Mortgage and Portfolio Loan Guide

Cash Out Refinance with Bad Credit

Tapping into your home’s equity to do a cash out refinance with bad credit may be a great option if you’re looking to consolidate high interest debt or make improvements to your home.

Here you’ll find everything you need to know about how to get approved for such a loan and what to expect when refinancing your home with a cash out or debt consolidation mortgage.

What is a cash out refinance?

When you own a home, typical market conditions provide natural appreciation of your property. This means over time the value of your home increases. As the value increases, you gain more equity in your home.

With a cash out refinance, you can tap into that equity to accomplish your financial or home improvement goals. When you refinance you pay off the existing mortgage loan and get extra cash out to cover other debt you’d like to pay off or make home improvements.

Why would a homeowner do a cash out refinance?

A cash out refinance is done for many reasons. Here are some of the most common scenarios:

  • Consolidate high interest credit card debt
  • Make improvements to the home
  • Pay for children’s college
  • Pay off medical bills or other collections
  • Increase cash reserves for unexpected emergency

Cash out refinancing is available for perfect, good, fair, and bad credit. The main factors that are considered are equity (amount borrowed vs. home value) and income (ability to repay).

A cash out refinance can be done on a primary residence, second home (vacation home), and investment property. The max loan to value ratio will depend on property type, occupancy, and credit score.

Example: if you have perfect credit, and it’s a 2 unit investment property, you may be limited to 70% loan to value. If it’s a primary residence and you have 620 credit score you may be limited to 85% loan to value.

Cash out refinance loans are available for credit as low as 520. Must meet equity and income requirements.

What are the benefits of doing a cash out refinance on your home?

When you consolidate your high interest credit card debt with a cash out refinance there are several incredible things that happen. Paying down your credit cards typically results in higher credit scores.

The credit bureaus (experian, equifax, transunion) score you based on the amount available in comparison to how much you have used. The lower amount you have used compared to the amount of credit available to you will only help your scores in a positive way.debt consolidation mortgage

The interest rates on credit card debt are typically much higher than mortgage rates. AND the interest on credit card debt is NOT tax deductible. The interest you pay on your mortgage IS tax-deductible. Many home owners’ largest tax deduction is their mortgage interest.

By rolling your credit card debt into your mortgage you not only decrease you overall monthly payments, but you also set yourself up for success in terms of tax deductions in many cases.

Take a look at your most recent credit card statement. How much of your payment went toward principal? Not much right?

The tricky thing about credit cards is the minimum payment is manageable, but the minimum payment never gets you anywhere in terms of paying down the principal balance.

By consolidating it into the mortgage, you create a manageable plan to pay off your debt.

If you’re doing a cash out refinance to complete home improvements there are several benefits.

Using the equity in your home to improve your home will likely increase the fair market value of your home. Keep in mind, it’s not a dollar for dollar trade-off. Just because you put $20K into new floors and appliances, that doesn’t necessarily increase the value of your home by $20K.refinance mortgage bad credit

Every market is different and some upgrades provide more value increase than others.

The biggest benefit of using your home’s equity to make improvements is it allows you to do the things that you have always intended on doing, but have been unable to save for because life gets in the way.

Improvements like:

  • A new deck/porch
  • Replacing carpet
  • New appliances
  • Roof
  • Improved landscaping
  • and more

What if I have bad credit, can I still do a cash out refinance?

There are several different mortgage options available when looking at getting approved for a cash out refinance. For good credit a conventional loan will probably be the best route to take. For fair to poor credit, an FHA loan will probably be your best route.

If you are a veteran of the US armed forces, and eligible for VA financing, you may be able to do a cash out refinance up to 90% of your home value even if you have credit below 580.

If you do not meet FHA or VA guidelines because you have had a more recent bankruptcy, foreclosure, or short-sale; a portfolio loan will likely be your best option.

Portfolio loans are for scenarios that are more unique and require a “common sense” approval approach. Portfolio loans are less strict than traditional financing, and are intended to be a short-term fix for short-term circumstances. Once you meet traditional lending guidelines you’ll want to refinance out of the portfolio loan.

More on portfolio loans here.

  • Low Credit scores okay
  • Primary residence, vacation home, and investment property
  • Single family home, 2-4 unit, condominium, manufactured homes allowed
  • Recent bankruptcy, foreclosure, short-sale considered

In Summary

There are many benefits to doing a cash out refinance. If you are not sure if you qualify for a cash out refinance whether you have good or bad credit please feel free to reach out.

