Can I get a loan with bad credit?

Bad credit reportObtaining a loan with bad credit depends on how bad your credit history is. Do you have large unpaid collection accounts? Or, are there a few collection accounts under $2,000. Are your credit card payments consistently late or do you have only one or two skips over the past 12 months. Bad credit, like beauty, is in the eyes of the beholder. Let's go over the big four types of mortgages and see if your credit is good enough to obtain a mortgage.

Bad credit VA home loans

The Veteran's Administration does not require a minimum credit score. The VA leaves the minimum credit score up to the lender. The lender is permitted to supersede the VA approval guidelines. In general, most lenders will ask the borrower to have a 620 minimum credit score. The VA requires a "satisfactory credit risk".

Here's what the VA says about bad credit:

Adverse Data
Reestablished Credit: In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date the last derogatory credit item was satisfied.

For example, assume a credit report reveals several unpaid collections, including some which have been outstanding for many years. Once the borrower has satisfied the obligations, and then makes timely payments on subsequent obligations for at least 12 months, satisfactory credit is reestablished.

Collections: Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. For example, a credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections. In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval. However, collection accounts must be considered part of the borrower’s overall credit history and unpaid collection accounts should be considered open, recent credit. Borrowers with a history of collection accounts should have reestablished satisfactory credit (see previous paragraph) in order to be considered a satisfactory credit risk.

Disputed Accounts: Lenders may consider a veteran's claim of bona fide or legal defenses regarding unpaid debts except when the debt has been reduced to judgment. Account balances reduced to judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments. For unpaid debts or debts that have not been paid timely, pay-off of these debts after the acceptability of applicant's credit is questioned does not alter the unsatisfactory record of payment.

Summary: The above guidance is not meant to address every possible scenario. Lenders should carefully review the complete credit history and use their judgment. For example, if an applicant has numerous unpaid collections – no matter when they were established – it’s not unreasonable to question the borrower’s ability and willingness to honor obligations. If the applicant and/or spouse are determined satisfactory credit risks in spite of derogatory credit information, the loan file should include an explanation from the applicant(s) and the lender’s underwriter of the basis for the determination. If lenders are unsure about a particular situation,
they should contact the appropriate VA Regional Loan Center.

Bankruptcy: The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.

You may disregard a bankruptcy discharged more than 2 years ago.

If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:

• the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and

• the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.

Foreclosures: The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.

• Develop complete information on the facts and circumstances of the foreclosure.

• Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”

If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan. Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.

Treatment of Federal Debts: An applicant cannot be considered a satisfactory credit risk if he or she is presently delinquent or in default on any debt to the Federal Government until the delinquent account has been brought current or satisfactory arrangements have been made between the applicant and the Federal agency. The refinancing of a delinquent VA loan with an IRRRL satisfies this requirement.

An applicant cannot be considered a satisfactory credit risk if he or she has a judgment lien against his or her property for a debt owed to the Government until the judgment is paid or otherwise satisfied. SOURCE: Lenders Handbook - VA Pamphlet 26-7



FHA loans for bad credit

If you're not a vet, the FHA may be your best bet at obtaining a bad credit mortgage. Believe it or not, the FHA (Federal Housing Administration) will permit a credit score as low as 500. That's incredible, but, the FHA requires a larger down payment for such a low credit score. Borrowers whose credit scores are below 580 are required to have a 10% down payment. At 580 and above, the minimum down payment is 3.5% (currently). The down payment can be "gifted" by eligible donors. (Read more about FHA down payments and closing costs).

Now for the bad news. The FHA guidelines (rules) can be superseded by the lender. Finding a lender who is willing take on a borrower with a credit score below 580 will take some work.

Satisfactory Credit: The underwriter may consider a borrower to have an acceptable payment history if the borrower has made all housing and installment debt payments on time for the previous 12 months and has no more than two 30-Day late mortgage payments or installment payments in the previous 24 months.

The underwriter may approve the Borrower with an acceptable payment history if the Borrower has no major derogatory credit on revolving accounts in the previous 12 months.

