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Bad Credit
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Bad Credit is OK
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 by
a multitude of lenders specialized in 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. |
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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.
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