The Secret to Getting a Mortgage 
Regardless of Your Credit

The mortgage loan application process can be a confusing maze of paperwork, documents, and verifications. Knowing the pitfalls and the
requirements 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 purchases.

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.

Credit Facts
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 timely manner.
Legitimate, adverse credit information generally stays on your credit report for 7 years; information on bankruptcies can be reported for 10 years.
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 true.

What Now

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 ownership.

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 challenged.

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 the
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 accurate.

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 accurate.

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 borrowers.

3. Provide a satisfactory explanation of the credit problem to your mortgage company.

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 resolved.

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 Credit.

Take positive actions to get on the road to rebuilding your credit.

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 account.

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 record.

 

Sample Credit Letter

Date
Your name
Your street address
Your city, state, and zip code

Complaint Department
Name of Credit Bureau
City, state, and zip code

Dear Sir,

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 corrected,
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).

Sincerely,

Mr. and Mrs. Credit Error

Credit Problems
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 application.

No Credit

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, mortgage
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 been resolved.

Sloppy Credit

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 finances.

Foreclosures

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.

Repossessions

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

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.

Bankruptcy

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 bankruptcy.

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” heading.

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 to your
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 current
financial outlook is sound.

Charge Offs and Collections

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 explanation and
documentation supporting his claim in the event that it is needed.

What First
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 report?

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 this book.

Glossary of Credit Terms
Adequate 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 property.

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 creditors.

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 11
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 bankruptcy.

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 creditors. 

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 debt.

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 claim.

Proof of Claim—The document filed in a bankruptcy case that establishes a creditor’s claim for payment against the debtor.

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 creditor.

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 debt.

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.

ü Current 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, CD’s, etc.

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.

ü If commissioned, complete Federal tax returns for 2 years.

ü If self-employed, complete Federal tax returns for 2 years, year-to-date profit/loss statement, and a current balance sheet.

ü Copy of car title if the car is less than 5 years old and owned free and clear.

ü Certificate of Eligibility (VA loans only).

ü Driver’s 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.

ü Condo documents, if property is a condo.

ü If divorced or separated, a copy of separation agreement and divorce decree.

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 figures).

Summary
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 correctly?

Did you provide your lender with a detailed explanation of your credit problems along with supporting documentation?

Can you get some of the derogatory items removed?

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.

Addresses

CBI-Equifax Information Services

3660 Maguire Blvd
Suite 300
Orlando, FL 32802

(800) 685-1111

Charge for report: $8 plus local sales tax

Credco

333 Earle Ovington Blvd. #300
UNIONDALE, NY 11553

(800) 435–5661

Experian

295 Jimmy Doolittle Drive
Salt Lake City, UT 84116

(800) 682-7654

Charge for report: First report FREE; second, $7.50

TransUnion

200 Spring Lake Cove
Suite 201
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 St., N.W.
WASHINGTON, D.C. 20580

(202) 326–3650