Can you prepare to qualify for a new mortgage loan?
When new homeowners to be or perspective homeowners in general make application to qualify for a new mortgage loan more often than not they have done little to prepare. It has become my personal goal to educate all perspective mortgage applicants that preparation in advance is much better than not, and often they do not even realize you can prepare for such. One of my former peers, now a client I respected because of his unique ability to cut to the chase when mentoring upcoming Leaders used to say often to our Team, “Your failure to plan does not constitute an emergency on my part”. I love this statement maybe because it slapped me in the side of the head personally a few times. Preparing to qualify for a new mortgage is not something that can be done in one day or even a week, more like a few months is a realistic perspective. Anyone with qualifying income can become a homeowner and qualify for a new mortgage. If you have bad credit, do not let this deter you in your preparation to qualify for a new mortgage. When the Real Estate market collapsed with the mortgage industry in 2008 it left countless victims across America and fingers can easily be pointed toward others beyond the homeowners. Life happens so if you are holding back or ignoring your future because of bad credit I am here to say, start now. Millions of hard working Americans felt the negative impact of our economy due to the 2008 collapse, you are not alone and do not let your pride stop you as it did me personally for a couple of years. There is light at the end of the tunnel, so many people lost their jobs, lost their pensions, lost their equity in their home, filed for bankruptcy, millions went through foreclosure, short sales, deed in lieu of foreclosures. The entire Real Estate and Mortgage industry went through so many changes and a complete overhaul of policy, acts of Congress and new laws and policy is now in place. The Mortgage industry is now one of the most regulated industries in America, the good news here are the protections in place to protect the buyer, if there is a downside it is there is no shortcut, any mortgage has following strict guidelines and to qualify a borrower must me minimum standards. There are no longer sub-prime lenders and all loan officers go through pre-licensing requirements and both federal and state testing, intensive background checks and credit checks. All loan officers must show financial responsibility, all these must be complied with for a person to become a loan officer. Long gone are the days of no documentation and stated income mortgages. A borrower must be able to show documented income to qualify for a new mortgage loan. Why is this important to you as a borrower? Because it may take some preparation time to qualify for a new mortgage loan. If you are a borrower and are self-employed you will need positive and qualifying income in order to qualify for a new mortgage loan. If you have poor credit it may take some time to boost your FICO scores or even possibly employ the services of a professional Credit Repair service. A borrower(s) with poor credit must have at least 12 months of on-time payments on all of their monthly financial obligations. Considering this fact, good planning is essential if you want to become a homeowner. Meeting only a FICO score of 580 for a 3.5% down payment FHA loan is not good enough. You may meet minimum FICO credit scores will not guarantee you will qualify for a new mortgage loan. All Lenders will review overall payment history on your personal consumer credit report. According to FHA guidelines a borrower is not required to pay off older collection accounts and charge off accounts and prior bad credit, collections, charge offs, judgments, bankruptcy, and foreclosure will not disqualify you from a new mortgage loan. On the other hand lenders will want to see re-established credit and no late payments for a minimum of 12 months.
When is the best time to prepare for a new mortgage loan? Perhaps you have just endured a bankruptcy, foreclosure, deed in lieu of foreclosure or a short sale. I can say for fact pride is usually the biggest reason for a slow down in re-establishing credit, after many months of going through a stressful situation, you may feel beat down, frustrated and just do not want to think of your credit profile. However, it is never too late and moreover to soon to begin to prepare to qualify for a new mortgage loan. The old adage remains true, putting off or ignoring your credit profile does not make some things go away and can make it better or even worse. DO NOT be discouraged, get over it quickly and look forward, your credit scores may be poor and your credit may be bad for the reasons above or a job loss, job change, a divorce or medical issues but your credit profile will improve. Over time if you did absolutely nothing, no new credit established, pay cash your FICO scores will improve but knowing where you stand can assist you in accelerating the effort. I personally have assisted clients with a previous bankruptcy and seen their credit scores exceed 700 FICO.
