The Secret to Getting a
Regardless of Your
|The mortgage loan application
process can be a confusing maze of paperwork, documents, and
verifications. Knowing the pitfalls and the|
established by mortgage companies can enhance your chances of loan
approval. Most mortgage companies underwrite their loans along
guidelines established by the Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie
Mac), Federal Housing Administration (FHA), and the Veterans
Administration (VA). The credit requirements for each of these
agencies are generally the same, with FHA and VA loans usually being
more lenient regarding credit.
Good credit is vital today in America because so many of the
things we want to buy must be financed or purchased on credit. Once
you have a bad credit
rating, detection is inevitable—the network
of credit reporting agencies keep diligent track of credit
You have probably seen the TV and newspaper ads for mortgage
companies claiming that they can approve your loan “no
matter” what type of credit you have. Most of these lenders are
known as equity lenders. In other words, they are placing most of
their emphasis on the amount of down payment, thus lowering their
risk. If they were to foreclose on your property, they would recover
their loss by selling your home. These “equity lenders” use
different standards for credit evaluation; and since they overlook
credit blemishes, equity lenders usually charge higher interest
rates to offset the risk associated with the credit.
Another term for these lenders is “B, C, D lenders,” referring to
the credit rating of the borrower. An “A” credit loan is a loan with
a good credit rating. “A” credit loans allow a loan to value up to
97% of the sale price with very competitive rates. “B, C, D” credit
loans have marginal credit, rely on lower loan to values, and charge
higher interest rates. With some help, guidance, and hard work, you
and an experienced loan officer can package your loan to fit into
“A” credit loan parameters.
To insure that you get the best rate possible and have your
choice of loan programs, it is important to understand the credit
requirements of an “A” credit lender. “Secrets to Getting A
Great Mortgage Rate Regardless of Your Credit” will help you
understand how credit is reported and credited and what types of
credit can be damaging to your loan application.
||In 1970 Congress passed the Fair
Credit Reporting Act to give consumers specific rights in
dealing with credit reporting agencies. The Act protects you
by requiring credit bureaus to furnish correct and complete
information to businesses to use in evaluating your
applications for credit, insurance, or employment.|
||You have the right to know what is
reported on your credit report.|
||Credit bureaus are required to
reinvestigate if you challenge information on your credit
report is inaccurate or incomplete, and it must be done in a
||Legitimate, adverse credit information
generally stays on your credit report for 7 years; information
on bankruptcies can be reported for 10
||You have the right to dispute the
completeness and accuracy of items on your report.|
||In 1991 a study by Consumer Reports
estimated that half of all credit|
reports have errors.
||If you have filed for bankruptcy, you
may have been told that you won’t be able to get credit for 10
years; this is not always true.|
||Mortgage companies place emphasis on
your credit record in the most|
recent 24-month period. They
will focus on the credit blemishes in that period of time in
determining your creditworthiness.
||If you have a tax lien you may have
been told that you can’t get a mortgage unless the lien has
been paid off; again, this is not always
|What do you do when credit
blemishes appear on your credit report and jeopardize your ability
to qualify for a mortgage? The next few pages of this booklet will
address options you have in repairing your credit report.
I will explain the problems which can be corrected and the ones
which can’t. Whatever your past credit problem may have been, it is
important to have a plan for correcting it in the future. I can help
you develop a sensible plan to reach your goal of home
1. Contest the accuracy of items on
your credit report.
Under current law, credit bureaus have the right to
sell information about you. This right also carries the
responsibility for substantiating the information if it is
Having items corrected and removed from your credit
report requires the consumer to be persistent in challenging the
credit bureaus to document their information. The credit bureaus are experts at ignoring these challenges
for a variety of reasons, but the system ultimately favors
persistent consumer. Credit bureaus and creditors are very
sloppy at verifying their information and often will prefer to
restore the credit rather than to prove it’s bad. By knowing your
rights, you can turn the unfairness of the credit reporting system
against itself. The credit bureaus convict without proof;
but when pressed, they will exonerate without proof.
First, make your dispute directly with the credit reporting
agency. Your letter should clearly identify your complete name,
current address, social security number, and the items on your
credit report which you wish to dispute. (You can use the sample
letter shown on page 5 as a guideline.)
