1. If you have bad credit you are probably worried about getting approved on a mortgage to buy or refinance a house. Many people with poor credit histories should be concerned about this because it is going to determine what kind of loan you are going to get approved on. With all of the changes going on in the mortgage industry there still is hop for you to try to get approved on a mortgage, but you are going to need to know how to do it.
2. During the refinance boom of 2002-2007 every single mortgage company was doing every single loan they could get their hands on. The mortgage companies had two kinds of loans, a desktop underwritten loan and a manually underwritten loan. Both were very similar in their guidelines but one had more restrictions than the other. A desktop underwritten loan was a system that the mortgage companies had connected to Fannie Mae that would approve or deny your application based on the factors you put on your mortgage application such as your income, assets, loan to value, credit score, and income. Each of those factors had a strength value that would be put into consideration when doing your home. The best factor anybody can have when applying for a home loan is their loan to value. Many think its a credit score but its not. Mortgage companies like seeing equity in the home. The desktop underwritten (DU) application would be sent and returned in less than a minute with an approval or denial. If there was a denial it would say why it was denied. In turn it would tell the mortgage broker what they need to tell the client to do for an approval. This underwriting system was and is the most flexible. You could have a 585 credit score but 35% equity in your home if your trying to refinance to pay off debt and it would approve with the best 30 year fixed mortgage rates for the day. Its like you had good credit scores just because you had some equity in your home.
3. A manually underwritten loan is one that is not backed by Fannie Mae but by investors such as hedge funds and pensions. These loans are tailored for each investor. For a loan to get an approval it had to meet all guidelines not just a couple. For instance if you wanted to do an 80/20 loan you had to have 720 credit scores, no cash-out, rate/term refinance, no mortgage lates in a year, debt to income ratio below 45%, 6 months worth of assets saved in accounts, been working for two years straight in the same profession, and there are a couple more to go with it. For a manually underwritten loan you would have to have a a credit score of 620 and above to get approved on one of these loans. As of the year 2008 these loans have pretty much gone away. During the refi boom these loans had the same interest rates as the Fannie Mae backed mortgages but now no mortgage company is doing them because their not backed by the government. Too much risk. There still is a market for them and they are considered jumbo loans now.
4. With your poor credit scores you want to make sure your bad credit is not going to be a factor when getting a mortgage. Let’s say that you are trying to refinance your home. On your credit report is a bankruptcy from 6 years ago (you bought the home 4 years ago when mortgage guidelines were very easy to get approved on so they found a loan for you), back property taxes, credit card bills in collections, late child support, and you have missed payments on your car loans. You don’t have any mortgage lates since you have owned the home (never miss a mortgage payment ever, especially after having a bankruptcy). Your credit score is a 590 (which is low, you want over 700), and all of the debts above equal up to $20k to get caught back up to date. You owe $125k on the first mortgage and the home is worth $175k giving you 29% equity in the home.
5. You call up a mortgage company and tell them that you need to take care of all of these past debts because they are starting to bother you and the courts and collection agencies are calling you up all hours of the day. You are really concerned about your bad credit history and feel that there is no way you are going to get approved on a mortgage. You talk to your mortgage broker and when they pull your credit they see your credit report. More than likely they are thinking that there is no way you are going to get approved on anything with your bad credit history. Back in the good old days they probably would have tried to open up a home equity line of credit for you but doing so would have been hard. You need to have credit scores over 680 now to get approved on a second mortgage with bad credit. The mortgage broker is not going to say anything but depending on how experienced this person is they listen to your whole story and take an application.
6. Your only chance now is to have your mortgage broker run your application through their desktop underwriting system. Remember how this system is flexible and looks at different factors and weighs them. Let’s say as an example you make okay money and your debt to income ratio (DTI) is 40% after including the credit card debts, you have two months worth of assets in accounts to show that you have some money to pay for mortgage payments (these could be in retirement, savings, checking, stock accounts, etc). This is low and they usually want to see 6 months of asset reserves. Your credit score is low at 590. Recently banks have started charging a 2% risk factor to your closing costs because of this low score and be prepared to have this rolled into your closing costs. The risk factor is 2% of the loan amount, i.e $145k x 2% = $2,900 in costs added on top of your normal mortgage closing costs. Then after rolling your past credit card debts and collections into the new loan your have a balance of $145k and the home is still worth $175k. This will give you a new loan to value (LTV) of 83%.
7. Your mortgage broker takes the time and inputs your information into the system. A loan officer who has done this before can enter all of this info in less than 3 minutes. You more than likely are going to get an approval based on some of the strengths of your application. Your loan to value is what’s going to save you. Fannie Mae’s underwriting system likes the equity and has decided to approve you because they know that after all of these debts are paid off that your bad credit score is going to go away and will slowly start going up. Plus, you still have 17% equity left in the home.
8. Most mortgage companies are being limited to the system now so if you do not get an approval at one place than you should try maybe your local bank and one more large mortgage company like Countrywide, Quicken Loans, or Chase. All of the exotic loans for people with bad credit are going or have gone away already. If one can’t get an approval for you on a mortgage than your probably going to find the same at the other places.
9. Even if you do not get an approval based on your application, the system will say what it will take to get an approval. Maybe it will say you need to have a loan to value (LTV) of 80%, or 4 months worth of assets saved up, or some other factors. This is when you need to hope for your appraisal to come in a little higher or see if you can lower the loan amount by not paying something off. There is usually one way or another that under the current guidelines a smart loan officer will find a loan that will help you clean up your poor credit scores.
10. Don’t give up trying to find a mortgage for your home. Your loan officer is trying to find you one because that’s how they get paid. You may need to be a little flexible in what you are trying to do with the mortgage but just be patient. Even if you do not get an approval at that time at least you know what you need to do to get approved on a mortgage with bad credit scores.