Kentucky Mortgage Loan with Bad Credit
Before we look at some possible home-buying programs, let's first look at what is considered Bad Credit, or less than perfect credit.
Most of the times when borrowers say they have bad credit, they mean one of the following:
Past or Current Bankruptcies
Low credit scores or fico scores
Collections on credit report showing unpaid or paid.
Delinquent or behind on credit cards, mortgage, car loan payments
Foreclosure or short sale where they lost a home to default
Owe back taxes to the Federal Government.
Defaulted Student Loans
Delinquent Child Support Obligations
Disputed accounts on credit report
Disputed accounts on credit report
Below I have listed one of the most popular programs Kentucky Home Buyers need to consider when buying a home in 2020 if they have experienced some of the credit issues mentioned above:
When it comes to getting a mortgage loan with past credit problems, FHA is probably going to be your best bet.
They're the most lenient on credit scores, down payment requirements and credit history when it comes to qualifying for a Kentucky Home Loan.
I have listed below some of the requirements you must overcome to get approved for a Kentucky FHA home loan.
Kentucky FHA Mortgage Loans:
The credit score requirements for Kentucky FHA home loans:
FHA says on paper in their written guidelines that they will insure a FHA loan down to 500 - 579 with a 10% down payment or 580+ with a 3.5% down payment. However, in the real world of lending in the secondary market, most lenders will not adhere to these guidelines.
Most FHA investors will want a 620 middle credit score, but they're a few that will go by the written FHA guidelines above for credit scores, but very few. Your best bet is to get with a loan officer and get your scores up to at least 580 so you can have a better shot of getting approved and access to more FHA lenders.
Be aware there are a lot of credit scores out there, but each lender must pull their own credit report and credit scores to determine your creditworthiness. I would shop around first to see what the requirements are for each FHA lender before they pulled your credit report.
Mortgage lenders use the FICO score model below for each credit bureau when they look at your credit scores.
Bankruptcy Requirements for Kentucky FHA Home Loans:
Be aware there are a lot of credit scores out there, but each lender must pull their own credit report and credit scores to determine your creditworthiness. I would shop around first to see what the requirements are for each FHA lender before they pulled your credit report.
Mortgage lenders use the FICO score model below for each credit bureau when they look at your credit scores.
MyFICO is now selling additional score versions to the public. These include three scores most often used by mortgage lenders:
- Experian FICO Score 2 (also known as EX-98 or Risk Model v2)
- Transunion FICO Score 4 (also known as TU-04 or Transunion FICO Risk Score Classic 04)
- Equifax FICO Score 5 (also known as EQ-04 or Beacon 5).
Bankruptcy Requirements for Kentucky FHA Home Loans:
FHA states in their published guidelines that if you had a Chapter 7 Bankruptcy, you must wait 2 years from the discharge date to reapply for a FHA insured mortgage loan.
If you had a Chapter 13 Bankruptcy and have a 12 month on-time payment history with the courts, you can potentially get approved for a FHA loan if you get permission from the trustee and qualify with the Chapter 13 payment plan in your debt to income ratio. If you have been in the plan for over 12 months, and have a good pay history, you can submit your paperwork for FHA approval.
For example, let's say you have been in the Chapter 13 repayment plan for 3 years and you want to buy a home using FHA financing. You could go ahead and petition the Chapter 13 trustee for approval from the courts to get a home loan. The trustee of the Chapter 13 courts will want to know your new loan payment with the home loan, so make sure you know how much you want to borrow before you apply ,.
Collections on Credit Report Requirements for Kentucky FHA Home Loans:
:
- If the credit report shows a cumulative balance of $2,000 or more for collection accounts:
- The debt(s) must be paid in full prior to or at closing, or
- Payment arrangements must be made with the creditor and the monthly payment included in the DTI, or
- A monthly payment of 5% of the outstanding balances of each collection must be included in the borrower’s DTI.
- Collection accounts of non-borrowing spouses in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts. Community property states are Arizona, California, Texas, Washington, and Wisconsin
- Medical collections and charge offs are excluded from this
guidance.B. Judgments – Loans for borrowers with outstanding judgments are
generally not acceptable unless the following documentation is obtained.
a. Judgment must be on the credit report that is linked to the TOTAL
Scorecard findings and the findings must be “approve/eligible” or
“accept/accept.”
b. If the judgment will not be paid off and released prior to the
closing, evidence of a payment agreement may be considered. The
payment agreement must be in writing and provided at the time of
underwriting. Crescent will require evidence that 12 months
satisfactory payments have been made as scheduled. Borrowers
may not pre-pay scheduled payments in order to meet this
requirement. The monthly payment must be considered in the
borrower’s debt-to-income ratio for qualifying.
c. Any judgments that are discovered in the processing of the loan
that ARE NOT on the credit report linked to the TOTAL findings
require the loan to be manually downgraded to “refer” status.
