained and documented? Typically, able to work around, but more lender scrutiny will be given to amount of down payment, debt against income %
Student Loan Lates– if within the last 12 months, most suited loan program would be Conventional Financing. Government Financing like FHA, does not take kindly to delinquent federal debt
Mortgage Lates– one late in the last 12 months is permitted so long as it can be explained and if necessary, fully documented
Foreclosure– 36 months from the date of the foreclosure till eligibility to repurchase using the 3.5% down payment FHA Loan, 48 months for VA Loans (no money down required), seven years no matter the down payment on a Conventional types
Short sale– 36 months from the date of the short sale till eligibility to repurchase using the 3.5% down payment FHA Loan, 24 months with the VA, 24 months on a Conventional Money with a minimum down payment of 20%
Bankruptcy-Chapter 7 (Chapter 13 less common), 24 months from the date of discharge till eligibility to repurchase using the 3.5% down FHA Loan, 48 months on VA Loans (still no money down required), 48 months on Conventional no matter the down payment
No Big Down Payment, Less Than Perfect Credit, Should Still Be Eligible
All mortgage companies have different thresholds of risk appetite. For example, the FHA (Federal Housing Administration) has no credit score requirement. Why then do lenders have a minimum credit score requirement of 620 for an FHA Loan? Unbeknownst, to the majority of home buyers, many mortgage companies have a secret ominous business strategy.
Enter: “Investor Overlays”
Investor overlays are adjustments to guidelines and/or pricing created in favor of the mortgage company. This is exactly why one lender can do the loan, and another lender cannot do the loan in some instances.
Overlays further protect lenders against potential future losses from the mortgage loans they originate, preserving profits and buyback risk (situation in which originating lender is forced to buy back from the investor if the loan they made was not fully documented). Investor overlays, tighten the screws on borrowers’ ability to qualify. Put another way, it shifts risk, which translates to cost to the consumer by means of limiting ability to borrow via higher loan fees, reduced purchase price, lower debt ratio, to name a few.
*Tip: every mortgage lender has investor overlays, it’s the nature of how mortgage companies operate, key is work with the lender whose overlays are minimal
Homework For Consumers:
- Know your credit score first and foremost. Obtain a copy of your credit report, this will aid you in your discussions in selecting the appropriate lender later on
- Get as much supporting documentation as possible surrounding the credit issue so as to the naked eye, the story can explained backwards and forwards with no stone left unturned
- When speaking with potential loan company, be very specific, do not be afraid to share every detail with as a complete of a description as possible and find out up front if they have any investor overlays or additional conditions regarding the scope of your previous credit history, doing so will save you considerable time and money.
If you have bad credit or a less-than-perfect credit situation, we can help. Unlike large-scale financial institutions, our investor overlays do not limit your ability to borrow. Get started today with a complementary mortgage rate quote for your mortgage pre-approval.