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The Secret to Getting a
Mortgage |
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mortgage loan application process can be a confusing maze of paperwork,
documents, and verifications. Knowing the pitfalls and the requirements established by mortgage companies can enhance your chances of loan approval. Most mortgage companies underwrite their loans along guidelines established by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Housing Administration (FHA), and the Veterans Administration (VA). The credit requirements for each of these agencies are generally the same, with FHA and VA loans usually being more lenient regarding credit. Good credit is vital today in America because so many of the things
we want to buy must be financed or purchased on credit. Once you have a
bad credit You have probably seen the TV and newspaper ads for mortgage companies claiming that they can approve your loan “no matter” what type of credit you have. Most of these lenders are known as equity lenders. In other words, they are placing most of their emphasis on the amount of down payment, thus lowering their risk. If they were to foreclose on your property, they would recover their loss by selling your home. These “equity lenders” use different standards for credit evaluation; and since they overlook credit blemishes, equity lenders usually charge higher interest rates to offset the risk associated with the credit. Another term for these lenders is “B, C, D lenders,” referring to the credit rating of the borrower. An “A” credit loan is a loan with a good credit rating. “A” credit loans allow a loan to value up to 97% of the sale price with very competitive rates. “B, C, D” credit loans have marginal credit, rely on lower loan to values, and charge higher interest rates. With some help, guidance, and hard work, you and an experienced loan officer can package your loan to fit into “A” credit loan parameters. To insure that you get the best rate possible and have your choice of loan programs, it is important to understand the credit requirements of an “A” credit lender. “Secrets to Getting A Great Mortgage Rate Regardless of Your Credit” will help you understand how credit is reported and credited and what types of credit can be damaging to your loan application. |
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Credit Facts | ||||||||||||||||||
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What Now |
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| What do you do when credit
blemishes appear on your credit report and jeopardize your ability to
qualify for a mortgage? The next few pages of this booklet will address
options you have in repairing your credit report.
I will explain the problems which can be corrected and the ones which can’t. Whatever your past credit problem may have been, it is important to have a plan for correcting it in the future. I can help you develop a sensible plan to reach your goal of home ownership.
Under current law, credit bureaus have the right to sell information about you. This right also carries the responsibility for substantiating the information if it is challenged. Having items corrected and removed from your credit
report requires the consumer to be persistent in challenging the credit
bureaus to document their information. The
credit bureaus are experts at ignoring these challenges for a variety of
reasons, but the system ultimately favors the Your letter should state the facts of your dispute and request the
deletion or correction of the items. Send your dispute by certified
mail, return Remember, persistence is the key! If at first your don’t receive a favorable response, you will need to persist with the demands on the credit bureau. Your second and third letters should be composed with firm, demanding language reminding the credit bureau of your loss if this matter is not resolved. Another source of correcting credit problems is directly with the creditor. Often, it is easier to make contact with a customer service representative who is willing to listen to the situation causing the late payments. Having the creditor agree to remove the delinquency, in writing, is the best way to permanently remove the item. Keep a copy of the letter from the creditor for future reference. Start with a call to the creditors customer service representative to probe the possibility of resolving the matter with a phone call and a good explanation. If you do not make progress over the phone, you will need to follow the same instructions for contesting an item with the credit bureau.
In some cases you will not have the time to contact the credit bureau to have the item on your credit report corrected or deleted. It is easier to provide the mortgage company or their mortgage credit reporting service with the proof that the items appearing on your credit report are not accurate. Proof can be in the form of canceled checks, receipts, statements, etc. This process is set up to quickly handle errors that would normally result in loan denial. Working directly with the mortgage credit reporting service is more personal than typical disputes with the credit bureau or creditor. Mortgage credit reporting agencies are obligated (under the same rules and regulations established by the Fair Credit Reporting Act) to correct credit items that are not accurate.Mortgage credit reporting services receive electronically transmitted credit information from the credit bureaus. They solicit business from mortgage companies and have a vested interest in providing excellent service to the mortgage company and their borrowers.