A majority of lenders will advise you to pay off your old outstanding collection accounts or charge off accounts but this is not a requirement. If you are ask to pay off old outstanding collections or charge off accounts to qualify this is a lender guideline known as Lender Overlays. Even if you have just went through a bankruptcy, foreclosure, deed in lieu of foreclosure, short sale and have outstanding collection accounts or charge off accounts according to FHA minimum guidelines you do not need to pay old collection or charge off accounts off to qualify for a new mortgage loan insured through FHA. In fact by paying off old collection accounts and charge offs you will lower your FICO score because it renews and reports again on your consumer credit report resetting the statute of limitations. There are lenders that do not have any overlays (more stringent guidelines than minimum FHA guidelines) such as myself at Platinum Home Mortgage. The best course of action you can take to re-establish your credit is and prepare for a new mortgage loan is to get a new credit card as many as 3 to 5 secured credit lines. Secured credit cards are the quickest way to re-estblish your credit. Credit cards with higher limits do better, minimal credit card limits of $200 to $300 secured list do very little to help, get at least a $500 to $1000 credit limit. Establish at least three secured credit lines to achieve maximum optimization. When your secure credit card line ages, your credit scores will improve your consumer credit profile. Keep a small balance, 10% or less on your credit line and make the minimum monthly payment, NEVER be 30 days or more late, it seems credit card companies are quicker to report a late than even the positive and they will report to all three of the major credit reporting agencies, TransUnion, Experian and Equifax.
Every applicant for a new mortgage loan program will have minimum credit score requirement. Like a FHA Mortgage Loan has a minimum FICO score requirement of 580 with 3.5% down payment. For conventional loan programs Fannie Mae and Freddie Mac will require a minimum FICO score of 620. USDA Lenders will also require a minimum FICO score of 640. VA Loan programs do not have a minimum credit score requirement but an approved VA Lender may have a minimum credit score requirement. When qualifying for a new mortgage loan to be safe you need to count on a minimum 580 FICO score although most VA mortgage lenders will have overlays and may not accept any applicant that do not have at least a 620 FICO score. Take this for what it is worth you do not want to count on “just minimum FICO score” to guarantee you a new mortgage loan in the particular program you qualify for. Mortgage underwriters will look at the applicant’s pay history. You could meet the minimum credit scores and have a poor credit payment history but most mortgage lenders do not want to see late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure or short sale. Every lend would prefer and possibly require on-time payments for the past 12 months of the borrower applicant’s monthly financial responsibilities.
Tradelines are paramount when qualifying for a new mortgage loan. Tradelines are credit cards and lenders want to see credit lines have been handled responsibly and no late payments. Without any tradelines it becomes extremely difficult to qualify for a new mortgage loan in fact it will be a deal killer, so reference the above paragraph to re-establish your credit. Many mortgage lenders want to see at least three tradelines and at least 12 months pay history and some may ask as much as a 24 month requirement referred to as a seasoning period
A very important and easy controllable behavior that is a primary factor in determining the outcome of your mortgage application is verification of rent. Lenders will require verification of rent, this is proof the mortgage borrower has been paying their monthly rent payments. If you are a renter, PAY your RENT with a check. There are a lot of renters paying their rent with cash and when it comes time to provide verification of rent, receipts are not sufficient, the bank will require copies of the cleared bank check. Pay your monthly rent payments with a bank check or wire the funds from our account to your landlord’s account. Renting from a registered property management company will give you the benefit of requesting the company property manager to provide a letter stating your monthly rent was paid on time the past 12 months and the property manager will need to sign a VOR (verification of rent) provided by the Mortgage Lender. FHA will not require a VOR if the borrower has FICO scores higher than 620 so the Verification of Rent will not be necessary. HOWEVER, if a borrower credit scores are under 620 the Automated Underwriting System (AUS) will more than likely request a VOR. All manual underwriting FHA Loans will always require a VOR. For those renters that plan on moving to Homeowner in the future pay you monthly rent with a bank check and pay your monthly rent on-time, do not be late.
The Larry Stepp Team at Gustan Cho Associates is available 7 days a week, holidays and weekends. If you are pondering your future and comparing Renter to Homeowner I look forward to assisting you and offering you resources and guidance.
Larry Stepp 407-922-4755 LarryS.HomesNetwork@gmail.com