Your letter should state the facts of your dispute and request
the deletion or correction of the items. Send your dispute by
certified mail, return
receipt requested. Keep copies of all
letters and enclosures. You will need to reference the return
receipt when contacting the credit bureau concerning their
timeliness in correcting items. Be sure to include with your
dispute letter some form of identification—a copy of a bill or a
copy of your driver’s license. Credit bureaus will delay your appeal
if you fail to include identification with your letter.
Remember, persistence is the key! If at first your don’t
receive a favorable response, you will need to persist with the
demands on the credit bureau. Your second and third letters should
be composed with firm, demanding language reminding the credit
bureau of your loss if this matter is not resolved.
Another source of correcting credit problems is directly with the
creditor. Often, it is easier to make contact with a customer
service representative who is willing to listen to the situation
causing the late payments. Having the creditor agree to remove the
delinquency, in writing, is the best way to permanently remove the
item. Keep a copy of the letter from the creditor for future
reference. Start with a call to the creditors customer service
representative to probe the possibility of resolving the matter with
a phone call and a good explanation. If you do not make progress
over the phone, you will need to follow the same instructions for
contesting an item with the credit bureau.
2. Provide proof to the mortgage
company that the information on your credit report is not
In some cases you will not have the time to contact the credit
bureau to have the item on your credit report corrected or deleted.
It is easier to provide the mortgage company or their mortgage
credit reporting service with the proof that the items appearing on
your credit report are not accurate. Proof can be in the
form of canceled checks, receipts, statements, etc.
This process is set up to quickly handle errors that would normally
result in loan denial. Working directly with the mortgage credit
reporting service is more personal than typical disputes with the
credit bureau or creditor. Mortgage credit reporting agencies are
obligated (under the same rules and regulations established by the
Fair Credit Reporting Act) to correct credit items that are not
Mortgage credit reporting services receive electronically
transmitted credit information from the credit bureaus. They solicit
business from mortgage companies and have a vested interest in
providing excellent service to the mortgage company and their
3. Provide a satisfactory explanation
of the credit problem to your mortgage
Generally, mortgage lenders will require a letter explaining each
late payment on your credit report. This letter is a very
important part of your file. The letter will enable the underwriter
to evaluate your credit situation and
determine if the situation
is a result of poor financial management or if the credit blemishes
are the result of forces that were beyond your control.
The best credit explanation will provide the underwriter with the
confidence to believe that the situation was beyond your control.
Examples: a lay off, unexpected medical bills, or an illness
resulting in your inability to pay those bills in a timely manner. A
variety of reasons and situations can result in blemishes on your
credit report. It is important that you take the time to document
this information in a well written letter which should be reviewed
by your loan officer. It is also important for the underwriter
to be able to clearly determine that the situation has been
The underwriter will focus on the explanation pertaining to the
most recent 24 months and the credit blemishes during that period.
It is best if there are no blemishes in the most recent 12 months;
although, exceptions can be made.
Consecutive late payments on certain accounts can be explained
easily since they usually are the result of one missed payment at
the beginning of that period.
For more information on your credit letter, it is best to consult
an experienced loan officer who should be able to discuss your
payment history and how best to convey your situation to the
underwriter. Because I have dealt with many credit reports and aided
borrowers to draft credit letters, I will be able to develop a
strategy to handle your particular situation.
As you are beginning to think about your letter of explanation,
you should put together a chronology of events which occurred at the
time of any credit problem. You should consider both personal and
business aspects of your life when compiling your chronology.
4. Rebuild Your
Take positive actions to get on the road to rebuilding your
Develop a budget and stick to it. Create two lists—monthly income
and monthly expenses. Discipline yourself to make cutbacks to
develop a realistic budget; and most importantly, stick to it.
Consumer Credit Counseling Service (1–800–388–2227) can help you in
setting up a debt-repayment plan.
Make sure your credit is accurate. As we have discussed, there
are steps to take to correct any errors.
Negotiate with creditors and gain their cooperation. Some
creditors are willing to remove negative remarks from your credit
file after you have made full or partial payment of your
Add a positive credit history to your file by assuring that any
missing data on timely payments are included in your file.
Add evidence of stability by showing steady employment, a long
time at your residence, and positive checking and savings account
information to your credit file.
If you have a credit card, use it and make payments on time. This
will improve your credit history quickly.
Open a passbook savings account then ask the bank for a loan
against the money. The bank keeps the passbook so that there is no
risk. Be sure they report the loan to the credit bureau for your
|Sample Credit Letter
Your street address
city, state, and zip code
Name of Credit
City, state, and zip code
I am writing under the provisions of the Fair
Credit Reporting Act 15 USC Section 1681 to dispute the following
information in my file. Items I dispute are also circled on the
attached copy of the report which I received.