Generally, mortgage lenders will require a letter explaining each
late payment on your credit report. This letter is a very important
part of your file. The letter will enable the underwriter to evaluate
your credit situation and The best credit explanation will provide the underwriter with the confidence to believe that the situation was beyond your control. Examples: a lay off, unexpected medical bills, or an illness resulting in your inability to pay those bills in a timely manner. A variety of reasons and situations can result in blemishes on your credit report. It is important that you take the time to document this information in a well written letter which should be reviewed by your loan officer. It is also important for the underwriter to be able to clearly determine that the situation has been resolved. The underwriter will focus on the explanation pertaining to the most recent 24 months and the credit blemishes during that period. It is best if there are no blemishes in the most recent 12 months; although, exceptions can be made. Consecutive late payments on certain accounts can be explained easily since they usually are the result of one missed payment at the beginning of that period. For more information on your credit letter, it is best to consult an experienced loan officer who should be able to discuss your payment history and how best to convey your situation to the underwriter. Because I have dealt with many credit reports and aided borrowers to draft credit letters, I will be able to develop a strategy to handle your particular situation. As you are beginning to think about your letter of explanation, you should put together a chronology of events which occurred at the time of any credit problem. You should consider both personal and business aspects of your life when compiling your chronology.
Take positive actions to get on the road to rebuilding your credit. Develop a budget and stick to it. Create two lists—monthly income and monthly expenses. Discipline yourself to make cutbacks to develop a realistic budget; and most importantly, stick to it. Consumer Credit Counseling Service (1–800–388–2227) can help you in setting up a debt-repayment plan. Make sure your credit is accurate. As we have discussed, there are steps to take to correct any errors. Negotiate with creditors and gain their cooperation. Some creditors are willing to remove negative remarks from your credit file after you have made full or partial payment of your account. Add a positive credit history to your file by assuring that any missing data on timely payments are included in your file. Add evidence of stability by showing steady employment, a long time at your residence, and positive checking and savings account information to your credit file. If you have a credit card, use it and make payments on time. This will improve your credit history quickly. Open a passbook savings account then ask the bank for a loan against the money. The bank keeps the passbook so that there is no risk. Be sure they report the loan to the credit bureau for your record.
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| Sample Credit Letter |
Date Complaint Department Dear Sir, I am writing under the provisions of the Fair Credit Reporting Act 15 USC Section 1681 to dispute the following information in my file. Items I dispute are also circled on the attached copy of the report which I received. (Identify item(s) disputed by name of source, such as creditor or tax court, and identify type of item(s), such as credit account, judgment, etc.) This item(s) is (inaccurate or incomplete), and I am requesting that the item be corrected or deleted. I have applied for a mortgage to purchase a home and this item(s) is
hurting the chances of my loan approval. If these items are not corrected, Please reinvestigate this (these) matter(s) and delete or correct the disputed item(s) promptly. I expect you to notify me in writing when these items are deleted (corrected). Sincerely, Mr. and Mrs. Credit Error |
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Credit Problems | ||||||||||||||||||
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are many different types of blemishes which can adversely affect your credit. We have attempted to summarize the most common credit blemishes and what effect, if any, they may have on your mortgage loan application.
Although there are many reasons a borrower may not have
established credit, the most prevalent is the young person or newlywed.
Fannie Mae, Freddie Mac, FHA, and VA all allow non-traditional forms of
credit for people who have no established credit. When a borrower has none
or very little credit, mortgage
This is the easiest and most acceptable bad credit to explain. The most common explanations for a defined period of late payments are divorce, illness, personal tragedy, job loss. The key to this type of bad credit lies in showing the underwriter that the situation was beyond the borrower’s control and the event was isolated. Also, it is important to show that the person has exhibited the ability to maintain good credit with the exception of this period of time. In most cases a 12-month gap in time is required from the end of the credit problem to settlement on a mortgage. The isolated period of bad credit can be for an extended time as long as the borrower can demonstrate that the situation has been resolved.
This is the borrower who just does not pay bills on time. The borrower may have the income and savings to pay the bills, but for a variety of reasons the credit record is less than perfect. This type of credit problem is probably the most difficult to work with since the borrower has not demonstrated the ability to handle credit. A key to obtaining a mortgage for this type of borrower is to put a 12-month gap between the last late payment and the settlement of the new mortgage. This will allow the borrower/loan officer to explain that the situation which caused these late payments has been resolved and that the borrower is now a responsible person who has the ability to handle credit and finances.