Crescent does not approve loans that must be manually
downgraded.
d. A subordination agreement will be required for any judgment that
is also a lien against the borrower and/or the subject property.
C. Disputed Accounts – Because disputed accounts are not generally
considered in the borrower’s credit report FHA will now require loans of
borrowers who have derogatory disputed accounts with cumulative
balances of $1000 or more (excluding medical) to be downgraded to
“refer” findings and manually underwritten. As you are aware, Crescent
does not approve loans that require manual underwriting.
NOTE 1: Disputed derogatory credit account of a non-purchasing spouse
in a community property state are not included in the cumulative balance
for purposes of determining if the mortgage application must be
downgraded to a “refer.”
NOTE 2: Disputed medical collections are excluded from the $1000 limit
as are derogatory credit accounts resulting from identity theft, credit theft
unauthorized use, etc. However, documentation must be provided to
conclusively support the disputed status. Documentation might entail
police reports, letters from the creditor, etc.
II. ML 2013-26 – Back to Work-Extenuating Circumstances
The guidance provided in ML 13-26 requires loans to be manually
underwritten. For this reason Crescent cannot approve loans that need these
credit underwriting leniencies. III. ML 2013-29 – Application of Unused Funds from
Short-sale or Foreclosure Guidelines for a Kentucky FHA Loan:
If you have experienced a short-sale or foreclosure, FHA states that you must wait 3 years from the date of the sale to obtain FHA financing again. And important note is this: The waiting period starts not when you were discharged from the home or bankruptcy, the waiting period starts when the home is sold and the deed transferred at the courthouse.
This is important to remember because a lot of people think it starts when they vacate the home or when there bankruptcy is discharged if the mortgage was in the bankruptcy, but it does not!!! The date used to end the waiting period starts when the deed is transferred at the courthouse from the owner to back to bank or whomever buys the home in the default.
If you have a delinquency with the Federal Government, this could hurt your chances of getting approved for a FHA backed Mortgage Loan. Here is why:
All FHA participants are ran through the CAVIRS Alert System administered by HUD to check to see if the mortgage applicant is delinquent to the Federal Government. This usually arises from an IRS income tax lien, over-payment on a social security claim, or lastly, a defaulted student loan.
A lot of the times FHA borrower don't realize that if they don't pay there Federal backed student loans, they go into default and this will hold you up from getting a FHA loan or possibly they will hold your tax refund.
If you have been delinquent on your student loans, you have to call and get on a 9 month repayment plan with them and they will clear you of your CAVIRS Alert. The payment plan can be as little as 5 or $10 a month, but the important thing is to get started so this will improve your credit rating too along with releasing the liens against you for other federal assistance like tax refunds, social security payments and benefits to name just a few.
I have done many FHA loans in Kentucky where they have rehabbed their Student loans if they are backed by Federal government and got them loan after 9 months.
If you happen to have an agreement already worked-out with the IRS or student loan creditors, sometimes we can take that arrangement and get you approved sometime with FHA depending on the lender.
Child Support Obligations Kentucky FHA Loan Requirements:
If the credit report shows a delinquent child support agreement, the FHA Government Underwriter will want to see the current child support agreement and what the monthly payment is so as to make sure they have your debt to income ratio figured correctly. You can have a delinquency report of child support on your credit report and still get an FHA loan.
It is okay to be paying child support ,a lot of times it shows on a borrower's pay stubs, and if so, we simply use that child support obligation to use for debt to income ratio qualifying.
As you can see, it is quite possible to buy a home in Kentucky with past bad credit. I work with a lot of mortgage applicants that has experienced credit issues in the past, but with the right direction and guidance, I can possibly get you into a home in 2020.
Put my 20 years of Kentucky Mortgage Experience to work for you .
Joel Lobb (NMLS#57916)
Senior Loan Officer
Senior Loan Officer
American Mortgage Solutions, Inc.
10602 Timberwood Circle Suite 3
Disclaimer: No statement on this site is a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet Loan-to-Value requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines and are subject to change without notice based on applicant's eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over the life of a loan. Reduction in payments may reflect a longer loan term. Terms of any loan may be subject to payment of points and fees by the applicant Equal Opportunity Lender. NMLS#57916 http://www.
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