Buying A House with Bad Credit in Kentucky
When in comes to buying a house in Kentucky and getting approved for a mortgage loan a lot of buyers will have to confront their past credit issues. Credit, along with income, work history, and assets determine if you qualify for a mortgage loan.
Below I will address the main issues you have to address when it comes to getting approved for a mortgage with past credit problems.
Mortgage late payments: One late payment in the last 12 months is permitted so long as it can be explained and fully documented if necessary.
• Foreclosure: Thirty-six months from the date of the foreclosure until eligibility to repurchase using the 3.5 percent down payment FHA Loan, 48 months for VA Loans (no money down required), seven years no matter the down payment on a conventional type.
• Short sale: Thirty-six months from the date of the short sale until eligibility to repurchase using the 3.5 percent down payment FHA Loan, 24 months with the VA, 24 months on a conventional money loan with a minimum down payment of 20 percent.
Bankruptcy: Chapter 7 (Chapter 13 is less common), 24 months from the date of discharge until eligibility to repurchase using the 3.5 percent down FHA Loan, 48 months on VA Loans (still no money down required), 48 months on conventional no matter the down payment. All mortgage companies have different thresholds of risk appetite. For example, the FHA (Federal Housing Administration) has no credit score requirement. Why, then, do lenders have a minimum credit score requirement of 620 for an FHA Loan? Unbeknownst to the majority of home buyers, many mortgage companies have a secret ominous business strategy.
Enter “investor overlays.”
Investor overlays are adjustments to guidelines and/or pricing created in favor of the mortgage company. This is exactly why one lender can do the loan, and another lender cannot do the loan in some instances.
Tip: every mortgage lender has investor overlays, it’s the nature of how mortgage companies operate, key is work with the lender whose overlays are minimal.
Timing
Typically speaking, if you want to get a mortgage after bankruptcy you’ll need to allow time to pass. For conventional mortgages you’ll need to wait four years after Chapter 7 bankruptcy or two years after Chapter 13 bankruptcy. But there are some other mortgage options that require a shorter waits.
Credit Scores
580 to 620 is the bottom score (again with few exceptions) that lenders will permit. Below a 620, then you have to look at doing a FHA loan or VA loan if you are a veteran. Even at 620, people consider you a higher risk that other folks and are going to penalize you or your borrower with a more expensive loan. 720 is when you really start to get in the “as a lender we love you” credit score. 760 is even better.
Watch your credit scores carefully. You have three credit scores, and the lender will take your middle score. For example, let's say you have a 590 on Transunion, 679 on Experian, and a 618 on Equifax. Then your middle qualifying credit score will be 618 credits score.
If you absolutely cannot get your credit scores up to 620, then FHA will be a good option for you. FHA states that if your fico credit score is 580 or above, they will allow for a 3.5% down payment, and if below 580, you will need 10% down payment.
There are a lot of mortgage lenders that will not go below 580 to 620 range, so keep that in mind when you are shopping for a mortgage lender, because they create credit overlays.
FHA Mortgage
Two years after your Chapter 7 bankruptcy discharge you may apply for an FHA loan. If you filed Chapter 13 bankruptcy, then you’ll only need to wait until you’ve made twelve months of satisfactory payments, and you’ll need to get the approval of the bankruptcy trustee. But if you want to be given serious consideration, you’ll need to provide a clear explanation for why you filed bankruptcy. For example, maybe you filed Chapter 13 bankruptcy because you had a medical emergency and was unable to pay your medical bills.
VA Mortgage
If you’re a veteran, you can get a VA mortgage two years after your bankruptcy discharge. This VA application process can be challenging, but in some ways it’s more lenient since post-bankruptcy credit issues such as a foreclosure won’t restart the 2-year waiting period. However, credit issues after bankruptcy might affect your interest rate, so take care to keep your credit as clean as possible.
USDA Mortgage
If you live in a rural area, you may qualify for a USDA mortgage three years after your bankruptcy discharge. It’s important to note that while the USDA provides loans to rural residents it’s only for property that will serve as the borrower’s primary residence. The USDA will not finance the purchase of income property or a vacation home.
As you prepare to apply for a mortgage after bankruptcy, keep in mind that the mortgage lender will take into account the totality of your financial situation—your finances, credit history, credit score, and any extenuating circumstances
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