A foreclosure on a mortgage can be a very difficult problem to solve. Any time a borrower has had a foreclosure, the underwriter will closely examine the reason, the borrower’s ability to pay his rent, the amount of the mortgage payment in comparison to the rent, and the time between the foreclosure and the purchase of a home. A sufficient gap in time between the foreclosure and the settlement date on the new loan, along with a VERY good explanation, can aid in loan approval. Mortgage loans to people who suffered foreclosure are handled on a case-by-case basis with no particular rules or regulations being followed. Remember that documentation of the foreclosure, along with supporting information, can greatly increase your chances.
This refers to accounts, such as cars, boats, and other types of loans, that have security for the loan. Perhaps a vehicle has been repossessed by the lender because of lack of payment. An underwriter will view a repossession and a judgment with the same severity. A borrower has a good chance for approval if at least 12 months have passed since the repossession and a good explanation can be provided.
Judgments are not as damaging to a mortgage loan application as most people think. The important thing to remember is that the judgment must be paid in full before a loan can be approved. It is easier to explain a judgment than to explain multiple late payments. In a judgment there is no credit record of a late or sloppy payment history. The concern is only for explaining the reasons for the judgment.
Mortgage companies have different views when evaluating
a bankrupt borrower. Fannie Mae, Freddie Mac, FHA, and VA require a
minimum of 2 years of clear credit from the date that the bankruptcy is
discharged before a new mortgage can be approved. The key word is
discharged.” Frequently confused with the date that the person filed for
bankruptcy, “discharge” actually Mortgage loans can be approved for certain borrowers who have not yet reached the 2-year mark. In this case, the borrower must prove that the bankruptcy was the result of a situation beyond the borrower’s control, such as being a victim of a financial disaster—business failing or medical problem. It is also very important that the borrower have VERY good credit since the time of the discharge. It can be easier to approve a loan for a borrower who has been bankrupt than a borrower who has horrible credit. Since the bankruptcy discharges debt, the credit reporting company cannot show the payment history on the credit report for the loans that were discharged. The credit report will only list the name of the creditors who were included in the bankruptcy. If the bankrupt borrower has not reestablished credit after the bankruptcy, it will be necessary to use alternative forms of credit which can be noted under the “No Credit” heading. For borrowers who have filed bankruptcy under Chapter 13 of the bankruptcy code, it is possible to be approved for a VA or FHA mortgage while they are in bankruptcy provided that they have been in Chapter 13 for at least a year and have had a good payment history on installments. If you have otherwise been a responsible bill-payer, you
should let prospective creditors know the circumstances leading to your Isolated factor which caused bankruptcy Your otherwise good credit history That financial problems have been erased, and your
current
A charged off account is a loan that has been determined
by the credit grantor to be uncollectible. Charge off and collection
accounts must be paid in full to a zero balance prior to approval for a
mortgage loan. A charge off or collection account showing on a credit
report must be explained with a satisfactory letter from the borrower
detailing the circumstances behind the charge off or collection. Charge
offs and collection accounts usually are not loan killers provided the
borrower has a good explanation and |
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What First | ||||||||||||||||||
| If
you are making plans to apply for a mortgage loan, the first item of
business will be to get a copy of your credit report. Next, give me a call
to set an appointment to review your situation.
How do I get a copy of my credit report?I can provide you with a preliminary (“infile”) report but will need a full report for loan approval. You can request a copy of your report from any of the sources shown later in this book. |
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Glossary of Credit Terms | ||||||||||||||||||
| Adequate Protection—The
standard of protection granted a creditor by the trustee or
debtor-in-possession to prevent the court from allowing the creditor to
foreclose on its property.