I’ve been able to help many homeowner’s who have been told by other lenders that they don’t qualify.

I invite you to reach out. 

 

Get your questions answered.

If I cannot help, I should be able to point you in the right direction at the very least.

 

 

self employed home loans

Adam Lesner | NMLS 198818

Michigan, Massachusetts, and Florida. Also offering financing in most states across the US including (but not limited to) Georgia, North Carolina, South Carolina, Alabama, Arizona,

California, Colorado, Delaware, Washington DC, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Ohio, Oklahoma, Oregon, Tennessee, Virginia, Wisconsin.

Do I qualify for a home loan?

Here are all the answers to the question “Do I qualify for a home loan?” The answer to that question is really a four part question regarding you income, credit, assets, and property.

The real questions to be asking are:

  • Does my income qualify me for a mortgage?
  • Does my credit meet mortgage requirements?
  • Are my assets enough to cover the required down payment, closing costs, escrows, and reserves?
  • Does the property I am looking to buy meet lender guidelines and requirements?

In this post I will cover the answers to all of those questions and more. You’ll know exactly what you’re up against when seeking mortgage approval.

Does my income qualify for a home loan?

When applying for a mortgage you have to think like an underwriter.

Regarding income, here is how an underwriter thinks: “does this potential borrower show consistency and stability with their income and employment history?”

In the mortgage world consistency is best demonstrated by providing proof of income for the most recent two year history. If your income is the same or more this year than it was last year, and the year before – that means your income is consistently increasing.

If your income is less last year than it was the year before, that means your income is “declining”. Declining income demonstrates instability, and could potentially cause an issue with approval unless there is a legitimate reason for the declining income.

If showing declining income it helps to show that you’re back on your feet by showing your year to date income is back on track to earn what you did in previous years.

If you are W-2 employee of a company your income will be based on the gross amount on your pay stub. If you are a salary employee it’s very simple.do I qualify for a home loan income

If you are an hourly employee your income is: your wage X average hours per week X 52 / 12.

If you recently received a raise, your income will be based on your most recent raise.

For incentive pay like commission, bonus, overtime – you will need a 2 year history of receiving that income in order to be able to demonstrate consistency/stability.

What if you are self-employed? See full article on how your income is considered.

The way the lender decides if you’re eligible for a loan is by calculating your income and measuring that against your monthly liabilities (including all items shown on credit, alimony/child support, and all real estate obligations). The underwriter divides your debt into your income (or debt to income ratio).

So if your debt is 4,000/month and your income is 8,000/month, you have a 50% debt-to-income (DTI) ratio.

Most lenders to not like to see debt-to-income ratio above 45%, but in some cases 50% DTI is accepted with strong compensating factors (high asset reserves, low loan to value ratio, etc.).

Does my credit meet mortgage requirements?

Credit = credibility of previous payment history.

You have 1 score from each bureau:

  • Transunion
  • Equifax
  • Experian

For a standard conventional loan, 620 middle credit score is needed. [For other loan types, there are cases where you can go as low as 500 credit score. Just ask.

So if you have scores of 650, 675, 690 – the 675 score is what is used.

Important Note: The scores that the credit bureaus report to mortgage lenders are different than what is reported to consumers who pull consumer reports. The scores that lenders see are almost always lower than what you might pull on CreditKarma.com.

CreditKarma.com is still a great site, and gives you something to start with when trying to get an idea of where you stand.

Aside from actual credit score, here are the things lenders look for on your credit report:

  • On time payment history (or lack thereof – aka late payments)
  • Length of credit established
  • Derogatory marks like collections, charge-offs, judgments, tax liens
  • Major credit events like bankruptcy, foreclosure, short sale

Payment History

It’s crucial to be able to show minimal late payments in the most recent 24 months, especially on housing payment history. Most traditional loans only allow one 30 day late payment in the last 12 months.

But there are alternative loan options for unique credit circumstances.

Length of Established Credit

In many cases there will be a need to show at least 12 months of established credit. However, there are exceptions.

If you have 10-20% down payment, >2 years on the job, and can prove rent history, it may be possible to get approved with less than 12 months credit history.

No Credit Score | No credit Historydo i qualify for a home loan credit

Some people just like to pay cash. Plain and simple. I get it.

For those who have no credit established, and no credit score, you may still qualify for a mortgage by using non-traditional credit approach.

