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.