If you have bad credit and have been thinking of buying a house or refinancing your current mortgage you have probably run into a few problems.  With the economy in it’s current recession, lenders have tightened down even more on lending requirements and have raised the credit score requirements to qualify for mortgage loans.  Are there even bad credit mortgages out there for people to quality for?  The answer is a nice loud YES!

The primary bad credit mortgage product is called an FHA mortgage.  FHA stands for (Federal Housing Administration) and is insures 100% of the loan amount that a lender funds to a borrower as long as it fits within FHA guidelines.  This is nice because you can get an FHA loan from any large bank or the bank of your preference so it really opens up your options to getting the best mortgage loan interest rate. 

FHA guidelines have less stringent guidelines than a regular conventional loan.  What exact guidelines do you have to follow to achieve an FHA loan you may ask?  The guidelines to be able to qualify for an FHA loan if you have less than perfect credit is as follows;

• FHA just recently announced that you must have a mid credit score of at least 620.  This used to not be the case. Out of your 3 credit scores the middle number must be above the 620 score to even be considered for an FHA mortgage loan.  Mos people that have bad credit usually have above a 620 credit score so this requirement is great for someone seeking a bad credit mortgage product.
• Regardless of how bad your credit is you must not have any lates or collections that have happened within the last 12 months.  The only way to get away from this guideline is if you have a high credit score.  If you have a high credit score above 720 than your score will compensate for blemishes that have happened within the last year on your credit report.
• All Collections, liens, and judgements must be paid prior to the closing of the loan.  Its totally ok if you have had collections, or judgements in the past, but they must all be paid off before the loan can close.  The reason for this is that if you have an open collection or judgement, those types of accounts take first lien position on the property you are buying.  This means that if you lost your house the collectors would get the money first before the lender who loaned you the home loan.  Lenders simply do not go for this on an FHA mortgage. 

We have just barely scratched the surface on FHA loans but hopefully if you have bad credit you have been filled with some hope of being able to purchase a home or refinance your existing home.

The first step in preparing to purchase home or to refinance your current mortgage is to understand what a mortgage lender expects from you the borrower.  Too often people just call a bank to see if they qualify for a bad credit mortgage without doing any research on their own about their own credit situation.  There are many free ways to pull a credit report such as freecreditreport.com or you can pay 15 dollars and go to a bank that can pull your report.  Make sure when you pull a credit report that it is a tri-merge report, meaning that all 3 credit bureaus are reporting on the credit report.

Now that we have that out of the way lets get down to the nitty gritty about what mortgage lenders want to see on a credit report and what they will accept.  The First thing an underwriter looks at is the mid credit score.  This score is calculated using special equations specific to each credit bureau such as the fair isaac model and beacon.  FHA and VA loans require a minimum score of 620.  Conventional loans accept credit scores within the range of 680-740.  If you have a score lower than a 680 absolutely look into a FHA or VA mortgage as they are amazing products that are usually much cheaper than a conventional mortgage loan.

The second thing an underwriter looks for is payment history.  An underwriter does not want to see lates, collections, or judgements that have happened within the last 12 months.  They will however make an exception on a few bad things that have happened within the last 12 months ONLY if you have a high credit score.  Why is that?  The reason is that if the score is high it means you have a high probability of getting back on track to make your payments on time every month.  If you have a credit score around 620 but have had lates within the last 12 months you will not be able to qualify for a bad credit mortgage loan product until 12 months have passed since the date of you most recent late. 

I cannot stress this enough, but buying a house is a process!  If you can’t qualify right now its OK!  By researching your credit situation you can make a plan that can help you get to qualification status within the year.  If you have had lates just work on getting on time and then just be on time for 12 months since the last late.  Too many people just give up and think they’ll never get into a house and ruin their credit even more.  Don’t get caught into this trap.  Be proactive and work out a realistic plan to help you move to qualification material.

For those of you who are searching out bad credit mortgages we would enthusiastically point you to aa FHA or VA mortgage product.  The reason for this is because the guidelines allow borrowers with less than perfect credit some leeway with the stringent approval process.  When trying to qualify for a FHA or VA loan there are a few secrets that you should know to help you get approved quickly.

The first secret is knowing how underwriters calculate your income.  It is not as easy as just telling them what you make per hour and how many hours you work a week.  An underwriter will write down how long you have been working at your job and go straight to your YTD income of your latest pay stub.  They take this number and divide is by how many months have passed for the current year, or by the amount of  months you have been at the job for the current year.  If you have worked inconsistent hours this number can be very different than what you think you make per month. 

The second secret is knowing when overtime can be counted in your income calculation.  The only way you can count your overtime is if you have been working at that same job for 2 years or more.  If you have worked at that job for less than two years an underwriter will just skip right over the overtime YTD section of your pay stubs.

The third secret is to know how underwriters look at second jobs.  Many people are working two jobs in this economic recession and although it may be helping them to pay their month to month bills, it may not help you qualify for a house.  Underwriters will only count your second job only if you have worked at your first job for over 2 years.  Also the first job that you have been working must be a full time job to be able to count the second part time job.  By not knowing this you could really throw off your ratios and trick yourself into thinking that you are going to qualify, when in reality you may not qualify at all if you have not worked your first full time job for over 2 years.

The fourth secret to know is that underwriters require your last 2 years of w2′s or tax returns if you are self employed.  The reason for this is that an underwriter adds the total gross income for both years and averages them out.  The reason this is important is because if you significantly made a lot more this year than you did the previous year, the underwriter will average your income and not calculate your income at what you currently make. 

By knowing these secrets you can save yourself alot of underwriting surprises and go into a loan application appointment with confidence knowing that you will be approved.

If you have bad credit and are looking for bad credit mortgage products that are available there are a few things that you should be doing while looking.  Without doing these must do items, you will surely fail in your goals of being approved to purchase or refinance a home. 

Credit maintenance is essential to your ability to qualify for a loan.  Just like brushing your teeth to keep your teeth strong and healthy there are some things you must do to keep your credit strong and healthy.  The first and foremost thing to do often is to keep track of your credit.  We are not saying to pull a credit report every month, but do it at least once a year.  Just like a doctor’s check up to see if anything is wrong, a credit checkup can save you many horrible headaches.  One growing headache is identity theft and fraud.  Checking your credit report is the easiest way to know if someone has stolen your identity.  Checking your credit will also help you see what accounts are being shown and accounted for on the credit report.  Remember that every mortgage loan lender out there only cares about the accounts on the credit report.  They don’t care about your utility bill or cable bill because those accounts don’t show on your credit. 

 The second thing to ensure your credit’s health is by nourishing it.  How do you nourish a credit score?  When planting a seed you need some essential things for it to grow.  Credit is exactly the same way as far as how it grows.  Credit scores raise naturally every 6 months if proper care and nourishment has been given.  To nourish your credit score make sure you are making payments on time, not opening new credit accounts, paying down high credit balances, and DO NOT close any open credit accounts.  Too often people pay things off and close accounts.  What you are essentially doing is plucking a beautiful flower from it’s stem.  Keep the account on the credit report for the world to see that you paid of a debt.  This will keep your score high whereas closing the account can lower your score 30-60 points!

By doing these few simple techniques you will be able to have peace of mind that your credit will strenghten and give you your buying power back to purchase or refinance your home.