In this blog, we will review qualifying for a mortgage with recent late payments. Timely payments in the past 12 months are crucial when qualifying for a home loan. It is fine to have prior late payments or bad credit when qualifying for a mortgage. Dale Elenteny of Gustan Cho Associates compares bad credit versus late payment as the following:
Timely payments in the past 12 months have more weight on lenders when determining how likely borrowers will be on time. Homebuyers can qualify for a home loan with bad credit. Bad credit has a broad definition. Does a late payment two years ago constitute bad credit?
Does a few collection accounts mean the borrower has bad credit? Do maxed-out credit scores mean bad credit? Is too many credit inquiries bad credit? Do recent late payments mean late payments? In the following sections, we will discuss qualifying for a mortgage with recent late payments.
What Is Considered Bad Credit When Buying a House?
Bad credit can cover a wide range of less-than-perfect credit items. When it comes to mortgage loans, bad credit generally means that a mortgage loan applicant’s credit profile and scores fall below the mortgage lender’s minimum lending requirements. Bad credit in mortgages can mean having the following:
- prior bankruptcy
- prior foreclosure
- prior deed-in-lieu of foreclosure
- short sale
- charge off
- collection accounts
- tax liens
- tax liens that have been paid off
- judgments
- judgments that have been paid off
- late payments from years ago
- recent late payments in the past 12 months
- late payments after bankruptcy or housing events
This article will discuss and cover qualifying for mortgage with recent late payments. You can have prior bad credit, unpaid collections and charge-off accounts, and other derogatory credit tradelines and can qualify for a mortgage if you had timely payments in the past 12 months. You do not have to pay outstanding collection accounts or charge-offs as long as you have proven to yourself that you had timely payments in the past 12 months. There are instances where consumers get late payments in the past 12 months for one reason or another. You can qualify for a mortgage with recent late payments in the past 12 months under certain circumstances.
Can I Qualify For a Mortgage With Bad Credit?
Homebuyers can qualify for a mortgage with prior bad credit. However, borrowers need to have re-established their credit. Borrowers need to be timely on all of their payments in the past 12 months to get an approve/eligible per the automated underwriting system. It is possible to get a home loan with bad credit. However, lenders want to know the reason for bad credit and whether it was a one-time event or financial irresponsibility:
- Has the borrower re-established?
- Has the borrower being able to repay the new housing payment without stress?
- Borrowers can have had prior bad credit.
- One of the things lenders look for is recent late payments in the past 12 months.
- How recent were late payments to how many creditors
Borrowers can qualify for a home mortgage with prior bad credit. However, timely payments in the past 12 months are very important to get an approve/eligible per the automated underwriting system.
What Do Mortgage Lenders Look For on Credit Reports?
Overall credit history from the credit report will be carefully reviewed and analyzed. Borrowers with a ten-year credit history case scenario: The mortgage underwriter will review payment patterns on overall credit history. For those seeking a home loan with bad credit, there has to have been a time when their credit went bad. Why did it go bad? Why were they paying bills on time and suddenly causing credit to deteriorate? Was it a loss of a job? Was it the loss of your business? Was it a divorce? Was it medical reasons?
Letter of Explanation Required For a Mortgage With Recent Late Payments?
As mentioned earlier, mortgage underwriters will review the overall credit history. They look at overall payment history and patterns and see when credit went bad. Mortgage lenders understand that there are periods when consumers face extenuating circumstances. Examples of extenuating circumstances include the following:
- such as a job loss
- business loss
- divorce
- medical issues
- personal issues where their credit deteriorates
The Great Recession of 2008 has ruined thousands, if not millions, of people and businesses. Many were forced into filing bankruptcy and lost their homes. If a person loses their job or business, they have no source of income to continue to pay their debt obligations. It is not a crime to fall behind on their debt to their creditors.
Mortgage With Recent Late Payments With High Credit Scores?
Millions of Americans fear a repeat of the 2008 financial crisis due to key signs that make sense. Under the Biden Administration, key factors signal another housing and economic collapse. Soaring inflation, skyrocketing home prices, out-of-control interest rates, sporadic stock market, and deteriorating financial numbers.
To many, the 2008 financial crisis seemed like it was just yesterday. Many homeowners are on the fence and worried about home prices tumbling.
Homebuyers have been on standby since the coronavirus outbreak in February 2020, waiting for a housing market correction. However, the housing market keeps on going up even with skyrocketing inflation, surging rates, and an unstable economy with a government with no solid leadership. Mortgage lenders are increasing lending standards and overlays due to fear of another housing crisis.
How Did The 2008 Financial Crisis Affect Homeowners?