A non-traditional credit report would consist of 3 accounts you pay toward that do NOT show on your traditional credit report.

Examples of non-traditional credit:

  • Rental payments
  • Utility payments (gas, electric, water, landline, home phone, cable)
  • Netflix/HULU
  • Child care
  • School tuition
  • Proof of 12 months savings
  • Gym membership
  • And more

If you have a legitimate (and consistent) 12 month payment history on an account there is a chance it may be considered by the lender in the overall decision to lend.

Derogatory Marks

For minor collections, there are cases where they do not need to be paid off prior to closing on your home loan. Medical collections are given some flexibility as well.

But if you have more than $1,000 in outstanding collections, they will most likely need to be paid prior to closing.

Judgments and tax liens must be paid prior to closing. The lender does not want to have to deal with those obligations potentially becoming a lien on the property/collateral.

These derogatory marks do not necessarily need to be removed from the credit report. Most of the time, the lender just wants legitimate proof or paper trail to confirm the obligation has been paid/satisfied/settled.

Disputed Accounts

When you dispute an account on your credit report because you disagree with the way it is being reported, the credit bureaus immediately disregard that account when calculating your scores.

The result of disputing an account is the credit scores go up. This is because the negative account that is being disputed is not being included in the overall scoring calculation.

For that reason, lenders will typically not allow a loan to proceed until the dispute has been removed, and new credit has been pulled. The logic is: if there is a disputed account, the credit scores are artificially high.

Major Credit Events

On most mortgage loans there is a waiting period between when a person has gone through a major credit event, and when they are eligible for new home financing. Below is a basic summary of what to typically expect as far as waiting periods are concerned. [there are portfolio loans where no waiting period is required]

  • Bankruptcy – Chapter 7
    • FHA – 2 year waiting period
    • Conventional – 4 year waiting period
    • VA – 2 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment if home was included in foreclosure.
  • Bankruptcy – Chapter 13
    • FHA – Must have 12 months on time payments and permission from trustee to enter new mortgage. Must be manually underwritten if less than 2 years.
    • Conventional – 2 year waiting period
    • VA – 1 year waiting period
    • USDA – 1 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Foreclosure
    • FHA – 3 year waiting period
    • Conventional – 7 year waiting period (Unless property that foreclosed was included in bankruptcy. If home was included in BK, waiting period is based on bankruptcy discharge date)
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Short Sale or Deed-in-lieu
    • FHA – 3 year waiting period
    • Conventional – 4 year waiting period
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment

Keep in mind, guidelines change constantly. It would appear a portfolio loan is a good option if you’re back on your feet and don’t yet meet traditional waiting period requirements. More on portfolio loans here.

Do my assets meet home loan requirements?

When evaluating assets the underwriter is reviewing available funds for:

  • Down payment – The amount that you’re coming out of pocket to secure the home.
  • Closing costs – The fees associated with acquiring the home (appraisal, origination, title, closing, recording, etc.)
  • Escrows/prepaids (for taxes and insurance) – The amount set aside to account for taxes and insurance on the property
  • Reserves – The amount of left over available funds

The funds used to qualify must be “seasoned” in your account for 60 days to be eligible funds. Any large deposits that are not seasoned must be explained and sourced. Cash deposits are unacceptable because the source cannot be verified/confirmed.

If you have a property that you are simultaneously selling during the process of buying the new home, the proceeds of the sale of that previous home do not need to be seasoned. You will need to provide proof of sale of the home (purchase and sale agreement) as well as the closing statement prior to closing on the new home.

Reservesdo i qualify for a home loan assets

The logic of reviewing reserves is: if the borrower should unexpectedly fall on hard times, there is enough set aside to cover the mortgage payment for X number of months.

Showing adequate reserves helps strengthen the overall file.

Reserves can be from your traditional bank account, brokerage account, retirement account, etc. You cannot use a non-borrower’s account to show reserves.

Gift Funds 

For most loan types gift funds from family are acceptable. There are scenarios where a non-family member can gift the funds, but every lender is going to have a different interpretation of who is acceptable. For best results, just ask.

Non-Liquid Assets

Cars, RV’s, heavy equipment, beanie babies… are not liquid assets.

Vehicles and other items that can be easily valued, can be considered if sold and properly documented.

If you sell a car in order to qualify for a mortgage be sure to have kelly blue book value on hand, bill of sale, and copy of the check you received when you sold the vehicle. Having a full paper trail helps tremendously.

