One of the crucial factors which determine if a mortgage is approved is having good credit. Lenders have tightened their criteria after the irresponsible lending of several years ago. However, those who have taken the necessary steps to repair bad credit should be able to obtain a mortgage when they are in a position to show a positive credit record for at least two years.
It all rather depends on what bad credit items are on the credit reports. Those who have a previous bankruptcy may be considered for a mortgage two years after the bankruptcy is discharged. If there is a foreclosure on the credit reports, it will take a minimum of three years before another mortgage is considered.
These are the minimum periods if applying for an FHA home mortgage, and other lenders each have their own criteria. Fannie Mae has stricter guidelines for issuing mortgages after foreclosure. However, those who have a strategic default on their credit report will find that lenders will not look favourably at their applications.
Once bad credit has been repaired, potential mortgage borrowers need to ensure that they maintain a good credit record. It will be necessary to continue to use credit in a responsible fashion by paying all bills in a timely fashion and keeping credit under a 30% ratio to available credit limits. Those considering mortgage applications should ensure that no new applications for credit are made in the six months prior to applying for a mortgage.
Many borrowers make several mortgage applications in search of the best deal. As long as these are made in the same period they will only count as one hard credit inquiry; thus submitting several applications within the same two week period will not impact one’s credit score negatively. However, if the applications are spread out they will have a negative impact.
The other key area which mortgage applicants who have repaired bad credit should focus on is appearing stable in both employment and finances. Staying in the same employment for at least six months, but preferably longer, will help. Applying with a sizeable down payment of at least ten percent will also aid the application, though some lenders may require more. A twenty percent down payment is ideal to avoid the additional expense of PPI. However those applying for an FHA loan need only provide a 3.5% down payment.
Obtaining a mortgage after repairing bad credit is possible. Much depends on what bad credit items were originally reported and the specific lender’s criteria. Comparison shopping between lenders and focusing on their conditions regarding previous bad credit will save time wasted in making applications to mortgage lenders who have strict guidelines.
The most reasonable guideline for those who have not had a foreclosure on their credit report is to apply after two years. This gives a good opportunity to concentrate on saving for the down payment and fees levied by the lender, and continuing to improve credit.
Sources: FHA
Fannie Mae