September 2010: Real Estate

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 First the bad news: Whether a bankruptcy, foreclosure or a deed in lieu of foreclosure, there’s no easy fix for repairing major credit issues. “Often nothing more than time will heal the process,” says loan officer Matt Hodges, owner of Compass Home Loans. The length of time differs depending on how cataclysmic the credit nosedive is. But rest assured, it will be a few years before you can fill out an application for a new mortgage.

Now the good news: A person with poor credit can still get a mortgage, assuming enough time has passed—especially right now, when so many Americans are in a similar boat. In fact, one in every 397 U.S. housing units received a foreclosure filing during the month of July, according to RealtyTrac. Foreclosure filings—default notices, scheduled auctions and bank repossessions—were reported on 325,229 properties in July, a nearly 4 percent increase from the previous month but a decrease of nearly 10 percent from July 2009.   

The most important thing is to show potential lenders that your financial woes are an anomaly, based largely on circumstances beyond your control—you got caught up in a housing bubble hastened by freewheeling lending practices—not a history of reckless spending.  

Begin by requesting a copy of your credit report from the three nationwide credit reporting companies Equifax, Trans Union and Experian, which operate under one website, annualcreditreport.com, from which you can order one free copy of your report per year. Scour the report for inaccuracies (you may have been the victim of a one-day identity theft shopping spree to Barracks Road and not know it), and try to correct them as quickly as possible.  (Refer to the Federal Trade Commission website for how to dispute credit report errors.) In the meantime, pay off any outstanding bills that you can.

Ask your lender if they can “rapidly rescore” your credit report, Hodges recommends. A rapid (or quick) rescore is not open to everyone, only those whose credit scores are in the low 700s—the borderline risky range. A rescore allows the lender to see what specific debts or outstanding bills the borrower could quickly pay off with existing cash, in order to bump the score to a number high enough to secure financing.

Don’t make too many inquiries when shopping for a mortgage, advises Hodges. Too many pulled reports can result in a lowered score. He suggests interviewing several lenders before settling on the one you want to work with. “Only after that process is complete should you have that lender pull your credit, to minimize the possibility of a lowered score.” 

It’s also worth pointing out that a computer, not a human, ultimately decides whether you’re loan-worthy or not. It’s called an automated underwriting (AU) machine, and it crunches credit, income, assets and collateral to determine the probability of the bank getting its money back. “Without the minimum threshold that either Freddie Mac or Fannie Mae require, a human underwriter will not consider your request for approval,” says Hodges. However, they may consider compensating factors, such as reserves in the bank and good job history, so come armed with documents that support this.

Lastly, if you do get approved for a mortgage with less than wonderful credit, don’t buy anything major prior to closing. “Fannie Mae passed a new rule mandating that a ‘soft’ credit pull must occur within three days of closing to determine if the borrower has been granted new credit—a new car loan, credit card debt,” says Hodges. “New debt may push one’s ratio too high for approval and will thus stop the closing from occurring.”

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