Homeowners saw their home values plunge during the 2008 financial crisis. Home values plummeted, and many homeowners had negative equity. Many of us still remember the 2008 financial crisis like it was yesterday. Dale Elenteny of Gustan Cho Associates remembers the 2008 real estate crisis as follows:
Many folks during the 2008 financial crisis could not take the dozens of daily harassment calls from credit collection agencies at all times of hours, seven days a week, with threatening phone calls that they were going to get sued. Getting a new job was difficult due to the Great Recession of 2008. Whole industries got wiped out or nearly wiped out.
Real estate agents, mortgage brokers, real estate investors, and those in the construction industry were hurt the most. They had the highest bankruptcy and foreclosure rates in the country. Will a repeat of the Financial Crisis of 2008 happen again? Mortgage lenders look at borrowers with recent late payments and bad credit to ensure they can repay their new mortgage loan.
Will the Financial Crisis of 2008 Happen Again?
Many top-producing full-time realtors and mortgage broker colleagues have filed for bankruptcy or went through a foreclosure, deed-in-lieu of foreclosure, or short sale after the 2008 financial crisis.
Many had to leave the field and find other lines of work. Some had to get two part-time jobs to make ends meet.
I was a real estate investor with 7 apartment complexes, just under 3,000 residential units, with multiple homes. Lost it all and got into the mortgage business after the real estate and mortgage meltdown of 2008. Things were bad, and the good old Golden days would not return.
Changes In the Mortgage Industry After The Financial Crisis of 2008
The whole mortgage industry went through a major overhaul. Mortgage loan originators were now expected to become licensed on the federal and state levels. All of them had to take national and state exams. David Reinholtz, President of Loan Officer School said the following about getting into a new career as a loan officer:
Mortgage loan originators had to go through federal and state background investigations and annual credit checks.
Letters of explanation should address the extenuating circumstances and be accompanied by documents such as termination letters, tax returns showing the decline in income, or other documents. Mortgage underwriters do not go by sympathy but by facts. For example, if a mortgage broker working for a sub-prime lender:
- lender closed their doors
- show documentation that the mortgage company went out of business
Thousands of mortgage and real estate companies shut their doors due to the Great Recession of 2008.
How Do Mortgage Lenders Look at You With Bad Credit?
For Home Buyers seeking a home loan with bad credit, lenders want to see they have re-established credit after a period of bad credit. Most mortgage lenders do not want to see any late payments or recent late payments after being back on their feet. Timely payment history in the past 12 months is extremely important. Recent late payments will be a major negative.
How Long After a Late Payment Can I Get a Mortgage?
Most mortgage lenders do not want to see any recent late payments in the past 12 months. One or two recent late payments will not always be a deal-breaker.
Mortgage underwriters will want to see why borrowers had recent late payments in the past 12 months. Multiple recent late payments in the past 12 months will be a concern.
You may need to either do credit repair to remove those recent late payments from the credit report or wait until the recent late payments have been seasoned.
Can I Get a Mortgage With a 30-Day Late Payment?
Borrowers with recent late payments in the past 12 months may need to correct the recent late payments issues first. Mortgage lenders like myself will go off Fannie Mae’s or Freddie Mac’s Automated Underwriting System findings.
Gustan Cho Associates has no mortgage lender overlays on government and conventional loans. If the automated findings yield an approve/eligible with recent late payments, then we have no problem.
The Automated Underwriting System will recognize the recent late payments and may render an automated approval. We need to correct late payments on the credit report if borrowers do not get an automated approval per DU FINDINGS or LP FINDINGS due to recent late payments. We need to see if we can get them corrected.
Will I Get a Denied a Mortgage With Recent Late Payments?
One solution to removing late payments from credit reports is to contact the creditor. See if they can remove the recent late payments from the credit report on a one-time mercy basis.
For consumers who have been timely with the creditor and have always paid monthly payments on time, the creditor may remove the recent late payments as a one-time courtesy off the credit report.
If the customer service representative says no, politely ask to speak to a supervisor. Request to the supervisor for mercy and are applying for a mortgage. If they can remove the late payment off the record on a one-time basis, promise them you will never be late again. Many times this tactic works.
Should I Fix My Credit Before Applying For a Mortgage?
I have seen credit repair consultants do magic, such as removing late payments, collections, judgments, charge-offs, bankruptcies, foreclosures, short sales, deeds-in-lieu of foreclosures, and other derogatory credit items off a person’s credit report:
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- Do not just go online and shop for any credit repair consultant
- Make sure it is a referral and contact their previous clients
- Get references on how the credit repair consultant did for them
- I have had my credit repaired and was extremely satisfied with my credit repair consultant
- Credit repair can do more damage than good when qualifying for a mortgage
- Credit repair is not required to fix credit to qualify for a mortgage
- The team at Gustan Cho Associates will help you with what credit fixes you need to do to qualify for a home loan at no charge.
If everything else fails with recent late payments, then you need to season the late payment history for 6 to 12 months and wait until it ages.
This blog on mortgage with recent late payments was updated on February 23rd, 2023