 

Does the property being financed meet lending guidelines?

There are an infinite number of reasons the property might not meet lender requirements.

I am going to cover some of the most common reasons the property can be the cause of denial with the lender.

Non-Warrantable Condo

When buying a condominium, not only does the borrower’s finances get evaluated, but the homeowners association is also closely reviewed.

The lender will order a “condo questionnaire” in order to evaluate the health of the association.

They’ll look for things like: completion status, investor concentration, pending litigation, and so much more.

More on non-warrantable condos here.

Repairs Neededdo i qualify for a home loan house

If the property is in disrepair, the lender will require completion of repairs prior to closing in most cases. Repairs needed will be determined based on appraiser’s comments in the appraisal report.

The repairs need to be completed by the seller, and a final inspection will be needed prior to closing to confirm completion.

If the repairs are fairly minor, there are many landers that will allow a “repair escrow”.

A repair escrow is where funds are set aside at closing to cover the cost of the repairs needed. Then the loan closes, and repairs are done after closing. A final inspection is completed when ready.

Typically this only allowed when repairs are no more than $5,000. With a repair escrow, 150% of the estimated repair costs are collected in case of unexpected cost overages.

Example: if the repairs needed are estimated to be $3,000, the actual amount collected for the repair escrow will be $4,500.

If the excess funds aren’t used, the difference will be refunded to the borrower or applied toward the principal balance.

For properties in need of major repair. There are renovation mortgages available on both FHA and conventional.

Unique Property Type

One of the most crucial parts of the appraisal report has to do with the appraiser being able to find recently sold homes that are comparable in size/condition/use that have sold within a reasonable distance.

If there are unique features to the property, the appraiser may have a challenge that cannot be resolved due to market conditions.

Even if there are comparables, some lenders simply do not allow unique property types.

Unique features that could be a challenge:

  • Berm homes
  • Properties that are not suitable for year round occupancy regardless of location
  • Agricultural zoned property
  • Condo hotels
  • More than 20 acres
  • Hobby farms
  • Leaseholds
  • Rustic log cabins
  • Working farms, ranches, or orchards

For unique property type financing, a portfolio loan may be a solution.

In Summary

There are four major pieces of the scenario to consider when asking the question “do I qualify for a home loan”?

Those pieces are: income, credit, assets, and property.

If any of your questions were left unanswered I strongly encourage you to reach out to me below and ask.

If I cannot help, I should be able to point you in the right direction at the very least.

self employed home loans

 

 

How to Buy a House Without Lying to Your Mortgage Lender

How do you actually close on a house without trying to sneak something by the big bad lender?

For some reason there’s this skeleton in everybody’s closet that they don’t want the lender to find out about. They think that if the lender finds out everything is going to fall apart, and they’re right.

But, there are certain things that need to be talked about or resolved, before closing on a house. Here’s the thing, one thing you have to remember is that if there’s an issue, we are going to find out.
There’s no sweeping stuff under the rug.

The way that you buy a house without lying to your lender is by telling the truth from day one.

By doing that (being completely transparent about all of your financial circumstances) it gives the lender the opportunity to work on a solution. Otherwise what happens is the lender finds out some other way.

By waiting, and not telling your lender you set yourself up for failure.

The realtor is set up for failure.
We’re all set up to then be scrambling to try to find a solution the day before closing.

Then the stress level goes through the roof. “what’s going to happen? Am I going to be homeless?”

When really this stuff could have been resolved a month ago (most of the time), and then the stress level isn’t as high.

Let’s just put all the pieces of the puzzle together at the same time, at the beginning, as soon as possible. If you know that there are any issues let’s get it in and figure it out.

We’re all about solutions. Let’s figure it out.

Solutions.
Resolutions.
Resolve.
Opportunity. 🙂

I don’t see an issue as “end of the world”. I see an issue as “hey, we’re going to learn something now, we’re going to figure something out.”

5 Odd Things Your Credit Report Doesn’t Show

Good or bad, there are some misconceptions about what information is shown on the credit report.

Before diving into what doesn’t show, let’s take a look at the things that are reported.

When you are looking to buy or refinance a home, your lender will want to take a look at your credit report. Your lender is looking for several specific things.