(Identify item(s) disputed by name of source, such as creditor or
tax court, and identify type of item(s), such as credit account,
judgment, etc.) This item(s) is (inaccurate or incomplete), and I am
requesting that the item be corrected or deleted.
I have applied for a mortgage to purchase a home and this item(s)
is hurting the chances of my loan approval. If these items are not
I will lose my deposit of $5,000.
Please reinvestigate this (these) matter(s) and delete or correct
the disputed item(s) promptly. I expect you to notify me in writing
when these items are deleted (corrected).
Mr. and Mrs. Credit
|There are many different types of
blemishes which can|
adversely affect your credit. We have
attempted to summarize the most common credit blemishes and what
effect, if any, they may have on your mortgage loan
Although there are many reasons a borrower may not
have established credit, the most prevalent is the young person or
newlywed. Fannie Mae, Freddie Mac, FHA, and VA all allow
non-traditional forms of credit for people who have no established
credit. When a borrower has none or very little credit,
companies can verify other forms of credit, such as
payment history on electric bills, gas bills, phone bills, rent (a
long rental history can be helpful), or personal loans from
individuals not reflected on the credit report. Verification of
these items can be accomplished by having the credit bureau call the
creditor. A written request for certification of loan or copies of
canceled checks for the previous 12 months can also serve as proof
of payment history. Since the borrower has little credit, an
argument could be made that the borrower has had a very conservative
history of using credit and that it is unlikely that this person
will abuse credit in the future.
Isolated Late Payments
This is the easiest and most acceptable bad credit
to explain. The most common explanations for a defined period of
late payments are divorce, illness, personal tragedy, job loss. The
key to this type of bad credit lies in showing the underwriter that
the situation was beyond the borrower’s control and the event was
isolated. Also, it is important to show that the person has
exhibited the ability to maintain good credit with the exception of
this period of time. In most cases a 12-month gap in time is
required from the end of the credit problem to settlement on a
mortgage. The isolated period of bad credit can be for an extended
time as long as the borrower can demonstrate that the situation has
This is the borrower who just does not pay bills on
time. The borrower may have the income and savings to pay the bills,
but for a variety of reasons the credit record is less than perfect.
This type of credit problem is probably the most difficult to work
with since the borrower has not demonstrated the ability to handle
credit. A key to obtaining a mortgage for this type of borrower is
to put a 12-month gap between the last late payment and the
settlement of the new mortgage. This will allow the borrower/loan
officer to explain that the situation which caused these late
payments has been resolved and that the borrower is now a
responsible person who has the ability to handle credit and
A foreclosure on a mortgage can be a very difficult
problem to solve. Any time a borrower has had a foreclosure, the
underwriter will closely examine the reason, the borrower’s ability
to pay his rent, the amount of the mortgage payment in comparison to
the rent, and the time between the foreclosure and the purchase of a
home. A sufficient gap in time between the foreclosure and the
settlement date on the new loan, along with a VERY good explanation,
can aid in loan approval. Mortgage loans to people who suffered
foreclosure are handled on a case-by-case basis with no particular
rules or regulations being followed. Remember that documentation of
the foreclosure, along with supporting information, can greatly
increase your chances.
This refers to accounts, such as cars, boats, and
other types of loans, that have security for the loan.
Perhaps a vehicle has been repossessed by the lender
because of lack of payment. An underwriter will view a repossession
and a judgment with the same severity. A borrower has a good chance
for approval if at least 12 months have passed since the
repossession and a good explanation can be provided.
Judgments are not as damaging to a mortgage loan
application as most people think. The important thing to remember
is that the judgment must be paid in full before a loan can be
approved. It is easier to explain a judgment than to explain
multiple late payments. In a judgment there is no credit record of a
late or sloppy payment history. The concern is only for explaining
the reasons for the judgment.
Mortgage companies have different views when
evaluating a bankrupt borrower. Fannie Mae, Freddie Mac, FHA, and VA
require a minimum of 2 years of clear credit from the date that the
bankruptcy is discharged before a new mortgage can be approved. The
key word is discharged.” Frequently confused with the date that the
person filed for bankruptcy, “discharge” actually
refers to the
date the creditor was absolved of liabilities listed on the
Mortgage loans can be approved for certain borrowers
who have not yet reached the 2-year mark. In this case, the borrower
must prove that the bankruptcy was the result of a situation beyond
the borrower’s control, such as being a victim of a financial
disaster—business failing or medical problem.
