Can Bad Credit Stop Your Houston Mortgage?

If you're concerned that previous financial mistakes or a poor credit score could hinder your purchase of an apartment in Houston and surrounding areas, you're not the only one. Many homebuyers think that their credit score is a guarantee that they are exempt from homeownership; however, the truth is more nuanced and positive. Although having a good credit score certainly helps in getting mortgage approval and helps secure higher rates of interest, If you work with a knowledgeable mortgage lender in Houston who knows various loan options and strategies for credit rehabilitation can help you gain access to opportunities that seemed forever closed. Houston's varied mortgage landscape offers various loan options that are specifically tailored for those with a difficult credit score such as FHA loans that have minimum requirements for credit to programs for first-time buyers as well as people who have suffered financial hardships. The most important thing is to know how credit affects the mortgage options you have, which programs can be successful despite problems with credit, and the actions you can take to improve your credit score. This complete guide explains the connection between the credit score and mortgage approval. It reveals that although bad credit poses difficulties, it's not going to end your Houston home ownership dreams.

Understanding Credit Score Requirements by Loan Type

The mortgage market isn't a one-size-fits-all and loan programs have drastically different requirements for credit. Understanding the different requirements is vital for borrowers who face credit difficulties.

Conventional loans, which are backed by Fannie Mae and Freddie Mac, typically require minimum credit scores of 620. However, some banks prefer to have 640 scores or better to get better conditions. These loans provide competitive prices and an array of terms, but have stricter standards for credit than the government-backed loans.

FHA loans, which are backed through the Federal Housing Administration, are specifically designed to aid people who aren't eligible for conventional loans. The required rating for credit is 500, but the majority of lenders have their own standards for overlays, requiring at least 580 in order to get the lowest possible down payment which is 3.5 percent. Scores that fall between 500 and 579 need 10% down payments and make FHA loans accessible to those who have significant difficulties with credit.

VA loans, which are available to military personnel or veterans, as well as spouses who are eligible, don't require the federally-mandated minimal credit score. However, the majority of VA-approved lenders require 620. It is the VA Program's flexible credit requirements and no down payment options makes it a good option for borrowers who have poor credit.

USDA loans, aimed at homeowners in suburban and rural areas who meet income guidelines, generally need a minimum credit score of 640. Some lenders are willing to accept lower scores in exchange for compensation factors like low debt-to income ratios or substantial savings.

Credit unions and portfolio lenders may offer loan programs within their own facilities with more flexible credit criteria by evaluating the entire profile of the borrower instead of solely relying the credit scores. These lenders are able to be able to approve loans that other institutions do not although rates may be more expensive.

What Really Counts as "Bad Credit"

The phrase "bad credit" is subjective and may mean different things to individuals. Understanding where your credit is helps you set reasonable expectations.

Credit scores vary between 300-850 and classifications typically break into the following categories Excellent credit is at or above 800, extremely good credit spans between 740 and 799, good credit ranges from 670-739 Fair credit ranges from 580-669, and low credit is below 580. For mortgages scores higher than 740 usually will be eligible for the best rates and terms. However, scores below 620 are subject to more difficulties with conventional financing.

But you credit score won't be the only thing banks consider. Recent negative events such as bankruptcies collections, foreclosures, or bankruptcies have a significant impact regardless of your score. A borrower with a 650 rating and no significant derogatory marks may be more likely to get approval than a person who has a score of 680 however a foreclosure that has occurred recently.

The length of your credit history also plays a role. If you have a weak credit history--a small number of accounts and a brief history -- could have a good score, but have trouble getting approval since lenders don't have enough information to determine the risk. However, a person with a lengthy credit history but a lower score because of recent financial hardship could benefit from greater flexibility with lenders.

The direction of your credit can also influence your decisions. Improved scores indicate financial stability and accountability, whereas declining scores indicate a worsening of financial conditions. The lenders are enthused by positive trends, even if your score isn't the best.

Impact of Specific Credit Issues

Different kinds of credit issues impact mortgage approval in different ways Knowing the distinctions will help you deal with your issues strategically.

Recent late payments, and especially recent ones, are warning signs. One late payment from two years ago is not likely to have an impact, however numerous recent 30 day lates or any lates of 60 or 90 days pose serious challenges. The majority of loan programs require at minimum 12 months of timely payments prior to approval.

Charge-offs and collections must usually be addressed prior to closing. Certain loan programs require the payment off certain kinds of collections, whereas other programs permit collections that are not paid under certain thresholds. Medical collections are generally seen as more relaxed as compared to unpaid credit cards as well as personal loans.

There are waiting periods for bankruptcy before the mortgage is eligible. Chapter 7 bankruptcies require two years following the discharge date for FHA loans, and the conventional loan period is four years. However, these times can be shortened in certain circumstances. Chapter 13 bankruptcies allow mortgage applications within twelve months of successful repayment program participation. FHA loans.

