Bad Credit? No Credit?
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:
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.
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.
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.
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.
Always remember: No credit IS NOT bad credit.
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.