Financing for Marginal Credit – which loan can you qualify for?

   If you have less than perfect credit, you may assume that you need a large down payment to get approved, but that is not the case.  If you are eligible for a VA loan or an RD (Rural Development) loan, you may be able to get approved for a loan with no down payment!    Or you may be able to use an FHA loan and purchase with a down payment of just 3.5%!     Or there may be other loans available through your state or local housing authorities that allow you to buy with little or no down payment.  These types of loans may be better suited for home buyers with less than perfect credit.    Conventional loan programs have large adjustments to the interest rate for credit scores below 740 where programs like FHA and RD don’t make rate adjustments unless the score is below 660.  To find the best mortgage loan for your credit profile,  it is essential to select a lender who is comfortable with the less than perfect credit scenarios.    

How to Get Approved with Marginal Credit

Most lenders today require a minimum credit score of 620.  Additionally, the ideal credit report should have 3 open lines of credit and no outstanding past due or collection debt.   If your credit score is below 620, your lender should be able to analyze your credit report to determine if there is anything that can be done to immediately improve your credit score.    There may be simple actions you can do to get a “rapid rescore”.    For example, if your current balance on a credit card exceeds the credit limit, you are losing a lot of points.   By paying down the balance on the account, you can increase your score.   Most lenders use software programs to help them identify if your score can be raised and what you need to do to make it happen –then you can then qualify for a home loan. 

Even some people with a credit score above 620 may not be eligible for a mortgage loan because their credit profile is not adequate.   That is, if you have less than 3 open credit lines or if you have collection or past due accounts, you may not be able to get a loan even if your score is above 620. 

When a potential homebuyer has a credit report that does not meet today’s standards for a mortgage loan, they need to create a game plan to get their credit back on track.   This means understanding where and what the issues are and then addressing them head on.

Each person is entitled to a free credit report through www.annualcreditreport.com  .  We recommend starting with that or by obtaining your credit report through a lender you are comfortable with.   There is another website you can go to www.creditkarma which will also give you a reading on where your credit stands.     

If you do not have 3 open lines of credit,  start to improve your credit profile by obtaining one or two or three accounts so you do have 3 open lines of credit.    You may also be able to get a relative to add you to one or more of their accounts as a joint user.   If you go this route, make sure that the balance on the account is low (because the debt will be counted against you if you are a joint user) and make sure the payment history is excellent (because the payment history will affect your score).  

If you have past due accounts, start by getting a grip on each of those accounts.   Determine who the original creditor was and when the original default date was (if the default date was 7 years ago or more then you can petition to have the account taken off your credit report).    If the creditor sold the debt, it might appear that the default date is more recent than it actually is.   You may be required to pay these accounts off in order to obtain a mortgage so you should fully understand what each one is.  You may be able to negotiate a settlement for less than the full balance if you are willing/able to pay the collection debt off.   Another option is to enter into a payment agreement where you make a small monthly payment each month for a fixed # of months.   In extreme cases, where the collection debt is significant, you may want to consult with a debt consolidator or an attorney (to consider bankruptcy).  Each loan type has a certain tolerance for outstanding past due collection accounts; you may or may not be required to pay off your collection debt in order to qualify for a mortgage. 

If you’ve sold your house with a short sale or had a foreclosure or bankruptcy, you will probably be facing a minimum of 3 years before you can get a mortgage.   Your credit will be looked at carefully once the 3-year period elapses.   Be sure that you have paid everything on time every month.  Be sure you have at least 3 open credit accounts.  

If you’ve had credit problems, please consult with a mortgage lender who can help you determine what you need to do to get on track.   Develop a plan – you may be 3 months away from having acceptable credit or 3 years away – but if you have a plan you will get there.

Renee Duval, an Amazing Loan Lady, Merrimack Mortgage Company, Concord, NH  NMLS#97967