MCP Help Blog

You were turned down for a home loan. Or haven’t applied because you don’t think you’d be approved. Well, no need to go into a bank’s office, fill out a hundred forms, and get embarrassed when the dude in the blue suit says “No.” You can see where you stand by doing a little investigative work online.

Beginning at the top, know that even A-grade credit is no longer enough to get you a mortgage. You need sufficient, stable income, and you need to document how much it is and how often you get it.

Step 1: Prequalify Your Income Before even looking at your credit, try checking out a mortgage prequalification calculator to see if you can afford the payments on a home in your neighborhood. If your income is sufficient, go to step 2. If it isn’t, improve your debt to income ratio by putting a plan in place to pay off debt and get where you need to be income-wise. Other solutions people have tried include buying a home with someone else–the two incomes make home ownership possible.

Step 2: Determine Your Credit Grade Your down payment requirement can range from almost nothing to 30% or more, depending on your credit rating. So your credit grade is crucial in determining what else you will need to buy your home. If you have Grade-A credit you probably know it. A score in the 700s, several longstanding accounts with no late payments, and relatively low balances on your accounts are signs of a high-grade borrower.

Once you get out of Grade-A range, your credit may be assigned a subprime grade of A- to D. Those with grades C or higher are most likely to be able to qualify for a mortgage within the next year, so let’s address these here.

A- starts at FICOs in the 660 range, a debt-to-income ratio of 38% max, no mortgage lates, and no more than 1 or 2 other slightly late payments. No recent bankruptcy. You can borrow up to 95% of the purchase price with A- credit. You may also be able to get an FHA loan with A- credit.

B to B- means a score of about 620, several late payments over the last 12 months, and maybe a couple of mortgage lates (but no 60 day late mortgage payments). You can have a debt-to-income ratio of up to 50% and finance 75-85% of the purchase price. You may be eligible for FHA financing if you have plausable reasons for the late payments and have done something about the situation that caused them. You may have had a bankruptcy within 24-48 months.

C+ to C- means a score of about 580, a debt ratio of 55%, and you may finance 75% of the value of the home. You become a grade C by being 30 days late on several bills and perhaps 60 days late on some payments. You may have had a bankruptcy within 12 months. You cannot qualify for FHA financing with C rated credit.

So, if you are an A-, B+, B, or B- borrower, your first stop should be FHA. See if you can avoid the bad credit mortgage market altogether with a government-backed mortgage.

If you can’t go FHA or your grade is lower than B-, and you don’t have a huge down payment (you probably don’t because if you had that kind of money you’d be paying your bills, right?!), you need a plan to pay your bills and pay them on time. Notice that these credit grades are drawn mostly from your most recent credit experience, the last 12 to 24 months. And on a $300,000 home, the difference in down payment requirement for a C- borrower and an A- borrower is about $60,000! Not to mention the difference in interest rate you will be charged as a C-grade borrower. The good news is that within a year you could be an A- borrower. So if you are serious about buying a home, get serious about paying your bills on time. Trashed credit today does not doom you for life–unless you let it.