Just because your credit history might not be the best, there is always hope to get approved, and this comes in the form of a manual underwrite. This is when an underwriter physically looks at your file and a computer program isn’t giving you a Yes or No. When applying for a mortgage with a credit history that may include derogatory credit, bankruptcy, foreclosure, judgment, disputes, and other items that an underwriter might need clarification on, a letter of explanation or “LOX” may need to be provided. By definition, a letter of explanation is just exactly what it says it is, and it is an explanation of why certain items got on your report, and why they will not happen in the future.
Now, when putting together a letter of explanation, these need to be very concise, brief, and must get directly to the point. There is no need to tell your life story here because more than likely the underwriter isn’t going to read the entire thing. They need to know what happened, why it happened, and why it will not happen moving forward. In a scenario where you need to submit multiple letters of explanation please make sure you are only explaining the item that the LOX is for. There is also a risk for writing too much about a certain situation as it could open up a Pandora’s box for the underwriter. If you show to the underwriter that there are other questionable details in your LOX, they are required to look more into every detail that may affect their decision to approve your mortgage. If this happens to you, the underwriter will probably ask for even more letters of explanation to address the new information you offered up to them.
Let me give you an example of an underwriter going through your file and requesting letters of explanation. If by chance the applicant has had a history of good credit and timely payments, then all of a sudden a period of late payments shows up, there will be a requirement for a letter of explanation. If the applicant filed for bankruptcy, no matter the chapter, a letter of explanation will need to be provided. In another situation, in terms of foreclosure, deed in lieu of foreclosure, or short sale the reasoning can easily be that the applicant had an ARM (adjustable rate mortgage) or balloon mortgage and when the adjustment period hit, the significantly higher payment could not be afforded at the time. These exact reasons are very common prior to the housing collapse where sub prime mortgage lenders gave home buyers teaser interest rates (rates significantly lower than their fully indexed rates per the details on the loan) and when the true rate set in, their payment would double and was no longer affordable. Now when describing this time in your credit, the one thing that you must not say is that you couldn’t afford the home any longer and you just decided to let the house go and wait until the foreclosure finalized. This looks extremely bad on you as the borrower, and almost 100% of the time this will result in a loan denial.
Finally, the best thing you can do for yourself when submitting these letters of explanation is to give documentation that shows why things had happened, and how your situation has changed currently for the better. The stronger the case you can make sure yourself, the better the chance you will get an approval from the underwriter. Just remember that you need to be concise, brief, and have all your documentation submitted when creating these letters of explanation, they are the difference between purchasing a house and getting denied.
With a new year comes new guidelines and hopefully I can help you in understanding the difference in guidelines between Conventional Loans (Fannie Mae and Freddie Mac) and FHA Loans (HUD). Let’s start with Fannie Mae and Freddie Mac shall we? These two have much looser mortgage lending guidelines when it comes to the actual recorded date of the the foreclosure when it is a mortgage as part of bankruptcy and qualifying for a new conventional mortgage after the mandatory waiting period. Do not worry if you do have a bankruptcy and/or foreclosure on your history as all mortgage programs have mandatory waiting periods after bankruptcy and foreclosure, and you WILL be able to purchase a home again. However, there are different guidelines and we will go over these changes in the paragraphs below.
Fannie Mae and Freddie Mac are the two government-sponsored enterprises (GSE) that govern and set standards for conforming mortgage loans otherwise known as conventional loans. The newly released 2016 guidelines on Mortgage as a Part of Bankruptcy are as follows: If you had a mortgage and/or mortgages as part of your Chapter 7 Bankruptcy (also know as debt liquidation where liens are released), the waiting period to qualify for a conventional loan is four years from the discharge date of your Chapter 7 Bankruptcy. As long as the mortgage was part of the Chapter 7 Bankruptcy, the four year waiting period begins from the discharge date of the Chapter 7 Bankruptcy. With regards to conventional loans, the foreclosure can be recorded at a later date and it does not affect the wait time.
With regards to FHA, if you have had a mortgage as part of your Chapter 7 Bankruptcy, the mandatory waiting period to qualify for an FHA loan is three years from the recorded date of the FORECLOSURE. Even though this mortgage may have been part of your Chapter 7 Bankruptcy, the discharge date of the bankruptcy means nothing as it all resides on the date of the foreclosure. This could pose a problem because a foreclosure may happen over a year after the bankruptcy has been discharged. The other way to speed up this process is to be diligent after the bankruptcy discharge date to make sure that the mortgage lender gets their name out of the deed of the home as soon as possible.
Just because you have gone through some tough times and have a bankruptcy and/or foreclosure on your history it is still possible as a home buyer to now qualify. These days, mortgage lenders understand that borrowers can go through some difficult periods in their lives resulting in bad credit from unemployment, business loss, divorce, or even medical issues. Speaking first hand, bankruptcies and foreclosures can happen to the best of us due to some extenuating circumstances. Even though it is possible to obtain a mortgage after bankruptcy and foreclosure, lenders are going to want to see you have been re-establishing your credit and have been timely with your payments in recent history.
In closing, just beware that even if Fannie Mae, Freddie Max, and FHA have guidelines that can qualify you to get into a home after bankruptcy and foreclosure doesn’t mean your lender is going to abide by these rules. Due to mortgage overlays (lender imposed guidelines in addition to Fannie, Freddie, and FHA) you still may not qualify for a loan as they may still require 7 year waiting period after bankruptcy and foreclosure.
