This is what we are talking about when you borrow money for a house. You are promising to pay the bank at a future date (actually many future dates) for the home you want today. Credit may be the most important factor in a loan application. Or a better way of saying it is how you use credit. Your credit history and payment patterns go a long way to determining whether or not a lender is going to approve your loan application.
It is true that credit restrictions are beginning to thaw a bit. The FHA program is now allowing credit scores down to 580 as acceptable credit scoring for a mortgage loan. But there are a couple of big ifs with that pronouncement. One of the if's is whether or not the lender you are applying through will allow the score. Lenders can put their own rules on credit score levels, so just because FHA says it is okay with them, doesn't mean you will be able to obtain the approval. The second if is a subject to why the credit score is 580. Was it due to past credit issues that have been resolved or is it because of ongoing problems?
Let's say the reason that you have the lower score is because there was a bankruptcy or a foreclosure in the past. And if that is the case you would be among many other folks who had the economic earth shift under their feet in the past few years and fell into the chasm.
If your response to that traumatic financial event was to decide that you aren't using credit cards any more that decision is going to make it tough to buy a house. Qualifying for a mortgage is a bit more difficult than qualifying for other types of credit. The loan amounts are significantly more so the risk the lender is taking is higher. Not to mention that the new federal rules and regulations set out by the government after the mess of the past few years won't allow banks to play loose and free with folks who have a questionable payment history. If you haven't reestablished credit after a bankruptcy, you need to do so. Up until this year the requirement has been three credit lines that have been open for 12 months or more. This isn't written in stone, but is a good rule of thumb-but...you may get by as long as the credit lines that are in existence are being paid on time. Typically three is still a good number but one that has been in existence for 18 months, one at 12 and one that is newer generally will work. In conjunction with that the borrower must without fail be paying rent on time. Derogatory credit after a bankruptcy indicates to a lender that the borrower still does not have things under control.
The USDA loan is being offered in some circumstances down to a credit score of 580-but...if the credit score is under 640 a couple of new rules apply.
Well, I suppose we could use the the shalts and shalt not for these USDA rules-I will give it a try:
IF your credit score is under 640 and you want a USDA loan;
1) You shalt not have open collections unless they have been in repayment for 12 months and you can produce a payment history.
2) You shalt not have more than one thirty day late payment on any current credit lines without a compelling story as to why the late payment happened and what has changed since it occurred so that it will not occur again.
3) You shall have 12 months rent checks available to produce for verification of rent if you rent from an individual rather than a rental management company.
It is fair to say that if your credit score is below 640 for either of these loans the burden of proof is on you to show that you can be a reliable borrower. What that means is producing documentation to prove what you say is true-for instance-compensating factors.
What is a compensating factor? A compensating factor is something you can show that shores up your credit worthiness such as guaranteed overtime at your job, the ability to save money, length of time at your job, good rental history, a retirement account, the ability to put down more money than required by the terms of the loan-sometimes a non borrowing but working spouse's income will count as a compensating factor.
Lately I have been running into folks who pay cash. That's great. I believe in paying as you go if you can. But not using credit doesn't give a mortgage lender a baseline to judge how you will handle paying off a mortgage loan. So once again, begin establishing credit if you think you want to buy a home in the next year or two. Plan ahead. The time to buy a home is not at the moment the thought enters your head. Buying a home is a process that ideally is mapped out for success.
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