A few things we do look for on your credit report:

  • Monthly liabilities like car loans, credit cards, student loans, and personal loans. Your monthly liabilities are used to calculate your debt-to-income ratio, and play a big part in your mortgage approval. The ideal situation is to have a DTI (debt-to-income ratio) of 45% or less. So basically you want to have monthly expenses that equal to less than half of what your monthly income is. Note: Student loans sometimes are in deferment status, so no payment is shown. In this case the lender will use a percentage of the balance as a monthly payment, or you can provide a letter from the student loan company stating what your payment will be when you start paying on your loan. With some loan programs you’re able to exclude that liability entirely as long as the loan isbusiness-17965_640 deferred for a certain amount of time (usually at least 12 months).
  • Credit scores. The lender is pulling a trimerge credit report. This means your scores and history are being pulled from all three credit bureaus (experian, equifax, and transunion). The lender will use the middle of the 3 scores. Don’t be surprised if each score is different, that’s common. The reason they are different is because not all creditors report your liabilities to all three bureaus (because it costs time and money to do so). By pulling your credit from all three credit bureaus, we’re able to see as much history as possible to make an educated decision regarding your credibility as a borrower.
  • Bruises. Things like current or past collections, late payments, judgments, tax liens, bankruptcies, foreclosures, and short sales are reported on your credit report. As a lender we take these into consideration when making a decision on your loan. We look for: how long ago did this take place, is there anything still outstanding, have you gotten back on your feet (re-establishing your credit)? Most people think that if they had a bankruptcy or foreclosure in the last year, they can’t buy a house, but with portfolio loans there may be an option if you’re back on your feet.

So those are the basics that we look for on a credit report. But what about the other stuff?

Time and again I go over credit reports with borrowers and it seems like the same questions pop up. “What about ‘X’ liability? I have been paying on that for years, doesn’t that count for something?”

Very valid point. Let’s take a look.
Repair your credit today with Lexington Law

 

5 things that don’t typically show on your credit report:

red 1 brighton mi mortgageYour rent payment history.

You have been renting for two years. Never late. Your landlord loves you, but your credit score is 550. What gives? Doesn’t two years of faithful payments mean anything in this world? Yes, and no. Yes it means something because when you get a mortgage your lender will contact your landlord for verification of on-time payments (verification of rent or VOR). By having a squeaky clean history you simply set yourself up for success.  On the flip side, your faithful payments are not going to be reflected on your credit report because it’s highly unlikely that your landlord will take the time and effort to report your payment history to the credit bureaus. The landlord would actually have to pay to report their information to the bureaus.

red 2 brighton mi mortgageYour income.

“Just take a look at my credit report, you’ll see where I’ve worked and how much I’ve made.” Um, no. Your income is definitely not reported on your credit report. There may be instances where your employer’s address could pop up on your report as a previous address, but the credit bureaus do not know how much you make. Nor should they. The fact of the matter is, your income isn’t a refection of creditworthiness. Income is definitely a factor with a mortgage approval, but not given any weight when it comes to credit score.

red 3 brighton mi mortgageLand contract history.

Some people buy their home with seller financing (commonly called “land contract” in the great state of land contract brighton mi mortgageMichigan). This is a way to purchase a home if you don’t fit within normal lending guidelines. The seller acts as the lender and accepts payments each month. There are some companies that will actually assist the seller with managing this type of private mortgage. The problem is it takes additional time and effort for the seller to go through the process of getting credit reporting set up. I say that there are companies that help with these types of matters, but to be honest, I have never seen land contract payment history on a credit report. Ever. In this case the (new) lender would reach out to the land contract holder to verify the payments have been current, get an official payoff, and verify with the county if the land contract was ever recorded.

red 4 brighton mi mortgageReal time data.

Your credit report doesn’t get updated like your Facebook feed. If you pay down a credit card, and have your credit pulled the next day, it’s probably still going to show your previous balance. If you’re looking to get an increase in your scores, pay down your balances on your credit cards, and wait a couple of weeks. Some experts have a rule of thumb to make the payment, wait until the next bill comes out (showing the new balance), and then have your credit pulled by your lender. To me that makes sense.

red 5 brighton mi mortgageThe sob story (last but not least).

There is always a detailed story behind each derogatory mark on a credit report, big or small. Whether it was your brother’s cell phone bill that you refuse to pay, or the hospital bill that insurance was supposed to cover. There’s always a long explanation. The credit report simply spits out data that they receive from creditors, not much more than that. If you have a situation that you believe is incorrect CALL THE CREDITOR. It’s not just going to “go away”. Talk to 10 different people if you have to, but come to some sort of resolution. If you choose to officially “dispute” the debt, it may create problems on your mortgage approval that you didn’t intend.

