If you are a first-time homebuyer with any damaging credit event in your credit history, you’re not alone. Approximately 30% of the population is in the same boat. While this may make it harder to get a home loan, it doesn’t mean you are automatically disqualified or that it will be impossible.
What is a “damaging credit event”?
Typically, a damaging credit event is a financial event in which the borrower is unable to fulfill their contractual obligations to the lender or creditors. These events are reflected in credit reports and credit scores. They alert future lenders/creditors to the borrower’s past financial missteps and the potential risks of lending or extending credit to this person. Obviously, lenders/creditors want to get their money back, which is why people with these events in their credit history have trouble getting loans/lines of credit, especially home loans.
The top credit-harming events are:
- Chapter 7 = court protection for person(s) or business(es) against debt
- Chapter 11 Bankruptcy = restructuring of business debt
- Chapter 13 Bankruptcy = restructuring of personal debt
- Foreclosure = couldn’t pay mortgage; bank takes ownership of property through courts
- Deed-in-lieu of foreclosure = you willingly give up ownership of the property to the lender in lieu of foreclosure
- Pre-foreclosure (lis pendens) = Lender gives public notification that a foreclosure proceeding has started
- Short sale = couldn’t pay mortgage; lender sells property for less than is owed (not value)
- Mortgage/Credit Card charge-offs = a lender/creditor has charged/written off of their books your debt balance that was still owed
- Judgments = a creditor has taken you to court to get an order from the judge for you to pay determined amount that is owed to the creditor
- Collections = a creditor has not received your payments for X period of time and is trying to collect the past due (minimum over 30 days) or full amount (usually uses a third party)
- Garnishments = usually a court order directed to your employer to deduct monies from your paychecks to pay back your creditor(s)
- Liens = public notices that a creditor/lender has rights to collect monies owed (usually in order of attachment, i.e., lender, H.O.A., workers mechanics’ liens, taxes etc.)
- Late payments 30-60 days or more = payments made 30+ days beyond the due date
- Modified subject property loan = couldn’t honor original term; new terms are arranged
- Modified/deferment in credit history = couldn’t honor original agreement; new agreement is arranged (exceptions exist, i.e., Student Loans that are deferred are acceptable)
- Too low of credit score – usually due to any combination of the above.
- Credit Utilization = the percentage of credit you have used on your credit cards. For example, if your limit is $1,000 and you have a balance of $300, you have used 30% of your available credit. Keeping this percentage consistently above 30% of your credit limit would generally decrease your overall credit score. If you go over your credit limit, it is like having a double whammy against your credit score.
Derogatory Credit Events
|Chapter 7 & 11 Bankruptcy||Chapter 13 Bankruptcy||Foreclosure||Short Sale / Deed in Lieu|
|Conventional||4 Years from Discharge Date||• 2 yrs from discharge date • 4 yrs from dismissal date||7 Years from Date Foreclosure Completed||4 Years from Date Sale Completed|
|FHA||2 Years from Discharge Date||1 year payout has elapsed, payment performance is satisfactory, & discharged prior to closing||3 Years from Date Foreclosure Completed||3 Years from Date Sale Completed|
|VA||2 Years from Discharge Date||1 year payout has elapsed, payment performance is satisfactory, & discharged prior to closing||2 Years from Date Foreclosure Completed||2 Years from Date Sale Completed|
|USDA||3 Years from Discharge Date||1 Years from Discharge Date||3 Years from Date Foreclosure Completed||3 Years from Date Sale Completed|
If you have one or more of these events in your credit history, don’t be discouraged! While these events negatively impact credit scores, the credit score is only one factor mortgage lenders consider.
Credit Scores and Other Criteria
Your credit score is certainly one of the most important factors mortgage lenders consider when applying for a home loan. Depending on the mortgage lender and/or loan program they may also consider:
- the stability and amount of your income,
- your cash reserves and how much you have saved for a down payment
- your debt-to-income ratio
- the loan-to-value ratio (LTV) for the home you are considering
Types of Loans to Consider
A majority of approved home buyers have credit scores above 650 but every person’s situation is unique and it will be to your benefit to do your homework and ask questions. The most common loan programs are Conventional loans, Federal Housing Administration (FHA) loans and Veterans Administration (VA) loans. Here’s how they compare:
|Loan type||Eligibility||Minimum credit score||Minimum down payment|
|Conventional||First-time home buyers* or seasoned buyers||620||3%|
|FHA||first-time home buyers*, low income||580||3.5%|
|VA||Military veterans||Depends on lender |
(the VA does not require a score but lenders do)
|Depends on your military eligibility|
(*first time home buyer = any person that has not had any ownership in property in the last 3 years)
Keep in mind that your credit score will typically determine how much down payment the lender will want, which will then determine the interest rate and the loan amount they’ll approve.
Make a plan to repair your credit and then get started.
Here are some things YOU can do to start rehabilitating your credit and work toward getting a new mortgage loan:
- Check your credit score often. You can get a free credit report right now from www.creditkarma.com (You can also get one free report per week from each of the three major credit bureaus at www.annualcreditreport.com. Usually, this service is limited to once per year, but they are making it available weekly right now during the COVID pandemic.) Make it a habit to do this at least once every year so you can make sure everything is accurate on your report. Once you have your baseline score, you know where you’re starting from and can begin measuring improvement.
- Work hard to get your credit reports as clean as possible. This may seem overwhelming, but it can be done. It’s just a process. Whether it’s correcting late payments or addressing incorrect items on your report, just get started, even if only baby steps. Be aware that changes/corrective actions can take 1-2 monthly reporting cycles to appear. Be patient. Most likely, you didn’t get into this situation overnight so don’t expect it to be fixed overnight.
- Starting today, make a commitment to build a decent credit history. Good practices include:
- Honoring your financial obligations and making your payments on time.
- Not overextending yourself with more debt.
- Developing good saving habits.
These strategies are the single best way to repair your credit, increase your credit score AND keep it clean thereafter.
Despite damaging credit events, top mortgage lenders in Florida will tell you that there are still many home-buying programs available. Depending on your credit score and other factors, the variables at play are home loan amounts and home mortgage rates. The good news is that Unlimited Mortgage Lending has over 20 years of experience helping people just like you, navigate these uncertain waters. Let us assess your situation to see which home buying programs you might qualify for. Call us today for guidance!
by Unlimited Mortgage Lending, LLC