This blog is a re-cap of our interview with Nigel Farnsworth with American Pacific Mortgage. We are very excited to learn about buying a Home with Bad Credit. Watch follow up blogs for more information on FHA loans, VA Loans, appraisals and more.
[su_button target=”blank” style=”stroked” background=”#1913d0″ color=”#fffdfe” size=”11″]Click Here to start your online search[/su_button]
What is Credit?
HI there, It’s Liz and Ashley with C4 Elite Real Estate Team. We are here today with Nigel Farnsworth from American Pacific Mortgage and today we are going to talk to Nigel about how to buy a home with bad credit.
What is credit and how does it affect the Mortgage Loan process?
Credit is the ability for a consumer to have a product, goods or services with the intent to pay. But, not paying immediately with the promise to pay later. How does it affect the mortgage loan process? It is an important, critical part of the loan process where credit is analyzed. The better your credit is, the better your chances of approval. And then of course the more challenging credit score can be a challenging loan process as well.
What is a Good Credit Score?
It all depends on what you are trying to finance. In the mortgage industry, the credit experts will tell you that the best credit score is 700 and above. Anything below that can have some additional questions or challenges. We have something that we have to abide by called the ATR, “the Ability To Repay”. Loan officers have to prove at this point that the consumer has the ability to pay the loan in the future. The underwriter, the loan officer and the company are tied to the performance of that loan. So the better they are on that credit scale, the better their approval is. If they have some credit challenges and the ATR becomes questionable, we sometimes ask some personal questions.
Do you Need Additional Information with a Bad Credit Score?
If the client has poor credit, we will need additional information because they are buying a home. Let’s say they are renting, and that is the closest thing to have to a mortgage payment. Sometimes we have to get verification from the landlord that they have been making payments on time. Additionally, if they are afraid to have any credit debt, we actually have to get some non-traditional credit trade lines. This means that we have to verify things that maybe they do not have on their credit report,. For Example, cell phone bills, utilities, etc.
Improving your Credit
What are some good habits to get into if you are six months to a year away from buying a home?
When we coach our clients, we tell them to continue to make all of their payments on time. That is one of the best things that you can do. Not only that, with credit cards, try to keep your balances at 30% or lower. If you can do that, it gives you a better recipe to escalate your score.
Will opening a credit card help their credit score?
That is a very common question that we get. We like for consumers to only have a few credit cards. The credit experts will come in and tell us that you do not want any more than two or three. If you do have a credit card, you want to keep those balances low and try not to max them out.
Let’s talk for a minute about interest rates. Can interest rates effect good credit negatively?
Mortgage companies and investors have what they call loan level price adjustments. That can have a bigger impact than your credit score. If somebody has challenging credit, that can be considered a higher risk and therefore the interest rates can be considerably higher. The better the credit score is on that scale, the less risk it is. Therefore, they will get better interest rates. Most consumers do not know that they can come in with marginal credit and they are going to be on the same playing level as somebody with excellent credit.
What do Credit Experts do?
Is there a point where someone’s credit is just so poor that they cannot do it alone? What options are out there for people?
We can do financing at American Pacific Mortgage all the way down to a 550 credit score. If somebody has a low credit score, we try to put them on a game plan to buy in the future. We often refer them to our credit experts, which will tell them what to do with the credit. Furthermore, they will help them negotiate items off of their credit and build good credit.
How long does it normally take for them to be coached?
It can take anywhere between 4 and 12 months. It depends on the individual and how willing they are to do the work. We have seen clients escalate their credit scores and graduate from those systems in four to six months. Other times we have seen others take over 12 months.
FHA Loans for Bad Credit
What types of programs do you have for clients with bad credit?
We have several programs for clients with challenging Credit. The best program out there for buyers with credit issues is an FHA loan. This is going to be the most lenient when it comes to credit scores. However, we have other programs out there if they have a down payment. Additionally, if they are self employed with marginal credit we can use the bank statements and one year worth of tax returns. Those types of programs we have in house and are readily available.
How does Debt to Income Ratio Affect Loan?
There are a lot of things that make up the interest rate as well as the loan approval. I would like to tell you it is all about credit, but it is not. We look at a lot of different things like the property type, debt to income ratios, which you referred to. We look at the credit of course, and sometimes even the property. So once we analyze all of those things, there are certain things that make up the credit score.
No Credit vs. Bad Credit
They used to tell us good credit is no credit. In a case where somebody does not have any credit, it is not all bad because what we can use the traditional credit lines. Verifying their rent is a big one. Again we can verify the utilities and insurance. We have even gone as far as looking at a Netflix account for verification. As long as they have a good payment history on those items, it gives us a good recipe for approval.
If you have further questions about the loan process or your credit score, contact Nigel Farnsworth. Stay tuned to our Blog Series: 30 Days to Buying a Home in Utah. Look for interviews with appraisers, underwriters, insurance reps and more. We at C4 Elite Real Estate Team are very excited to help educate you on the home buying process in Utah. Our agents are available to answer any and all questions about your real estate needs. If we do not know the answer we have a team of professionals we can call on to help us help you!