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Your credit report
may be full of dings, compounded with a
history of foreclosure and bankruptcy, but you may still get a loan for home
purchase, refinance, or even cash out of your current home. It doesn't matter
whether you have charge-offs, collections, or tax liens on your credit report as long as you can meet the specific
guidelines for loan approval for the credit-damaged borrower.
The
lending industry uses categories to asses the credit risk of any particular
borrower. If the property checks out and you have sufficient income, impeccable
credit and the required down payment you are considered an 'A' borrower. An 'A'
borrower can walk into almost any lender and get a mortgage loan. A borrower can
fall short in one of these areas and still be considered an 'A' borrower, as
long as the other areas can compensate for the weakness. For example, a borrower
that exceeds the required monthly debt-to-income ratios (28% housing debt and
36% combined debt) could offer a large down payment. Many lenders will also
excuse modest credit 'blemishes' if a reasonable explanation 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 lender.
But what
about those that have more serious marks against their credit. Depending on how
tarnished your credit history has been, lenders will typically place borrowers
into the following credit categories, which are qualified by time
frames:
A-minus
credit:
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, including hospitalization and clinic visits, are
usually 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:
Acceptable blemishes within the last 18 months: Up to four 30 days late , or
up to two 60 late days payments are allowed 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 less than $1,000 in all, are acceptable. However,
outstanding collection accounts less than four years old must be paid.
Bankruptcy or foreclosure that had been discharged or settled previous to the 18
month time frame is allowed.
C
credit:
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 allowed on revolving or installment credit. Open collections
accounts and charge-offs may not exceed $4,000 and must be paid in full.
Bankruptcy or foreclosure that had been discharged or settled prior to the last
12 months is acceptable.
D
credit:
A sporadic disregard for timely payment or credit
standing categories the borrower in this class. Open collections accounts,
charge-offs, and judgements 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 judgement on the borrower's loan application. There are no
hard-and-fast rules of separating the borrower on the border line between one
credit category and another. Also, there are compromising variations between one
lender to the next depending on the degree of subjectivity involved in
underwriting and how much each lender wants to commit their funds.
Down
payment requirements are being reduced
Typical lenders in the market of
credit-damaged borrowers usually lend only up to 80% of the appraised value of
the home, so the borrower often has to have 20% equity or come up with a 20%
down payment for a purchase. Extensive shopping may uncover a company that will
lend a greater percentage.
What about income? A-minus and B-credit
borrowers are often allowed to allocate 50% of their income to pay for combined
monthly debt (compared to the standard 36% guideline used for A credit
borrowers), while the bottom rung of the credit ladder can be stretched to 60%.
As for proof of income, some lenders do have "Stated Income" programs which do
not require tax returns, W-2s, or pay stubs, but may require up to 6-month bank
statements to verify income activity.
Depending on the extent of the
blemishes, borrowers with less-than-perfect credit histories can expect to pay
higher than market interest rates for their home loan. But if getting into a
home or refinancing out of a bind is one's goal, there are plenty of lenders out
there among whom the homebuyer or borrower can shop around to get the
appropriate financing. If you are having trouble finding a lender that caters to
borrowers with less than perfect credit, you might want to consult with a
mortgage broker. Since brokers typically deal with a multitude of lenders, they
might know of lenders that make such loans.
At Aimloans, we have access to many alternative programs. If your loan can not be made under the online programs
you will be directed to our Broker department that can shop for though hundreds of niche products programs
to find you the one that is right for you and your family.
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