How much will past credit problems hurt me in getting a mortgage?

Posted by  on Apr 09, 2014

Q: I had some financial problems after I lost my job a few years ago, but now I've got an even better job and would like to buy a house. How much will my past problems hurt my chances of getting approved for a mortgage loan?

A: According to a recent study by the National Mortgage News, your chances of approval have gotten better recently.

The Great Recession was a double-whammy for would-be home buyers. Not only did many experience the kind of financial setback that you describe, but also mortgage lenders responded to the housing crisis by tightening their loan standards. In other words, your credit score may have been falling at the same time mortgage lenders were raising the minimum score they would accept from borrowers.

Now, though, things are starting to look a little better. More and more Americans going back to work and, meanwhile, mortgage lenders are getting more comfortable with taking on credit risk. The National Mortgage News surveys lenders to find which ones have the lowest credit score minimums and then averages the 15 lowest to get a sense of what minimum standards in the marketplace are.

The most recent survey found that the average of the 15 lowest credit score minimums dropped to 571 in the fourth quarter of 2013 after having been 599 a year earlier. It's not that 571 is an absolute threshold, but think of it as a benchmark for measuring your likelihood of getting approved in today's market.

Even if it looks like your credit score is in the clear for approval, you should do whatever you can to address any problems before you apply for a mortgage. The less credit risk you appear to have, the lower the mortgage rate you are likely to get. After all, getting approved is just the first hurdle. Making the mortgage affordable is going to be the key to making this decision work out in the long run.


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