What is the weirdest thing you found on your credit report that you had to fight tooth and nail to get removed? Better yet, what was one thing you thought for sure would be on your credit report, but never was added?

Adam Lesner | Brighton, Michigan | Mortgage Loan Officer NMLS 198818

So Your EX Destroyed Your Credit…

Portfolio Loan

Post-Divorce Mortgage

I have seen it countless times. An otherwise “A grade” borrower is left with no mortgage options because their ex-spouse was extremely irresponsible with their finances while going through divorce. Resulting many times in no other option than having to file for bankruptcy, and even foreclose on their home.

For these types of situations there is hope!

FHA, VA, and conventional guidelines are set in stone. As brutal as it sounds, they don’t really care about the sob story. If you had a nasty divorce which resulted in a bankruptcy, short-sale, or foreclosure you’re pretty much between a rock and a hard place if you have any desire to be a homeowner in the next couple years.

So what can you do? You have been a homeowner since you graduated college 15 years ago. Are you really going to be forced to live with family, or rent? NO. Believe it or not, there are lenders out there that take a common sense approach to mortgage loans for people with bad creditlending. Lenders that will look at your situation from a common sense standpoint, and make every effort to understand exactly what led to the circumstances that you’re in. Lenders that will take into consideration that you fell on hard times, but are now back on your feet. These are the lenders that offer in-house portfolio lending. Lending designed to bring common sense back into the home financing world. Where you don’t have to fit inside the little black and white boxes of the strict government guidelines.

Imagine that?  Being treated like a human being instead of a statistic. What a refreshing concept?

So where do you start? The best thing to do is seek out a small-to-mid-size lender, bank, or credit union which offers portfolio loan financing. Find out what their requirements are for these unique loans. Find out what you can do to prepare as best you can. There are still going to be requirements to meet because they want to make sure you ARE back on your feet, and confirm that you do have the ability to repay the loan.

thumb-422147_640Some things to prepare yourself for when getting a portfolio loan:

  1. You’ll probably be required to put at least 10% down.
  2. Points may be required to cover the level of risk they are taking.
  3. Typically there is no mortgage insurance requirement 🙂
  4. You need to have a verifiable income.

 

Other situations when a portfolio loan may be your best option: unique property you’re looking to buy, self-employed less than two years, bad credit because of an isolated incident like a work injury, etc.



You thought you didn’t have a chance in the world to buy a home, but don’t give up. If you’re back on your feet, and you have at least 10% for down payment, home-ownership may be more within reach than you thought.

portfolio mortgage lenders

 

I invite you to reach out to me directly to see if a portfolio loan is the right fit for you.

At the very least I should be able to point you in the right direction.

 

real estate investment loans

Repair your credit today with Lexington Law

Finally! Mortgage Loans for Bad Credit

mortgage loans for bad credit 1

Yup, you’re approved!

Applying for mortgage loans when having bad credit can be uncomfortable to say the least. I can’t tell you how many times I’ve heard the same story. A great family, with strong stability fell on hard times. They had to let their house go because of a serious injury, downsizing of a company, or loss of a loved one. In many cases those folks get back on their feet within 6 months to a year, and would like to buy a home again. However, with the lending guidelines in today’s world, that can be quite a challenge.

The good news is there are lenders out there that will treat you like a human being. Mortgage loans for bad credit do exist, and I’ll tell you how to find them WITHOUT having to jump through a million hoops.

How bad can your credit be?

Well, it depends…

Credit scores and time since the blemish really aren’t the main factors. The main factor is “why”. What’s the story behind the credit problem? Were you blatantly irresponsible? Or did you have a rough patch?

Let’s say you had a foreclosure a year ago because your company outsourced your job after they cut your pay 50% a year before they let you go. You were in a position that you genuinely couldn’t afford to make your payment and had no choice but to foreclose. As long as you can some how prove the course of those events taking place, and show a previous history of being financially responsible, you definitely have a chance to get approved.

Now, if you “gave your house back to the bank” because you noticed home values were declining, that’s another story. It has to make sense. There needs to be proof that there was a legitimate reason for the cause of the credit issue.

Who can offer bad credit loans?