It is also very important that the borrower have
VERY good credit since the time of the discharge. It can be easier
to approve a loan for a borrower who has been bankrupt than a
borrower who has horrible credit. Since the bankruptcy discharges
debt, the credit reporting company cannot show the payment history
on the credit report for the loans that were discharged. The credit
report will only list the name of the creditors who were included in
the bankruptcy. If the bankrupt borrower has not reestablished
credit after the bankruptcy, it will be necessary to use alternative
forms of credit which can be noted under the “No Credit”
For borrowers who have filed bankruptcy under
Chapter 13 of the bankruptcy code, it is possible to be approved for
a VA or FHA mortgage while they are in bankruptcy provided that they
have been in Chapter 13 for at least a year and have had a good
payment history on installments.
If you have otherwise been a responsible bill-payer,
you should let prospective creditors know the circumstances leading
bankruptcy. Issue a 100-word statement to each credit
bureau to be included in your file showing:
Isolated factor which caused bankruptcy
Your otherwise good credit history
That financial problems have been erased, and your
financial outlook is sound.
Charge Offs and
A charged off account is a loan that has been
determined by the credit grantor to be uncollectible. Charge off and
collection accounts must be paid in full to a zero balance prior to
approval for a mortgage loan. A charge off or collection account
showing on a credit report must be explained with a satisfactory
letter from the borrower detailing the circumstances behind the
charge off or collection. Charge offs and collection accounts
usually are not loan killers provided the borrower has a good
documentation supporting his claim in the event
that it is needed.
|If you are making plans to apply
for a mortgage loan, the first item of business will be to get a
copy of your credit report. Next, give me a call to set an
appointment to review your situation.
How do I get a copy of my credit
I can provide you with a preliminary (“infile”)
report but will need a full report for loan approval. You can
request a copy of your report from any of the sources shown later in
||Glossary of Credit
Protection—The standard of protection
granted a creditor by the trustee or debtor-in-possession to prevent
the court from allowing the creditor to foreclose on its
Balance Sheet—A statement of financial conditions as of a
specific date. It is different from a cash flow statement, which
summarizes income and expenses.
Bankruptcy Code—The body of a federal statutory law that
governs the bankruptcy process.
Chapter 7—In a Chapter 7 proceeding, the debtor’s business is
liquidated and its assets are distributed to creditors with allowed
proofs of claim.
Chapter 11—A Chapter 11proceeding is a form of reorganization
of debts. The debtor continues to operate its business after the
bankruptcy is filed. Chapter 11 liquidations are common and are
usually the result of an unsuccessful reorganization.
Chapter 13—May only be filed by an individual debtor with
limited debt. It allows a payment plan for an individual’s financial
and/or business debts.
Closing—When a bankruptcy case is closed, it is no longer
on the court’s docket.
Collateral—Property of a debtor in which a creditor has a
lien securing its debt.
Consumer Credit Counseling Services—Non-profit organizations
established to help debtors make payment arrangements with
Credit Report—A document completed by a credit-reporting
agency providing information about the buyer’s credit cards,
previous mortgage history, bank loans, and public records dealing
with financial matters.
Creditor—One to whom you owe money.
Debtor—One who owes debts. In bankruptcy, the bankrupt
business that is under the control and protection of the bankruptcy
court is the debtor.
Debtor-in-Possession—The business debtor in a Chapter
reorganization. In a Chapter 11, the debtor retaining
possession of the
assets involved in the bankruptcy.
Discharge—A discharge in bankruptcy relieves the debtor of
the dischargeable debts incurred prior to filing. Discharge is the
legal term for the elimination of debt through bankruptcy.
Dismissal—The dismissal of a bankruptcy case, for all intents
and purposes, returns the debtor to the same place it was before
Foreclosure—A debt-collection procedure whereby property of
the debtor is sold to satisfy debts. Foreclosure often involves real
estate of the debtor.
General, Unsecured Claim—A claim that is neither secured nor
granted a priority by the Bankruptcy Code.
Involuntary Bankruptcy Proceeding—In an involuntary
bankruptcy proceeding, the debtor is forced into bankruptcy by
Jurisdiction—The power and authority of a
court to issue binding orders after hearing controversies.
