What does it take to get approved for mortgage loans with bad credit? (Unnamed Copywriting)

What does it take to get approved for mortgage loans with bad credit?

Before the housing crisis, it was very easy to get approved for mortgage finance. The difference between loan approvals for borrowers with good credit versus the loans for people with bad credit was just the interest rate. Mortgage loans for people with bad credit typically didn’t include harder loan underwriting at all.

Sub-prime lenders would offer a home mortgage to almost anyone, and typically would only need the bare minimum of documentation to approve the loan. Towards the end of the height of lending, most sub-prime banks were only requiring a four page loan application and a credit report to close a mortgage refinance. All they were interested in was the actual credit score to determine the interest rate.

As these banks all fell, however, a new form of loan modification became the best way to get home loans for people with bad credit. FHA loans took over the market that the sub-prime loans left behind. Unlike sub-prime loans, however, FHA loans offer the same interest rate to every borrower in the program.

Now, as opposed to before, the difference between a home loan for a borrower with good credit and one with bad credit is not the interest rate, but the actual process of approval. Both good and bad credit borrowers will have very similar interest rates when it is all said and done, but it will take a lot more work for a bad credit borrower to get to that point.

With an FHA loan, a borrower needs to only show that they are a good addition to the FHA program, and that there is a high likelihood that they will consistently show good payment patterns on the new loan.

For a borrower with good credit, good income, solid mortgage payment history, and a good amount of equity in their home, it does not take much work to convince an underwriter that they are a low risk borrower. For someone with a low credit score, however, this is more of a process.

The main thin to remember is that these are not just home equity loans. These are loans covering the entire bulk of a borrower’s mortgage debt. On every new FHA loan, the lender stands to lose a considerable amount of money should the borrower default on the loan. So, when an underwriter sees a bad credit history, they are very likely to question the file.

The important thing to remember is that a bad credit borrower needs to put some effort into making their credit look as strong as possible, prior to even applying for a mortgage. The main determining factor in the FHA underwriting practice is the last twelve month period of credit history. This means that an underwriter is not going to be looking at a borrower’s credit score, but at the way in which that borrower has been making payments on their monthly liabilities for the last twelve months.

This means that paying off all your collections is not the best thing to do. You need to get a copy of your credit report and see what the last year looks like. You need to focus on making payments on time for the accounts that are still active, and you need to ensure that nothing new is going to collections. If there are collection accounts that are new from the last twelve months, these are the ones that you need to pay off first.

If you can create a picture of yourself as a borrower who has fallen on bad times, but is trying to turn things around, and has started a pattern of better repayment, you will be putting yourself in a situation where you can get approved at a very competitive interest rate through the FHA program.