The FHA will permit the lender to approve a loan that exceed the above guidelines, provided the borrower can prove and document extenuating circumstances. Here's what the FHA manual says about really bad credit:

The Mortgagee (lender) must analyze the Borrower’s delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. The Mortgagee (lender) must document this analysis in the mortgage file. Any explanation or documentation of delinquent accounts must be consistent with other information in the file. The underwriter (approval person) may only approve a Borrower with a credit history not meeting the satisfactory credit history above if the underwriter has documented the delinquency was related to extenuating circumstances. SOURCE: FHA Handbook 4000.1 - page 255



Collection Accounts: (A collection account is a debt or loan that has been submitted to a collection agency by the creditor). The lender must determine if the collection account(s) were a result of the applicant's disregard for financial obligations, inability to manage debt; or extenuating circumstances. The applicant must provide a letter of explanation (with documentation), for each outstanding collection account. The lender may require that the collection account(s) be paid off at or prior to settlement.

Charge Off Accounts: (A charge off account refers to a debt or loan that has been written off by the creditor). The lender evaluation of any charge off accounts are the identical to the collection account requirements.

Disputed Derogatory Credit Accounts: The FHA understands that collection accounts, charge off accounts and accounts with late payments in the last 24 months may be the result of disputed medical accounts, disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use. The disputed derogatory credit accounts may be excluded from consideration in the underwriting analysis provided the borrower can supply the lender with a copy of the police report or other documentation to support the reason for the bad credit listing(s).

Judgments: Judgment refers to any debt or monetary liability of the Borrower, and the Borrower’s spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body. Judgments of a non-borrowing spouse in a community property state must be resolved or paid in full, with the exception of obligations excluded by state law.

Exception: If the borrower(s) has entered into a valid agreement with the creditor to make regular payments on the debt, and the borrower(s) has made on time payments for at least three months and the judgment will not supersede the FHA-insured mortgage lien. It should be noted that the borrower cannot pre-pay payments to satisfy the required minimum three months of payments.

Bankruptcy: A Chapter 7 bankruptcy does not disqualify a borrower(s) from obtaining an FHA mortgage, providing at least two years have elapsed since the date of the bankruptcy discharge, and the borrower(s) has established good credit (or chosen not to incur new credit obligations).

Exception: A bankruptcy of less than two years, but no less than 12 months, may be acceptable for an FHA loan, if the borrower(s) can show proof that the bankruptcy was brought on by extenuating circumstances beyond the borrower’s control; and has since shown a documented ability to handle their financial obligations in a reliable manner.

Foreclosure: A Borrower is usually not eligible for a new FHA loan when the borrower(s) had a foreclosure or a deed in lieu of foreclosure in the three-year period prior to the date of FHA application case number assignment.

The three-year time period begins on the date of the deed in lieu of foreclosure or the date ownership transferred from the homeowner to the bank or foreclosing entity.

Exceptions: The lender may approve an exception to the three-year prerequisite if the foreclosure was due to "documented" extenuating circumstances that were beyond the control of the applicant, such as a death of a wage earner or a significant illness, and the borrower(s) have re-established good credit since the foreclosure.

Divorce is not considered an extenuating circumstance. Although, an exception may allowed if the borrower’s mortgage was up-to-date at the time of the borrower’s divorce and the the ex-spouse received the property, and the mortgage was later foreclosed.

The failure to sell the home due to a relocation to another area or a job transfer does not qualify as an extenuating circumstance.




USDA loans for bad credit

The USDA is a bit tougher with bad credit than the FHA. According to the USDA underwriting manual, the USDA "applicants with validated credit scores of 640 or greater meet the minimum credit reputation provided indicators of unacceptable credit". Credit scores lower than 640 may be approved by the lender if the applicant can document that the bad credit was outside the control of the applicant. Applicants with credit scores of 580 or lower are not eligible for a USDA home loan.

Non-Federal Judgments: Court-ordered judgments are required to be paid off before the mortgage is approved for a guarantee unless the applicant can provide documentation specifying that on time payments have been made in accordance to a documented agreement with a creditor.

Delinquent Federal Non-Tax Debt: Delinquent Federal non-tax debts are ineligible for a USDA single family home loan guarantee unless the delinquency is resolved.

Delinquent Federal Tax Debt: Federal tax liens can are allowed to be unpaid provided that the applicant has entered into a valid payback agreement with the federal agency owed to make regular payments on the delinquent debt and the applicant has made on time payments for no less than three months of scheduled payments. The applicant cannot pre-pay scheduled payments to satisfy the required minimum three months of payments.

SOURCE: USDA Underwriting Manual

Bad Credit Conventional Loan

Conventional mortgages are established on the guidelines of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). The two corporations are even less forgiving than the USDA loan program because the conventional mortgages are not backed by the federal government. If a VA, FHA or USDA mortgage is foreclosed on, the federal government will partially reimburse the lender for the loss. Since there is no backing on a conventional loan, the credit requirements are more stringent.