Foreclosures can impose longer waiting periods: three years in the case of FHA mortgages and seven for standard loans starting from the date of their completion. Short sales and deeds in lieu of foreclosure have similar, but with slightly shorter waiting times.

Student loan debt does not directly affect credit scores but impacts the calculation of debt-to-income. The high amount of student loan debt may hinder approval even for those with good credit scores, if monthly obligations eat up too much of your income.

Compensating Factors That Help Overcome Bad Credit

Even with credit issues strong compensating factors could get lenders to accept your mortgage application, despite scores that normally would make you unqualified.

Large down payments drastically lower the risk for lenders. If you are able to put down at least 15-20 percent, lenders are more accommodating with credit criteria. A higher equity stake means that the lender will have less money at risk in the event of problems.

Low debt-to-income ratios demonstrate financial capacity to handle mortgage payments. In the event that your credit rating is not too high however you are in a position to pay off your other debt, and your mortgage payment is only a small portion of your income the lenders will view your credit score more favorablely.

The large cash reserves -- savings above the amount of your down payment and closing costs - provide security. A minimum of six months of mortgage payments saved allows you to take on financial storms and offset problems with credit scores.

A stable employment history, particularly many years with the same employer, or within the same industry implies a stable income, which reduces the risk of default. The lenders prefer borrowers with steady earnings over those who have frequent job shifts, even though the former have better credit.

Positive credit trends are important. If your credit score has increased substantially over the last year, and you have demonstrated exemplary financial management following prior difficulties, lenders tend to give you more flexibility than if your score is stagnant or has declined.

Steps to Improve Your Approval Chances

If your credit score isn't where you'd like it certain actions can boost your odds of getting approval and get better rates.

Check your credit reports carefully and make sure you dispute any errors. Incorrect information is frequent, and rectifying mistakes can improve your score in a short time. Request reports from the three bureaus -Experian, Equifax, and TransUnion--as they can contain different information.

Pay off credit card debt with a ferocious pace. Credit utilization - the percentage of available credit you're taking advantage of--has a significant impact on scores. A reduction in utilization to 30 percent, but ideally less than 10 percent, could boost your score by a significant amount within just one billing cycle.

Automate payments for all accounts to ensure that you do not miss payment the due date. History of payments is the most significant aspect in credit scores, and a unpaid payment could reduce scores by 50-100 points.

Do not apply for credit prior to submitting for mortgage. Each application triggers a difficult inquiry, which temporarily lowers your score and the new accounts lower the average age of your account.

Take a look at the debt counseling programs or credit management if your situation is overwhelming. Although enrollment may temporarily affect credit score, completing these programs shows a an attitude of financial responsibility that lenders appreciate.

Don't close credit accounts from the past even if you've already paid off the debt. The length of your credit history affects scores, so closing your accounts decreases the amount of credit you have available which could result in higher the utilization ratio on any remaining credit cards.

Working with lenders that specialize in Credit Disputes

There are a few Houston mortgage lenders that possess the same knowledge of borrowers with poor credit. Partnering with experienced experts who are knowledgeable about the various loan options and credit rehabilitation can be the difference between acceptance and denial. Mortgage lenders with specialization can help you find programs you have not heard of, design the application in a way that highlights compensating factors, give advice on what problems with credit to first address and then engage on your behalf you with underwriters that may otherwise reject your application. If you're concerned that credit challenges might prevent your Houston homeownership dreams, the experienced team at TX Premier Mortgage can evaluate your specific situation, recommend appropriate loan programs, and guide you through the approval process. Their experience in FHA loan, VA loans, and alternative financing options has been able to help a number of Houston families who have a difficult time getting credit to obtain homeownership even though other lenders refused to help. A mortgage lender that specializes in identifying solutions instead of simply identifying issues makes what appears impossible feasible possibility.

Conclusion

Although bad credit definitely complicates the process of approving mortgages and can limit the loan options available to you however it does not automatically bar the possibility of Houston homeownership. Knowing the minimum credit requirements of various loan programs, understanding the ways that specific issues with credit affect the approval process, using compensating factors, and taking proactive actions that improve credit score will increase your chances of approval significantly. It is important to approach the procedure with a realistic mindset and working with reputable lenders who are specialized in dealing with the credit-challenged and willing to put in the time to build your credit profile if you aren't able to get approval immediately. Be aware that credit scores don't last forever. They reflect your current financial situation and are able to improve with regular prudent management. If you're able to buy today through a variety of programs or you need to take some time working on your credit, Houston homeownership remains achievable for those who are willing to take the correct steps. Don't let concerns about credit keep you from exploring the options available and determining the options that can be attainable for your specific situation.