The vast majority of lenders, especially big banks, and mega-originators, only write “A-paper”. They are (for the most part) extremely conservative with what they will approve, and who they will approve. You want to look for a small to mid-size local company. Maybe a credit union or a company who has some sort of partnership with a credit union. Small local banks are good too.

Why? These types of companies are typically privately held. They are more likely to be committed to building and strengthening relationships in the community, and bend over backwards to meet the needs of their clients. I’m not suggesting that there aren’t awesome people that work at BIG companies. All I am saying is that their hands are tied many times because of the company they represent.

There is something special about reaching out to someone and telling them you can help when no one else would even give them a second look because of their bad credit. Really giving folks a second chance without making them wait 2-7 years to get back on their feet.

What can you expect with these in-house loans?

  • Primary residence only.
  • Usually 10% down will be required. Gift okay.
  • The interest rates may be higher than typical loans.
  • No monthly mortgage insurance even if you put less than 20% down.
  • Paying points may be required.
  • Okay on purchase or refinance. Even cash-out is okay in some cases!

Getting a loan like this isn’t for everyone. Typically it’s a short term fix for people with unique situations, but know that home-ownership is right for them. Once they’re back on their feet within a couple years, it would most likely make sense to refinance into the loan that meets the needs of their updated circumstances. Did you know this type of opportunity was available right now?

portfolio mortgage lendersI invite you to reach out to me.

Get your questions answered.

You won’t be talking to some newbie or intern, you’ll be talking with Adam Lesner directly. We don’t get everyone approved, but we do our best to find the right loan if it makes sense.

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Adam Lesner NMLS 198818 | Mackinac Savings Bank NMLS 401686 | Main offices in Michigan, Massachusetts, and Florida. Also offering financing in most states across the US including (but not limited to) Georgia, North Carolina, South Carolina, Alabama, Arizona, California, Colorado, Delaware, Washington DC, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Ohio, Oregon, Tennessee, Virginia, Wisconsin.  

 


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How to Build Credit to Buy a House

Prepping Your Credit for a Mortgage

When you’re finally ready to become a homeowner; it is certainly an exciting and anxious time! The last thing anyone wants to do is find out last minute that there is a blemish on their credit report that cannot be resolved quickly enough to close on your dream home in time. In Part 1 of the “keeping your home loan process simple” series we looked at all the basics of the puzzle on a mortgage approval. In this portion we’ll look at the credit piece in detail order to keep potential home buyers in the loop on what to be ready for.

Your credit report is your opportunity to show your credibility to your lender. It serves as a reference of the liabilities you have paid in the past and present.

Your credit report is heavily considered with your approval because it gives an indication as to how you treat the responsibility of paying items you’re liable for. If you have 0 previous derogatory marks, and you have 3-4 tradelines that you have been paying on time for 24 months; your credit should be in good shape. There is no question that everyone’s situation is unique in many ways.

 

Understanding how information on your credit is evaluated can “make you” or “break you”. If you can anticipate issues that you may encounter; you’re really putting yourself a step ahead of the game. Below are a few explanations of common terms to help decipher what a credit report shows. 

Score

There are loan programs available that allow you to buy a home with a credit score below 640. However, the objective is simplicity. So with that in mind; a good goal would be to make an effort to be at 680 or higher as a middle score (as reported by Experian, Equifax, and Transunion). Anything 740 and higher is considered excellent.

History

The history on your credit report is just as important of a factor as your credit score. Anything derogatory in the last 10 years is likely to be available to the eyes of the lender.

Tradeline

Any recurring debt that is reported by the credit bureaus on your credit report is a tradeline. Examples include but are not portfolio loan past credit issueslimited to car loan, student loan, personal loan (from bank), home loan, and recreational vehicle loan. Rent payments (although important to keep record of and pay on time) and utility bills are examples of liabilities that are typically not reported on credit reports.

Debt-to-income Ratio

Your lender will use your credit report as a starting point to help determine what your debt to income ratio is. Your lender will take into account the liabilities that show on your credit report, and compare that with how much your verifiable monthly income is. Of course your new mortgage, property taxes, property insurance, and mortgage insurance (if applicable) will be factored into the equation. You certainly can expect  any child support, alimony, and 401k loans to be factored into your debt as well. 

Example: Mr. Homebuyer has 3 credit cards that total 100/month, a mortgage of 900/month (including taxes and insurance), and makes 4,000/month. Mr. Homebuyer’s debt to income ratio is .25 (or 25%). Debt / Income = Debt to income ratio. To keep things simple you want to aim to be below 43% debt to income ratio.