Collection Accounts and Credit Scores: We are all normal people and there are times when consumers get behind on their debt obligations when going through difficult times. Once a payment is late most creditors will report this late payment history to the 3 credit bureaus: Experian, Transunion, and Equifax. Once one of these derogatory items is reported to your credit, you will see your credit score reduce significantly. If this should happen multiple times, you can easily see a 100+ point decrease in your score bring you from good credit to bad credit in just a few months. In most situations for the first 3-6 months the bill is late the creditor will reach out to you directly to receive payment of the debt. After this, if it is still not paid, the creditor may pass your file on to a collection agency who will aggressively pursue you to make good on your debt and pay it. If you still refuse to pay it and the collection agency can determine through a background check you have the assets and means to pay the debt, they can sue you resulting in a judgment entered against you. This means in order to enforce that judgment, your debt can be collected through wage garnishment, bank levies, and even placing liens on your assets or property. However, the collection agency will make 100% sure you have the assets to pay the debt because getting lawyers involved isn’t a cheap proposition for them. On the flip side, a judgment is useless if there is no means for the debt to get satisfied and paid. In this scenario, the consumer would be judgment proof meaning a debt collector cannot collect on the debt due to the debtor being insolvent.
Credit Score Improves As Collection Accounts Age: Even though you may have unpaid collection accounts on your credit history, as they get older and older, they will have less of an impact on your credit score. It is not out of the ordinary to see individuals with good credit of 700+ with unpaid collection accounts after the accounts have aged for a few years. As you re-establish your credit moving forward and show credit worthiness, your score will increase, opening the door to future mortgages and loans. Another situation where you can rebuild your credit score over time is after a bankruptcy dishcharge, foreclosure, deed in lieu of foreclosure, or even a short sale. At the time this event takes place, your credit can be reduced 100-150 points rather easily. If you work at obtaining new credit after these events, you can re-establish your credit thus offsetting the negative impact that might have taken place.
Qualifying For Mortgage With Collection Accounts: If you were wondering, you can qualify for an FHA loan with current unpaid collection accounts. According to FHA, they classify collection accounts into 2 categories: medical collections and non-medical collections. Medical collections do not count against your decision for credit as FHA will look right past them. However, if you have non-medical collection accounts that total over $1,000, the lender will use 5% of the unpaid balance as part of your DTI (debt to income ratio). For example, if you have $2,000 in non-medical collections, lenders will apply 5% or $100 as part of your monthly debt obligations.
Keep Old Collections Unpaid: There is one mistake that many consumers can make and that is to contact an old creditor and make a payment on the old collection account. The problem with doing this is you are “waking up” that collection account and re-activating it in the eyes of the credit bureaus who will see this debt as current and new. Upon seeing this, your credit score will get hit yet again and you will be back to square one. The other thing that you are doing is restarting the clock on the statute of limitations for this debt and now you be back to the debt being “new.” More than likely, if the debt is old enough you might not be liable for it anymore and you can disregard it. If you let your old debts go, after 7 years they will be removed from your credit, the only debt that is different is bankruptcy which is eliminated after 10 years.
In conclusion: Just remember that you still have options if you have collections on your credit history and are looking to purchase a home.
If you are in the market for a new home and are doing your due diligence with regards to housing guidelines to determine if you are eligible for a mortgage, there is one key area you are probably not looking into. You need to make sure you understand the different lending guidelines of different banks. What it comes down to is that banks can determine how much risk they want to take on and they can create guidelines to minimize their risk. You might get some guidelines from Bank A and they could be totally different from Bank B. These are what the industry calls Lender Overlays, or expanded guidelines on top of what Fannie Mae, Freddie Mac, FHA, or VA will allow. In a general sense, think of the Fannie Mae guidelines as the primer on your walls and the lender overlays as the color paint over it. You normally don’t see a house with just primer on the walls, and you won’t find many lenders just using standard guidelines.
Now, just because Fannie, Freddie, FHA, and VA set the underwriting guidelines for residential mortgages, these institutions don’t directly lend to the borrowers. What they do is purchase and/or securitize the loans that conform to their guidelines. Lenders who write loans will have an easy time selling the loan once it is closed knowing they followed these pre-determined guidelines. Now where lenders have their overlays they are doing this as they are the ones approving and closing the loans.
Now you may be under the assumption that the minimum credit score for an FHA loan would be 580 and there is a possibility that you could go as low as 500 with a minimum 10% down payments. This may be the case and FHAs guideline, but as we spoke about, you could go to a lender that is going to want a 620+ credit score. In terms of the lender, this is where they are comfortable in approving the loan even though FHA may say something differently. Now this isn’t to say they won’t take any FHA loans, but they will get you approved for an FHA loan with their own credit score overlay.
There are different overlays besides ones that are credit score based. There is a multitude of items that a lender can create an overlay for on top of the pre-determined guidelines. Lenders can also have overlays that deal with the following: max loan-to-value, max debt-to-income ratio, and other items. Take as an example a streamline refinance where there is no requirement for an appraisal or credit score, now what a lender might do is require an appraisal and a minimum credit score.
The best thing you can do these days is to find a lender without overlays, and I have the solution. Look no further than Loan Consultants and call me directly 888-900-1020, where we offer products that do NOT require additional overlays. We can get your loans closed with just using the national guidelines for loan origination. Where the other big banks will deny you or make you jump through hoops to get you approved, that is not the case here. We are here to make sure we try and get 100% of our loans to close. We are a group of dedicated professionals who are doing away with lender overlays and getting borrowers into new homes! Don’t hesitate to call and stop wasting your time with big banks who have too many overlays to keep track of!