There are a lot of conflicting opinions out there about your credit score and credit history when it comes to getting a home loan. I want to lay out the facts for you so that you know exactly what the truth is when it comes to getting a mortgage and your credit history.
If you have had a bankruptcy, foreclosure, or short sale within the last 12 months, the chances are extremely low 20 that you will be able to get a home loan within a year of one of these financial hiccups. Now, after the 12 months, there are certain programs and options that may be available to you but typically between 2-7 years is how long it takes for these infractions to be erased off of your financial and credit history. That doesn't necessarily mean you can't buy a house or get a mortgage, but the red flag will still be there for a certain amount of time. This is just the statute of limitations. There are a lot of lenders that can help you get into a home loan within one to two years after a short sale or bankruptcy depending on the type of bankruptcy and your current credit history.
Let's say something major happened where it may have been out of your control and your credit score and history tanked. This could have been from medical emergencies, a divorce, or other issues that may have been extenuating circumstances. If you are a relatively responsible lender, meaning you try very hard to pay your bills on time, keep your debt to income ratio extremely low, and had a fairly high credit score before the infraction, chances are, you can get back up there pretty quickly.
What lenders are going to say is that they can either work with you now and maybe offer you a home loan with higher interest rates and not the best terms, or you could wait six months, 12 months, or even a couple of years, building up your credit history, improving your score, and then getting a bigger house or higher-priced house for a better rate and terms.
When it comes to your credit score anything higher than a 720 credit score is considered good to excellent. 800 to 850 is considered excellent and there are very few lenders that would ever deny and 800 credit score unless the income just didn't back up what you wanted to buy. For instance, you could have an 850 credit score but if you only make $40,000 a year, a lender is not going to approve you for $300,000 house. However, you could be making $200,000 a year with a 500 credit score and you may be able to qualify for that house but with higher interest rates and terms to protect the lender.
It's really a both/and/or a situation. If all of the factors work perfectly, you can get a pretty decent conventional loan with great terms. If your credit score is below 580 your lender may want you to spend the next six months increasing it to at least 600 or higher. You're likely to have more options when it comes to a home loan, get better rates, better terms, and you may be able to afford a bigger house.
This is why each individual borrower is different. What the borrower makes, their credit score, credit history, and what they want to buy. It really pays to sit down with a lender and discuss all of your finances. Be as open and honest as possible and come up with a plan that works for you, your budget, and your family.
Feel free to contact me below at any time for information on lenders in our area and how you can start the process of buying a home.