Derogatory Items

Derogatory items that show on your credit report will hurt your scores, and create challenges when getting a mortgage. Late payments, collections, tax liens, bankruptcies, foreclosures, short-sales, and repossessions are some examples of derogatory items that can be found on your credit report. The more recent those items have been reported; the more negatively your scores will be affected. Here are some of the most common issues and tips on how to address them.
 
  • Late payments. Any liability that is reported on your credit report showing a late payment of 30 days or more will have a negative impact on your scores. Upholding your end of the bargain (paying on time) is a significant part of establishing good credit. 
  • Collections. These can be a result of an unpaid cell phone bill or even a medical bill you forgot to pay. Really, almost anything that you agreed to pay for in any fashion can be sent to a collection agency if it remains unpaid. It’s in your bestDoes a Portfolio Loan make sense for you- (1) interest to get collections resolved as quickly as possible once you’re aware of them. In some cases collection agencies will accept less than what is owed in order to resolve the debt. However, paying the collection won’t necessarily improve your credit. To improve your scores after paying the collection; request a “letter of deletion” from the collection agency. Basically it’s a letter confirming the collection shown on your credit report has been paid in full, and will be deleted from your credit report. If you can convince the collection agency to do that then make sure you ask for a copy as well. You’ll want to send a copy of that to all 3 credit bureaus. Some collection agencies will do this; others won’t. It’s definitely worth a try. You may need to talk to a manager and get it escalated. If you have 1 or 2 medical collections that are only a few hundred dollars you don’t need to lose sleep over that. Medical collections are not treated as severely as regular collection (depending on the size of the medical collection).
  • Tax liens. If you have taxes that you owe the IRS they will issue a lien, and report that to the credit bureaus if they are not paid by the due date. The best thing to do is pay your taxes on time because if there is a lien outstanding; the IRS may start tacking on interest to the balance that is owed. Any tax liens outstanding will hinder your ability to obtain home financing until that has been paid in full. You’ll need to provide your lender with proof from the IRS that it’s paid in full and clear.
  • Bankruptcy. There are two most commonly used bankruptcy types that consumers use; chapter 7 and chapter 13. You would need to consult with an attorney to decide which is more fitting for your situation. Guidelines related to mortgage approval after bankruptcy are constantly changing. As a rule of thumb you want to be at least 3 years out from when the bankruptcy was discharged before looking to obtain financing. Immediately after the bankruptcy is discharged it’s best to make every effort to “reestablish” your credit. That involves getting a couple new tradelines in your name (credit card, personal loan, student loan…). Once you have shown a 24 month history of reestablished credit; you’re setting yourself up for success. 
  • Foreclosure and short-sale. Similar to bankruptcies; you’ll want to be at minimum of 3 years out from when the foreclosure or short-sale was closed. Again, guidelines are constantly changing on these items. Working on getting your credit reestablished as explained in the above bankruptcy explanation should be a high priority. Check here for changes on this.
  • Repossession. If you decide to “give your car back to the bank,” you can expect repercussions. Make sure that once it’s repossessed that there are no lingering debts affiliated with that. It’s a good idea to make sure all of your other liabilities are on time, and in good standing for 24 months prior to seeking home financing.
Guidelines and regulations are constantly changing.
President Obama’s recent state of the union address briefly touched on how that needs to be a priority. The fact is owning a home is generally a significant component in realizing the American Dream. Hopefully guidelines will loosen up a bit from the extreme government regulations that are currently mandated. In the mean time; use this information as a tool to set yourself apart from the average home buyer. With some preparation, you can get a mortgage for bad credit. 

A couple closing tips… 

Don’t overextend your credit limits.
If your credit cards are pushing their limits, then this can be a red flag for lenders. Try to keep your credit card account balances below 35% of your available credit limit. This may keep you from looking overextended.

Credit glossary word of the week: CHARGE-OFF

A debt that is declared by the creditor as being noncollectable. This means the lender considers the money it loaned to the borrower is lost. Lenders use this as a last resort, once all collection efforts have failed. A bankruptcy filing often results in several accounts becoming charged-off. Charge-off s usually lower credit ratings. Also known as bad debt, charged-off account, charged-off balance, charged to loss, charged to profit and loss.

 How to Build Your Credit to Buy a House

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E001: How to Build Credit to Buy a House