When you have past credit issues, such as bankruptcies, foreclosures, or short sales, it might seem like you will never get a mortgage again. The good news is that you will get a mortgage; it just might take a little time. The regulations used to be pretty tough, making borrowers wait many years before being able to be a homeowner again, but things have lightened up and many people are realizing their dream of becoming a homeowner much sooner than they ever thought possible. The minimum credit score for any type of loan is typically not the issue for people with past credit issues; the real issue is how much time has passed since the incident occurred.
Minimum Credit Scores for Residential Loan Programs
Every loan program has a minimum credit score or a threshold that they will allow for someone to be eligible for a loan. There are many other factors that play into whether or not you are actually eligible though. The hard and fast numbers for the loan programs include:
- Conventional loans – Credit scores below 640 are generally not allowed, but the 640 minimum does not apply to everyone; it is reserved for those with a low LTV (less than 75%) and debt ratio less than 36%. If your LTV or debt ratio is higher, the minimum credit score increases accordingly with the highest minimum for a conventional loan being recorded at 700 if your debt ratio is between 37% and 45% and your LTV is greater than 75%.
- FHA loans – The minimum credit score for FHA loans is 580 if you want to be able to put down just 3.5% on the home. If your credit score is between 500 and 579, you may still be eligible for an FHA loan, however, you will be required to put down 10% on the home.
- VA loans – The generalized minimum credit score for VA loans is 620, but it varies by lender. This is the minimum credit score set forth by the VA, but many lenders will require the score to be higher unless there are many compensating factors in place, including a low LTV and low debt ratio.
- Subprime loans –Non-conventional loans do not have a minimum credit score per se. It is up to each lender and the risk they want to take. Generally, they want credit scores above 600, but that does not mean that someone with a credit score of 580 with a low debt ratio and high down payment will not be approved for this type of loan.
If you have a bankruptcy in your past, you have a certain length of time that the bankruptcy must be discharged in order to obtain each type of loan. Having a BK does not exclude you from any type of loan, even a conventional loan. What matters is that you meet the minimum credit score requirements and have passed the proper amount of time. If you have a Chapter 13 bankruptcy and are making payments on it still, you may be able to get a new mortgage as long as you have been making payments for at least 12 months; each payment has been on time; and your trustee overseeing the BK approves the addition of a new debt. If you have a Chapter 7 bankruptcy, the following guidelines must be followed:
- Conventional loans – Loans provided by Fannie Mae or Freddie Mac have the best terms and lowest fees and they just lowered their waiting period times for loans after bankruptcy. It used to be a four year waiting period, but it is now just two years from the date your bankruptcy was discharged to apply for a conventional loan.
- FHA loans – These government backed loans are getting easy to obtain after a BK. Today, the wait is just two years after the date of discharge of the bankruptcy.
- VA loans – The loans provided to the veterans of our country also only requires a 2 year waiting period following the discharge of the BK.
- Subprime loans – Loans that are not backed by the government are the easiest, yet often most expensive loans to obtain after a BK. As long as 24 months has passed since the discharge of the Chapter 7 BK, you can apply.
Foreclosure and Short Sale
Losing a home is never a pleasant experience, but lenders want to make sure that it is definitely behind you before making you a homeowner again. They want to see your credit bounce back and your rental history to be pristine. The guidelines for obtaining a mortgage after a foreclosure are similar to those of a bankruptcy:
- Conventional loans – The dreaded four year wait is now over; borrowers must wait only 2 years after a foreclosure and/or short-sale to apply for a conventional loan.
- FHA loans – The FHA requires a slightly longer waiting period for foreclosures and short-sales than they do for bankruptcies. This is because they take housing history as a very serious component of your risk profile. The FHA requires a 3 year waiting period after a foreclosure unless you had extenuating circumstances.
- VA loans – Just like the FHA, the VA requires borrowers to wait a period of 3 years following the foreclosure or short-sale of their home to apply for a new VA loan.
- Subprime loans – Most subprime lenders will require a waiting period of 2 years following a short-sale or foreclosure.
FHA Back to Work Program
The FHA does have a program for extenuating circumstances and a serious financial event. This pertains to borrowers that suffered a bankruptcy, foreclosure, or short-sale as a result of the recession. These borrowers are said to have extenuating circumstances and as long as they can prove it as well as prove that they have fully recovered, they may be able to forgo the above waiting periods for FHA loans and get a loan sooner. The conditions surrounding this program include:
- Your income must have decreased by at least 20% during the recession due to a loss of job, downsizing, or other extenuating circumstances.
- You must have experienced a foreclosure, bankruptcy, or short-sale.
- You must show a full recovery from the economic event that caused you financial distress.
- You must take housing counseling prior to taking on a new FHA mortgage.
If you qualify with the above circumstances, your waiting period is decreased to 12 months for either a bankruptcy, foreclosure, or short-sale for an FHA loan.
It is possible to bounce back after an unfortunate financial disaster that caused you to lose your home or write everything off. As long as enough time has passed; your credit has recovered; and you understand the ramifications a new mortgage can have on your financial life, you should be able to obtain a new mortgage and start your home ownership all over again.