How Soon Can I Get a Mortgage After Credit Problems?

How Soon Can I Get a Mortgage After Credit Problems?
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Josh Smith
By: Josh Smith
Posted: April 4, 2018
BadCredit.org's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Many consumers have run into credit issues that can hamper their ability to secure a mortgage loan, be it as minor as a late payment or as severe as a foreclosure. As such, the question of how soon they can get a mortgage after credit problems is a common one from potential homebuyers.

The short answer is: at least two years (under optimal circumstances.) But, that’s definitely not the whole story. Like so many other important questions in life, the most appropriate answer to this question is really, “it depends.” That’s because there are a number of factors that need to be considered to arrive at an accurate answer.

For instance, what’s meant by “credit problems”? Did you miss a payment or two? Or did you file for bankruptcy? What has your financial situation been since you had those problems? Are you going to be satisfied with just any mortgage? Or, are you really asking, “how soon will lenders consider me for the best mortgage rates possible?” Let’s try and break down all these factors without getting too far into the weeds.

What does it take to qualify for a mortgage?

A mortgage is a loan used to purchase a piece of real estate. So, it’s likely going to be one of the largest loans you ever apply for, both in size and duration. However, on the other side of the coin, it’s a secured loan, since the lender will be able to foreclose on the mortgage and take possession of the house if you fail to repay the loan, so mortgages present relatively low risk to the lender.

For that reason, despite the large sum of money being provided, banks and other lenders are generally more likely to approve a mortgage at a decent rate than even a much smaller unsecured personal loan or line of credit. In general, the main qualifying factors for getting a mortgage are:

  1. Your current (and expected future) income
  2. Your current level of debt (as well as other fixed expenses)
  3. Your credit history

The higher your income, the larger the mortgage for which you can typically qualify. The lower your debt and expenses in relation to your income (aka debt-to-income ratio), the better your chances of being approved for an affordable mortgage. And, the higher your credit score, the lower the interest rate a lender is likely to offer on the loan, though some lenders, like the expert-rated picks below, can more bad-credit-friendly than others.

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Obviously, we’re all looking to boost our income. And, hopefully, you’re doing the best you can to keep your overall debt under control. But, what can you do about your credit score — or the red flags mucking up your credit reports?

What constitutes a serious credit problem?

There are a number of factors that go into calculating your credit score, and various lenders have different definitions of which scores they consider to be good or bad. There are, however, a few issues that will always drop your score dramatically and send up red flags to lenders:

  • Bankruptcies: Having been legally relieved of legitimate debt you could not pay
  • Charge-Offs: A formal acknowledgment by a credit card company that they’re writing off the debt you owe as noncollectable (usually after 180 days of delinquency)
  • Foreclosures: Having a bank take away your home due to mortgage loan default
  • Short Sales: An agreement with your mortgage lender to sell your home at a loss in order to satisfy a mortgage you cannot afford
  • Repossessions: Having a bank or dealer take away your vehicle or other belongings due to auto loan default
  • Judgments: Money a judge orders you to pay in settlement of a civil or criminal lawsuit
  • Tax Liens: Money you owe(d) the government for taxes that were not paid on time
  • Late Payments: Paying any installment or revolving debt payment more than 30 days after the due date
  • Collection Accounts: Debt that has been turned over to a collection agency

If any of these items show up on your credit report, it’s unlikely you’ll be able to qualify for a mortgage right away. Or, if you do qualify, it will be at a much higher interest rate than average. In the case of bankruptcy or foreclosure, you may be subject to a mandatory “seasoning” period before you can apply for a mortgage.

Fortunately, though, none of these credit problems will affect your credit score forever. Although some may still technically appear on your credit report, they all have statutes of limitations preventing lenders from using them as disqualifying factors in credit decisions.

How long do serious credit problems remain on your report?

By law, all negative credit report items have a specific length of time they can remain on your report and affect your credit score. Here’s a breakdown of how long these negative items will generally stay on your credit report:

  • Bankruptcies: 10 years from filing date (for Chapter 11); 7 years from filing (for Chapter 13)
  • Charge-Offs: 7 years from the date of the charge off
  • Foreclosures: 7 years from the filing date
  • Short Sales: 7 years from the closing date
  • Repossessions: 7 years from the day the item was repossessed
  • Judgments: 7 years after satisfied, longer if left unpaid
  • Tax Liens: 7 years after satisfied
  • Late Payments: 7 years from the last unpaid due date
  • Collection Accounts: 7 years and 180 days from the original delinquency date

The above time periods indicate the very longest each of these items will prevent you from qualifying for a mortgage. Lenders are given significant leeway in deciding how and when to take a chance on a customer with a less-than-stellar credit history.

If the customer’s income and debt-to-income ratio are acceptable, some lenders will consider a mortgage as soon as two to four years after a bankruptcy, and three to seven years following a foreclosure. Of course, interest rates on these mortgages can be quite high. Banks and mortgage lenders may consider the circumstances surrounding the past challenges to help make their decision.

For instance, they may consider the application of an individual who had a long, clean credit history, then lost her job and faced high medical bills all at once, leading to a foreclosure. Although the foreclosure occurred just five years ago, the individual has a good job with steady income and few outstanding debts at this point. The bank may well choose to offer this person a mortgage at a competitive rate believing the circumstances that led to the foreclosure are unlikely to happen again.

What can you do to improve your chances of getting a competitive mortgage after credit problems?

The best thing you can do under this circumstance is to work hard to repair your credit and make wise financial decisions going forward. The longer you maintain a positive credit history, the higher your score will become. Saving as much money as possible is also an excellent idea. A sizeable down payment can do wonders for your chances of approval, and could save you a lot of money on personal mortgage insurance (PMI).

Then, once you’re past the point where the credit problems come off your report, you should be able to apply for a mortgage with confidence.