Are There Any Bad Credit Mortgage Lenders Left?

By Gina Pogol
Mortgage Credit Problems Columnist

Gary Asks: Dear Gina, I have bad credit as a result of my divorce (my ex filed bankruptcy and her creditors came after me so I had to file too). I'd really like to buy a home while prices are low but my credit score is less than 600. My income is good enough that I could make my payments even at a higher interest rate. I just need to find a lender that still makes these kind of loans.

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Gina Says:

Dear Gary,

Many sub-prime lenders have left the business or switched to related activities like appraisal management and mortgage modification. Know also that sub-prime or bad credit mortgage lending has changed--you won't be able to get a 100% mortgage with bad credit and no income verification. Prepare to make a substantial down payment, at least 20% to 30%, to pay several points upfront, and to pay a higher interest rate.

Finding Bad Credit Mortgage Lenders

Your first step is to complete the form on this site to see what kind of terms bad credit lenders are willing to offer you. If you need to save a down payment, take the opportunity to improve your credit score at the same time. Paying your bills on time after a bankruptcy is the surest way to rehab your credit score. Even if you have to get a bad credit home loan, a better score means better terms--sub-prime lenders grade borrowers from A- to D, and D borrowers pay a lot more than A- borrowers.

FHA Is Not Sub-prime

If you have put at least 24 months between you and your bankruptcy and have saved at least 10% down, try applying for a mortgage with an FHA-approved mortgage lender. With 10% down, FHA allows you to have a score under 580 and still get approved. Keep in mind, however, that most FHA lenders have higher standards than the agency requires. This is because lenders with excessive defaults on FHA mortgages can lose their ability to fund FHA loans, even if the mortgages were underwritten exactly in accordance with FHA guidelines. To keep this from happening, most lenders impose what are called overlays--stricter underwriting standards than required by law. This has resulted in the average credit score of FHA borrowers to increase from 621 a couple of years ago to 693 today.

Credit Quick Fixes

Finally, there are a couple of shortcuts to improving your credit score. If you have relatives or close friends with excellent credit (like you may have had before your divorce), see if they will put you on a credit account as an authorized user. You don't actually use the account, but if you're on it, your buddy's good credit history becomes part of your credit profile, which can improve your score. If you have some available cash, pay down balances to improve your credit utilization (the ratio of credit used to total credit). With your good income, you should be able to make this happen quickly.

Many people think that they won't be able to get a loan for seven years after bankruptcy. That's simply not true, especially if their credit was good before filing. Keep your nose clean and check your scores every six months to monitor your progress. You may be pleasantly surprised.



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