Lien—An interest in property securing the repayment of a
Motion—A request for the court to act. A motion may be filed
within a lawsuit, adversary proceeding, or bankruptcy case.
Personal Property—Moveable property. Property that is not
attached to land.
Priority—Certain categories of claims are designated as
priority claims by the Bankruptcy Code, such as claims for lost
wages or taxes. Each must be paid in order of priority by
Proof of Claim—The document filed in a bankruptcy case that
establishes a creditor’s claim for payment against the
Real Property—Land and anything permanently affixed to the
land, such as fences, buildings, and those things attached to the
buildings, such as light fixtures or plumbing. May refer to rights
in real property as well as the property itself..
Secured Creditor—A creditor whose debt is secured by a lien
on property of the debtor.
Secured Proof of Claim—A proof of claim for a debt that is
secured by a lien, a judgment, or other security interest.
Security Interest—A lien on the property in the possession of
the debtor that acts as security for the debt owed to the
Trustee—An officer of the court appointed to take custody of
the assets of a bankruptcy estate.
Unsecured Creditor—A creditor without security for its
Items to Bring
to Loan Application
ü Fully executed
sales contract with all addenda. A copy of the multiple listing
agreement and the house location survey, if possible.
month’s pay stubs (2 most recent if paid biweekly or twice per
month) and all W–2’s for the past two years.
ü Copies of
bank statements covering 3 most recent months of activity on all
checking and savings accounts, mutual funds, IRA’s, 401K plan,
ü If using
stocks or savings bonds as source of down payment, provide most
recent statement or a copy of the security.
ü If relying
on non-employment income (e.g., retirement, interest, rent, etc.),
complete Federal tax returns for 2 years.
commissioned, complete Federal tax returns for 2 years.
self-employed, complete Federal tax returns for 2 years,
year-to-date profit/loss statement, and a current balance
ü Copy of car
title if the car is less than 5 years old and owned free and
of Eligibility (VA loans only).
license and social security (FHA loans only).
ü If selling
your present home, provide copy of listing
agreement and sales
contract (if available). If you have
already sold your home, we
need a copy of the HUD–1 Settlement Statement.
documents, if property is a condo.
ü If divorced
or separated, a copy of separation agreement and divorce
ü If you own
rental property, copies of leases.
ü If renting,
name, address, phone number of landlord.
ü Check to pay
for appraisal and credit report (fees vary depending upon loan
type and number of borrowers—you can call ahead for the
|While we have been very
successful working with borrowers to resolve credit issues on their
mortgage loans, it is important to realize that not all credit
problems can be resolved.
Our policy has been to maintain a very aggressive
view of credit and most importantly to listen to the borrower’s
explanation of credit problems so that we are in a better position
to assist in getting the loan. Great emphasis is placed on the
borrower’s credit in the most recent 24 months with the major focus
on the credit in the 12 months immediately prior to settlement on
the mortgage loan. The borrower should exhibit the ability to manage
finances for the past 12 to 24 months.
If your credit has prevented you from
either refinancing or purchasing a home, you owe it to yourself to
take a closer look at your credit problems.
Was your credit evaluated
Did you provide your lender with a
detailed explanation of your credit problems along with supporting
Can you get some of the derogatory
You will have to be willing to spend time to resolve
the credit issues that will affect your loan application. Enlist the
help of a Home Loan Specialist or Real Estate Agent who is willing
to work with you in resolving these issues. It is important that
your loan officer and realtor have experience in dealing with credit
problems. Frequently, a loan officer will review an infile credit
report, fail to request an explanation from the borrower concerning
problems, and simply inform the realtor that there are too many
credit problems to work at securing the loan. What the loan officer
is really indicating is an unwillingness to spend the time or energy
required to make the loan work. When you want to buy or refinance a
house (or if you are an agent who wants to sell a house), always
work with a Home Loan Specialist . . . not an “interest-rate
salesman” with the lowest bid.
CBI-Equifax Information Services
Orlando, FL 32802
Charge for report: $8 plus local sales
333 Earle Ovington Blvd.
UNIONDALE, NY 11553
295 Jimmy Doolittle Drive
Salt Lake City, UT
Charge for report: First report
FREE; second, $7.50
200 Spring Lake
Jackson, MS 39208
(800) 888-4213 or (800) 916-8800
Charge for report: $8 plus local sales tax
Federal Trade Commission (FTC)
ATTN: Credit Bureau Complaints
Pennsylvania Avenue & 6th
WASHINGTON, D.C. 20580