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FAQ: Loans for Borrowers with Low Credit Scores
I have had credit problems in the past. Will my low credit scores affect my ability to obtain a mortgage loan?
In evaluating an application for a mortgage loan an applicant’s credit history will be considered as one element in determining the applicant’s qualification for the requested loan. Negative credit histories or a lack of previous credit experience can adversely affect an applicant’s ability to obtain a requested loan. The credit bureaus compute “credit scores” based on the information contained in your credit report. These credit scores have significant impact on your qualification for a mortgage loan and on the interest rate and points associated with a particular rate.
What types of credit issues can affect an applicant’s credit scores.
Many factors can affect a consumer’s credit scores. Of course, debts that have gone to collection or have been “charged-off” by a creditor will negatively impact an applicant’s credit scores. Unpaid collection items or “charge-offs” will typically result in lower scores than paid items that went to collection. Paying bills more than 30 days beyond their due date will negatively impact credit scores. Late payments, collection items and charge-offs will have more negative impact if they are recent occurrences. More recent credit information will be weighed more heavily than older information. Generally, the applicant’s previous payment history on a mortgage loan is given the greatest weight, followed by major installment accounts such as auto loans and then by major credit card accounts. Some revolving charge accounts such as department stores and accounts with finance companies have less impact. Other factors that have nothing to do with your payment history can also impact credit scores. For example, applicants that have balances at or near their maximum credit limits will have significantly lower scores than applicants who have low credit card balances.
What is the lowest credit score an applicant can have to qualify for a mortgage loan?
Applicants with median credit scores of 760 or higher will obtain the best possible pricing and mortgage insurance rates on conforming loans. Better pricing is available on non-conforming “jumbo” loans (those with loan amounts exceeding the maximum allowed by Fannie Mae or Freddie Mac) with credit scores of 800 or higher. Applicants with median credit scores in a range from 660 to 740 will generally be subject to slightly higher rates and/or costs than applicants with higher scores. The lower the score, the higher the rate or costs. Applicants with slightly lower scores than 660 can typically qualify for FHA financing. Most lenders only offer FHA financing to applicants with credit scores of 620 or higher. AmeriFund currently offers FHA financing to applicants with scores as low as 560. AmeriFund offers subprime financing to applicants that do not qualify for FHA or conventional financing with median scores as low as 550 at much higher interest rates (as high as 10% per annum).
My credit problems occurred more than three years ago. Will this affect my ability to obtain a mortgage loan?
Credit scores are affected most heavily by occurrences in the preceding two years. Generally, a few late payments occurring on installment loans or credit-card accounts more than two years ago will not affect an applicant’s ability to obtain maximum financing (with minimum equity or down-payment) as long as the late payments were isolated.
I recently filed bankruptcy. Will this affect my ability to obtain a mortgage loan?
An applicant may be able to qualify for maximum financing (conforming loans) with a previous bankruptcy provided that the discharge date is more than two years ago, the applicant has re-established and maintained a positive credit history on at least three accounts since the date of the bankruptcy discharge, and the applicant provides an acceptable explanation for the reason the bankruptcy was filed. Chapter 13 bankruptcy plans (which provide for a restructuring of debt and repayment of all or a portion of the debt over a 3 to 5 year period) must have been fully completed for a two year period to obtain maximum financing at the best available interest rates. However, our company offers special loan programs at higher interest rates which allow more recent bankruptcies. These special programs typically require higher down-payments or equity positions than our conventional loans (between 20% to 35%) depending on how recent the bankruptcy
I have very recent late payments on a prior mortgage. Will this affect my ability to obtain a mortgage loan?
As previously stated, mortgage payment histories are given greater weight than other types of credit information. Thus late payments occurring on a mortgage within the past two years will typically preclude an applicant from obtaining maximum financing at the best interest rates. However, our company offers special loan programs at higher interest rates which allow recent late payments on mortgages. These special programs typically require higher down-payments or equity positions than our conventional loans (between 10 to 35%) depending on how recent the late payments occurred. We even have loan programs for applicants that are currently in default on a mortgage loan or which have experienced foreclosures, however, these programs typically require higher equity positions of between 25% and 35% and have interest rates which are much higher than those offered on other loan programs.
How is the amount of the down-payment I will be required to pay determined on these special loan programs allowing derogatory credit?
The amount of the down-payment required for an applicant with recent derogatory credit is determined on a case-by-case basis. Generally, the more negative and more recent the derogatory information, the higher the down-payment or equity position that will be required.
I’ve heard that programs for applicants with bad credit had been eliminated because of problems in the Subprime mortgage industry. Is that true?
The recent travails of more than three dozen major Subprime mortgage lenders sent the mortgage industry (and Wall Street) reeling. Only as recent as early 2013 did we begin offering Subprime programs with liberal “non-agency” qualification standards. More options are again becoming available for applicants with less than favorable credit scores.