Balance Sheet—A statement of financial conditions as of a specific date. It is different from a cash flow statement, which summarizes income and expenses. Bankruptcy Code—The body of a federal statutory law that governs the bankruptcy process. Chapter 7—In a Chapter 7 proceeding, the debtor’s business is liquidated and its assets are distributed to creditors with allowed proofs of claim. Chapter 11—A Chapter 11proceeding is a form of reorganization of debts. The debtor continues to operate its business after the bankruptcy is filed. Chapter 11 liquidations are common and are usually the result of an unsuccessful reorganization. Chapter 13—May only be filed by an individual debtor with limited debt. It allows a payment plan for an individual’s financial and/or business debts. Closing—When a bankruptcy case is closed, it is no longer on the court’s docket. Collateral—Property of a debtor in which a creditor has a lien securing its debt. Consumer Credit Counseling Services—Non-profit organizations established to help debtors make payment arrangements with creditors. Credit Report—A document completed by a credit-reporting agency providing information about the buyer’s credit cards, previous mortgage history, bank loans, and public records dealing with financial matters. Creditor—One to whom you owe money. Debtor—One who owes debts. In bankruptcy, the bankrupt business that is under the control and protection of the bankruptcy court is the debtor. Debtor-in-Possession—The business debtor in a Chapter 11 Discharge—A discharge in bankruptcy relieves the debtor of the dischargeable debts incurred prior to filing. Discharge is the legal term for the elimination of debt through bankruptcy. Dismissal—The dismissal of a bankruptcy case, for all intents and purposes, returns the debtor to the same place it was before bankruptcy. Foreclosure—A debt-collection procedure whereby property of the debtor is sold to satisfy debts. Foreclosure often involves real estate of the debtor. General, Unsecured Claim—A claim that is neither secured nor granted a priority by the Bankruptcy Code. Involuntary Bankruptcy Proceeding—In an involuntary bankruptcy proceeding, the debtor is forced into bankruptcy by creditors. Jurisdiction—The power and authority of a court to issue binding orders after hearing controversies. Lien—An interest in property securing the repayment of a debt. Motion—A request for the court to act. A motion may be filed within a lawsuit, adversary proceeding, or bankruptcy case. Personal Property—Moveable property. Property that is not attached to land. Priority—Certain categories of claims are designated as priority claims by the Bankruptcy Code, such as claims for lost wages or taxes. Each must be paid in order of priority by claim. Proof of Claim—The document filed in a bankruptcy case that establishes a creditor’s claim for payment against the debtor. Real Property—Land and anything permanently affixed to the land, such as fences, buildings, and those things attached to the buildings, such as light fixtures or plumbing. May refer to rights in real property as well as the property itself.. Secured Creditor—A creditor whose debt is secured by a lien on property of the debtor. Secured Proof of Claim—A proof of claim for a debt that is secured by a lien, a judgment, or other security interest. Security Interest—A lien on the property in the possession of the debtor that acts as security for the debt owed to the creditor. Trustee—An officer of the court appointed to take custody of the assets of a bankruptcy estate. Unsecured Creditor—A creditor without security for its debt. |
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Items to Bring to Loan Application |
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Summary | ||||||||||||||||||
| While
we have been very successful working with borrowers to resolve credit
issues on their mortgage loans, it is important to realize that not all
credit problems can be resolved.
Our policy has been to maintain a very aggressive view of credit and most importantly to listen to the borrower’s explanation of credit problems so that we are in a better position to assist in getting the loan. Great emphasis is placed on the borrower’s credit in the most recent 24 months with the major focus on the credit in the 12 months immediately prior to settlement on the mortgage loan. The borrower should exhibit the ability to manage finances for the past 12 to 24 months. If your credit has prevented you from either refinancing or purchasing a home, you owe it to yourself to take a closer look at your credit problems.
You will have to be willing to spend time to resolve the credit issues that will affect your loan application. Enlist the help of a Home Loan Specialist or Real Estate Agent who is willing to work with you in resolving these issues. It is important that your loan officer and realtor have experience in dealing with credit problems. Frequently, a loan officer will review an infile credit report, fail to request an explanation from the borrower concerning problems, and simply inform the realtor that there are too many credit problems to work at securing the loan. What the loan officer is really indicating is an unwillingness to spend the time or energy required to make the loan work. When you want to buy or refinance a house (or if you are an agent who wants to sell a house), always work with a Home Loan Specialist . . . not an “interest-rate salesman” with the lowest bid. |
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Addresses | ||||||||||||||||||
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CBI-Equifax Information Services 3660 Maguire BlvdSuite 300 Orlando, FL 32802 (800) 685-1111 Charge for report: $8 plus local sales taxCredco UNIONDALE, NY 11553 (800) 435–5661 Experian 295 Jimmy Doolittle Drive (800) 682-7654 Charge for report: First report FREE; second, $7.50TransUnion 200 Spring Lake CoveSuite 201 Jackson, MS 39208 (800) 888-4213 or (800) 916-8800Charge for report: $8 plus local sales tax Federal Trade Commission (FTC) ATTN: Credit Bureau Complaints (202) 326–3650 |
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