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Loan Officer Training-
Re-Establishing Credit for Mortgage Approval Without Relying on Credit Repair Companies
Most Applicants Do Not Need to Pay for Credit Repair to Qualify for a Mortgage
- A common misconception among borrowers is the belief that hiring a credit repair service is required before obtaining a mortgage.
- This assumption is not universally accurate.
- In reality, re-establishing credit over time can be straightforward:
Pay All Bills On Time For One Year
Mortgage lenders primarily focus on recent credit history. Previous credit issues typically do not prevent mortgage approval if credit has been re-established and payments have been made on time.
These payments can include any of the following:
- Credit card payments
- Auto payments
- School loan payments
- All other types of loan payments
- Mortgage and rent payments
- Utility payments and any other type of credit, if applicable
If housing and installment debt payments have been made on time during the required review period for manually underwritten FHA loans, the U.S. Department of Housing and Urban Development (HUD) permits underwriters to consider the borrower’s payment history acceptable.
Paying Off Old Collections Or Charge-Offs Shouldn’t Be Your First Move
Many individuals believe that outstanding collections will prevent mortgage approval and that old debts must be repaid prior to applying. This belief is incorrect.
Paying old collections updates the account’s activity date, which can temporarily lower the credit score. Additionally, funds needed for the down payment, closing costs, or reserves may be diverted to pay these collections.
It is generally advisable to leave old collections unchanged and seek guidance from a mortgage loan officer.
In most situations, old collections and charge-offs do not need to be repaid prior to applying for a mortgage.
Exceptions exist depending on the loan program, property type, Automated Underwriting System (AUS) findings, and underwriter requirements. For instance, certain property types such as two- to four-unit properties, second homes, and investment properties are subject to specific provisions in the Fannie Mae Collection and Charge-Off Policy.
The Recent Payment is What Matters Most
While previous credit issues are not ideal, recent late payments are viewed more negatively by lenders.
Underwriters require evidence that the borrower has achieved financial stability and is currently making timely payments.
The Last 12 Months are Most Important
The primary objective should be to avoid any new late payments prior to applying for a mortgage.
This means:
- Don’t miss credit card payments.
- Don’t miss auto loan payments.
- Don’t miss student loan payments.
- Avoid overdrafting bank accounts.
- Refrain from opening new credit accounts.
- Do not dispute negative credit reports without professional guidance.
- Consult a mortgage professional before paying off old collections.
Fannie Mae specifies that lenders evaluate a borrower’s credit history by considering the current status of accounts, payment timeliness, and the frequency, recency, and severity of delinquencies.
Old Late Payments And Repossessions Are Not Deal Killers
A late payment or repossession does not automatically disqualify an applicant from mortgage eligibility.
It is necessary to provide additional context and information to complete the credit profile.
Underwriters Will Look At:
- How recent late payments were,
- If the borrower has made on-time payments since the late payments,
- If the borrower has rebuilt credit,
- If the borrower has consistent income,
- If the borrower has sufficient funds to cover closing costs,
- If the borrower has funds to receive automated underwriting approval, and
- If the borrower’s file needs to be manually underwritten.
- The most recent twelve months of credit history are viewed more favorably when the applicant meets the aforementioned requirements.
Best Ways to Re-Establish Credit for Mortgage Approval
Consider Opening a New Credit Account. If insufficient credit history exists, opening new accounts may be necessary.
Responsible use of a secured credit card can assist in building credit.Limit
Credit Card Balances
Maintaining low credit card balances relative to the credit limit is advisable, as high balances can reduce credit scores. Paying balances in full does not negatively impact scores.
Schedule To Make Payments Before The Due Date
A late payment within the twelve months preceding a mortgage application can have a significant negative impact on an account.
Do Not Close Old Credit Cards
Closing older credit accounts can negatively affect credit scores, as these accounts contribute positively to credit history.
Seek Guidance Before Paying Collections
Some collections may not require payment, while others might. It is advisable to seek mortgage approval before addressing outstanding collections.
The Bottom Line
Credit for mortgage approval does not need to rely solely on a credit repair company.
The best strategy is often to:
Rebuild With On-Time Payments
Maintain on-time, balanced payments for at least one year, avoid new derogatory credit, and leave collections and charge-offs unchanged unless otherwise advised by a mortgage loan offi Older credit issues are often manageable, whereas recent late payments typically present a more significant concern
Get New Credit To Off-Set Prior Bad Credit
The easiest and fastest way of rebuilding your credit with bad credit and boosting your credit scores for mortgage approval is by getting new credit. Get three to five secured credit cards with $500 credit limit. Get two credit rebuilder account. Add yourself as authorized cardmember from a family member, or close friend. The main cardholder cannot have any late payments, have timely payment history, no late payments, and under 30% credit utilization ratio. We will cover more on this topic on a separate thread.
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